Today I heard that our Federal Finance Minister Lindsay Tanner is suffering from insomnia because of the growing Government debt burden. Poor thing. Why is he worrying himself sick? Well I have the cure. If he reads this blog and understands it I think he will back in slumberland sooner rather than later.
One of the advantages of running the economy at “high pressure” – that is, with low unemployment is that some of the more malevolent aspects of human behaviour are suppressed. We know that when the economy goes into a downturn, firms increase their hiring standards because they have the upper hand – lots of workers are unemployed and so the firms can pick and choose more readily. One of the worst aspects of these adjustments is that pure prejudice begins to reveal itself more openly. The most recent data from the US suggests this is the case.
Senior journalists often do more harm than good when they write about technical issues that they clearly do not understand. In many cases, they rely on the technical knowledge of their favourite economist or the flavour of the month economist and they are not skilled enough to know when their “economist” is also talking rubbish.
The global recession is presenting a new dilemma for the first world which will have significant impacts long after growth has returned. We saw in recent years that the price of oil rose sharply as the demand of energy from emerging nations skyrocketed. While we clearly have a short-term incentive at least for China to redirect its economic energies into domestic growth to give our export sectors a boost there will be implications of this that we might not have bargained for. Do we really want an extra 1 billion or more people to be as rich as us? It is a case of being careful what you wish for …
This is Part 3 in Deficits 101, which is a series I am writing to help explain why we should not fear deficits. In this blog we consider the impacts on fiscal deficits on the banking system to dispel the recurring myths that deficits increase the borrowing requirements of government and that they drive interest rates up. The two arguments are related. The important conclusions are: (a) deficits introduce dynamics which put downward pressure on interest rates; and (b) debt issuance by government does not “finance” its spending. Rather debt is issued to support monetary policy which is expressed as the desire by the RBA to maintain a target interest rate.
A lot of people E-mail and ask me to explain why we should not be worried about deficits and why they do not have to be financed by debt (even if the government does typically increase its debt when it goes into deficit). So in the coming weeks I will write some blogs to explain these tricky things. First, I will explain how deficits occur and how they impact on the economy. In particular, we have to disabuse ourselves of the notion that when governments deficit spend they automatically have to borrow which then places pressure on the money markets (which have limited funds available for lending) and the rising interest rates squeeze private investment spending which is productive. This chain of argument is nonsensical and is easily dismissed. So this is Deficits 101. Next time I will detail the reason why the central bank issues bonds (government debt).
The ABS published the January Labour Force Survey data this morning which is the monthly indication of how the labour market is faring. All expectations were that with other indicators such as the NAB Business Confidence Index and the ANZ Job Advertisements count all heading south very rapidly in the last month that the Labour Force data would be equally grim and signal the slide into recession. How wrong we all were. But should we believe the data?
Things are going crazy with the climate these days and certain animals are coming up with new coping strategies. I was sent some photos yesterday about a Koala that got hot and thirsty in South Australia during its current record heat wave.
Australia is not alone in mistreating our disadvantaged and unemployed citizens. As a portent of things to come in Australia after July 2005, tough new labour market reforms came into law in Germany on January 1. The Hartz IU reforms received a bit of European press in the last few days. I read two stories over the last few days, one in the German paper Bild am Sonntag (BamS) under the heading – Hartz-IV-Chaos! Kann ich meine Stütze bar abholen? – and another from the French daily Le Monde that provided some useful insights into the how a country that refuses to provide enough work for its citizens turns on the same.
On January 1, 2005, the ABC carried the headline Business welcomes trade deal, which officially came into force as the new year unfolded. The Australian-US free trade deal was touted by the current government as a major breakthrough. Well from where I sit it is neither a free trade agreement or one that we will look favourably on in the years to come. The fact that the ALP tried to convince us that they were capable of showing leadership (not!) by passing it with some irrelevant amendments is even more frightening.
I am in a quandary … as usual! I thought along the same lines when Australia was stricken with drought recently and there was a national urgency to provide both government assistance and support from the private sector (national appeals and such). At present the world’s media is focused on the events following the natural disaster in the Indian Ocean. Not without some justification given the extent of the calamity. Nation’s (some) are rushing to provide aid and our Prime Minister John Howard quickly committed $35 million in aid and has said more funds will be made available. He is quoted on ABC news today as saying “The amount will be added to significantly in the time ahead … We have a moral obligation on the basis of pure humanity to help and we will help.” Say that again John: “We have a moral obligation on the basis of pure humanity to help and we will help.” But try this logic out: the citizens who have been ravaged by the earthquake and subsequent tsunamis could have taken steps to avoid their exposure. Why didn’t they educate themselves enough to ensure they knew about the dangers and why didn’t they build better houses and why, why, why?
Mike Rhodes reported from California in Homeless attacked in Fresno that in February 2004, a “a coordinated multi-agency attack on homeless encampments earlier this month, the City of Fresno destroyed tents and other shelters used by the homeless … the Fresno Police Department … has returned to the tactic of not allowing the homeless to build any permanent structures. With thousands of homeless on the streets in Fresno, and homeless shelters able to provide only a couple hundred beds, a majority of the homeless have been turned into criminals. If you are homeless and can’t get into a shelter, you are breaking the law if you try to sleep anywhere in this city. This new policy penalizes the homeless and criminalizes poverty … There have also been public service announcements telling the community not to give money to the homeless … ”