It’s Wednesday and I discuss a number of topics today. First, the ‘million simulations’ that Bloomberg apparently think show that there is an impending US bond market rout. Second, the way in which neoliberal-inspired legislation ensures the private energy providers can gouge prices and make huge profits in the face of a state-owned alternative. Third, my latest podcast with Real Progressives. Fourth, the crocodile tears from the Australian government concerning Gaza when they are effective supplying the means to kill our own citizens and tens of thousands of others. Finally, to calm down after all that some great jazz. <\/p>\n
Bloomberg published a ridiculous article yesterday (April 2) – A Million Simulations, One Verdict for US Economy: Debt Danger Ahead<\/a> – which I thought might have been a delayed April Fool’s joke.<\/p>\n It was on the on-going theme that the media have been pushing hard in the last few months about how the US government is going to run out of US dollars – a proposition that any one who reflects for a second should work out is impossible.<\/p>\n The headline is intended to shock.<\/p>\n But when we read the story we find something different.<\/p>\n A “million simulations” – sounds a lot.<\/p>\n I recall when I was a doctoral student we could program cards to run one regression per day at the computing centre.<\/p>\n When modern software came along on PCs\/Macs, I could run millions of routines in a very short time.<\/p>\n So a million simulations is trivial these days and the quality of the output critically depends on the starting assumptions and parameters used to motivate the model simulations.<\/p>\n And that is where one realises this Bloomberg exercise is a total beat up and I would have very low self esteem if I went home after work knowing that they were reporting my work.<\/p>\n The US Congressional Budget Office, which is typically way off the mark in its forecasts, has claimed that:<\/p>\n \n… the national debt will grow to an astonishing $54 trillion in the next decade, the result of an aging population and rising federal health care costs. Higher interest rates are also compounding the pain of higher debt.\n<\/p><\/blockquote>\n Think about the use of the term “pain” in this context.<\/p>\n The national debt is nothing more than that portion of non-government wealth that is held in government bonds.<\/p>\n The interest payments are flows of income to those wealth holders.<\/p>\n Since when has income or wealth been painful?<\/p>\n There is a legitimate argument to be made that the wealth and income is in the hands of too few people and the massive inequality in the respective distributions is highly undesirable.<\/p>\n There is also a legitimate argument to be made that the whole debt-issuance process is unnecessary and should be terminated forthwith – which would have the desirable consequence of eliminating the misinformation emanating from these media articles.<\/p>\n But that is not the intent of the Bloomberg journalists.<\/p>\n They have somehow been conned into believing that non-government wealth and income is painful.<\/p>\n I am sure that the economist who motivate this sort of reporting would never be prepared to relinquish some pain and hand over any holdings of government debt they might have (directly or indirectly) or donate the flow of incomes to some worthy cause (because it is ‘painful’).<\/p>\n But it gets worse when we read on:<\/p>\n \nWith uncertainty about so many of the variables, Bloomberg Economics has run a million simulations to assess the fragility of the debt outlook. In 88% of the simulations, the results show the debt-to-GDP ratio is on an unsustainable path \u2014 defined as an increase over the next decade.\n<\/p><\/blockquote>\n So now ‘unsustainability’ is “defined as an increase over the next decade”!<\/p>\n No thresholds here – just an increase.<\/p>\n Would a debt ratio rising from 10 per cent of GDP to 12 per cent be considered unsustainable?<\/p>\n By this definition yes.<\/p>\n The article predicts that the polity will not be able to engineer a sufficient deficit reduction and perhaps it will take a “disorderly rout in the Treasuries market triggered by sovereign US credit-rating downgrades, or a panic over the depletion of the Medicare or Social Security trust funds \u2014 to force action.”<\/p>\n Think about that.<\/p>\n This page details the recent history of – United States federal government credit-rating downgrades<\/a>.<\/p>\n If we traced the history of bond yields in the US (data available – HERE<\/a>) – and matched it to the various threats of downgrades from the credit rating agencies we would struggle to find any evidence of a “disorderly rout”.<\/p>\n And as I discussed in this recent blog post – Rinse and repeat \u2013 Truss chaos \u2013 the new benchmark<\/a> (March 28, 2024) – the journalists have a new benchmark on which to prophesise doom and have somehow conned the public (including progressives) into believing it:<\/p>\n \nAs for how things might end, Britain\u2019s experience in fall 2022 provides a glimpse into the abyss. Then-Prime Minister Liz Truss\u2019s plan for unfunded tax cuts sent the gilt market into a tailspin. Yields soared so quickly that the central bank had to step in to snuff out the risk of an outright financial crisis. The bond vigilantes\u2019 actions forced the government to call off the plan and Truss out of office.\n<\/p><\/blockquote>\n The chaos had nothing to do with the capacity of bond vigilantes to force government change.<\/p>\n The vigilantes assessed, correctly, that the political position of Truss and Co was so tenuous that they would crumble in the face of threats – they did and the financial gamblers made handsome profits.<\/p>\n But the same sort of tactics (short selling etc) have been aimed at the Japanese government for decades without success.<\/p>\n Why?<\/p>\n Because the Japanese government maintained its resolve and knew its currency issuing capacity was all powerful.<\/p>\n Note in the quote above it says that the “central bank had to step in to snuff out the risk of an outright financial crisis”.<\/p>\n Central banks can always dictate the evolution of yields on government debt and the bond market investors can only influence that if the government allows them to.<\/p>\n The power is in the hands of the central bank not the gamblers.<\/p>\n The article goes on to speculate that the US Treasury debt might because an ‘unsafe asset’ – meaning it might attract credit risk (default).<\/p>\n That will never happen and journalists are wasting their precious time writing about it as if it might.<\/p>\n At the last state election in the state of Victoria, the government announced that they were reinstating the government-owned State Electricity Commission to force price reductions in the energy market.<\/p>\n I have written about the energy markets in Australia before:<\/p>\n 1. Electricity network companies profit gouging because government regulatory oversight has failed<\/a> (November 22, 2023).<\/p>\n 2. Welcome to the world of privatised electricity and canned music<\/a> (October 3, 2012).<\/p>\n The aim of the original state-owned SEC was unambiguously to provide a public service \u2013 in this case, electricity \u2013 and it did so in a reliable fashion at a decreasing real price even though it was faced with continually increasing demand for its services as the population and industry grew in the Post-WW2 period.<\/p>\n The earlier post details how the old SEC was privatised in 1994 and the generation, transmission and retail elements that were previously provided as a state-owned monopoly were broken up into tiny parts and turned over to the profit-seekers.<\/p>\n Service quality and reliability has declined ever since and prices are sky high.<\/p>\n The current Victorian government has finally taken the decision to reverse some of the damage that the sell-off has created and has introduced a new state-owned SEC to act as a counter to the privatised operators.<\/p>\n But the problem is that the move comes up against – National Competition Policy<\/a> – which was introduced by the Federal Labour government in the 1990s.<\/p>\n Yes, a so-called progressive government once again demonstrating that they were agents of capital rather than defending public service.<\/p>\n NCP basically makes it very difficult for public enterprises to operate because it negates the advantage the public sector has as the currency issuer (in the case of the federal level) or, in the case, of state governments, their capacity to borrow at very low interest rates relative to the corporate borrowing rates.<\/p>\n The policy stated that:<\/p>\n \nThe objective of competitive neutrality policy is the elimination of resource allocation distortions arising out of the public ownership of entities engaged in significant business activities: Government businesses should not enjoy any net competitive advantage simply as a result of their public sector ownership.\n<\/p><\/blockquote>\n The relevance for Victoria’s current attempt to introduce a new state-owned SEC relates to the so-called ‘financial accommodation levy’ built into the NCP.<\/p>\n This levy is charged to Government entities which effectively fines them for being able to borrow cheaply relative to private corporations.<\/p>\n It means that the new SEC will not be able to exploit a lower cost structure – which arises from the access to cheaper debt (as a State government) and from the absence of a margin required to generate profits for private shareholders.<\/p>\n And that means that the price gouging that the private suppliers are engaging in as they drive their profits up and exploit their market power will continue.<\/p>\n The only hope is that the Victorian government tears up the NCP – that is, refuses to abide by it.<\/p>\n Under the constitution, the federal government can only impose the policy on the states by agreement.<\/p>\n The corporate lobby claims that failure to enforce the ‘levy’ on the new SEC will mean private investment in renewables will stop.<\/p>\n A threat with no substance.<\/p>\n The new SEC will have no traction if the levy is imposed.<\/p>\n But think about how ridiculous things have become – that the consumers are being forced to pay massive price hikes on energy to feed the profits of the private companies when that could be arrested by simply exploiting the capacity of the state to provide better and cheaper public services.<\/p>\n And that capacity is hamstrung by an ideologically motivated law, which could be ignored if the Victorian government had the fortitude.<\/p>\n Last week I did an interview with Steve Grumbine and the team at Real Progressives in the US which discussed why the predictions of John Maynard Keynes that he made nearly 100 years ago have not come to fruition.<\/p>\n This blog post motivated the podcast – Keynes was wrong because he failed to consider class conflict<\/a> (March 14, 2024).<\/p>\n I argued that “progressives shouldn\u2019t be working to reform the system; they must work to change it” and talked about the role that MMT could play and where it was of limited use.<\/p>\n The podcast page is – HERE<\/a> – and provides a transcript etc.<\/p>\n The actual audio follows:<\/p>\nThe ridiculous National Competition Policy in Australia<\/h2>\n
Class, Capitalism, and MMT with Bill Mitchell podcast<\/h2>\n