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A snippet on foreign debt

June 25th, 2003

Following financial deregulation and the floating of the dollar, both the current account deficit and net foreign obligations (debt and equity) grew rapidly, reaching about 5 per cent of GDP and 50 per cent of GDP respectively by 1990. Since then the current account deficit has fluctuated and net foreign obligations have risen slowly to around 54 per cent of GDP, the great majority of which is debt. By contrast, in 1980, two-thirds of foreign obligations were equity (Parliamentary Library Research Paper No. 3, 2002รถ03, Australia’s Foreign Debt).

It is straightforward to compute that if nominal GDP is growing at 6 per cent per year and if nominal foreign debt grows by an amount equal to the current account deficit, debt will remain stable at 50 per cent of GDP if the current account deficit is equal to 3 per cent (=0.50*0.06) of GDP. Since Australia’s current account deficit has generally been greater than this, it seems likely that debt will grow over time.

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  1. June 25th, 2003 at 12:35 | #1

    Excellent find Pr Q.
    The Parliamentary Library is the best crib source for Australian social stuff on the internet.
    The actual hyperlink is here.
    I don’t know how that paper slipped under by blog radar screen, given that my blog antenna is constantly questing and probing and ceaselessly scanning of the cyber horizon for threatening trends.

  2. June 25th, 2003 at 13:05 | #2

    Brad de Long takes the view that today’s globalisation resembles nothing so much as a similar stage a century ago, when Britain and its currency dominated the financial world. He thinks that since that was beneficial on the whole and its irregularities got smoothed out, the same applies now. His view is, he knows nothing against it so go for it.

    But it is different now. Change is coming through faster, so the mechanisms for distributing gains can’t be counted on to outpace losses due to change – a shock wave effect. And the reserve currency isn’t hard money but a fiat currency, so it can no longer be argued that foreign ownership of investments is automatically and ipso facto a plus as it is also completely responsible for creating the investments in the first place (i.e. no local losers to the foreign owners – though there were minor exceptions a century ago, from owning the locations of the monetary metal mines).

    Of course it’s not the USA itself that’s the net gainer – it’s taking its cut as current consumption, exporting inflation – but downstream countries like ours are indeed doing a wealth transfer as a proportion of increased foreign ownership. Whether a large proportion or not, with debt it’s material because it’s cumulative. And that, of course, is why the middlemen countries with positive net savings rates are still willing to take dollars; they can pass the buck further down, taking the role that British savers did a century ago.

    All this has inspired me to look up some ancient debt mechanisms, like sale of rents, vivegages and antichretic mortgages. Some of it’s quite fascinating, if you’re funny that way.

  3. June 25th, 2003 at 18:50 | #3

    And can we please have GDP figures discounted for lontitudinal variations in:
    exchange rate (TWI)
    inflation rate (CPI)
    capital remittances (GNI)

    Also, it is meaningless to posit net foreign liablity stocks without also comparing them to net domestic asset stocks.

    Each hh may all owe AUD 16,000 ($2003) to foreigners now, compared to AUD 1,000 some 20 years ago.
    But if the AUD has declined in value, then that is not so bad.
    Also, if our the real value of Aust domestic asset holdings has increased at a greater rate than the increase in the real value of Aust foreign liabilties then we are all better off – from a net wealth perspective.

    My distinct impression is that Australias net private wealth has skyrocketed in the past generation.
    Last year thr nation’s net private-sector wealth

    grew by almost 8 per cent to $3431 billion..Every man, woman and child in Australia is now worth an average $176,900…After adjusting for inflation, wealth grew by 2.8 per cent and real wealth per Australian rose by 1.6 per cent…The make-up of the nation’s wealth remained relatively stable, with 57 per cent – worth $1868 billion – held in housing. Business assets represented 34 per cent, government securities 4 per cent and durables 4 per cent.

    TREASURY
    Australia’s Net Private Wealth.
    AMP
    Live long and prosper? – Feb 2002
    Trends in Taxable Income – June 2002
    NATSEM
    Trends in Australian Wealth – New Estimates for the 1990s

    Now Pr Q how about some discounted GDP estimates per my questions above?
    Plus lets get some figures on variations of
    property and equity markets.
    And estimations on the capital/labour income distribution shares over time, whilst you are about it.
    Come on, we haven’t got all day!

  4. June 26th, 2003 at 15:56 | #4

    The growth in the power and scale of the finance industry is a fundamental cause in the steep rise in the:
    foreign domiciling of our debt
    domestic concentration of our assets
    Why is it that finance is the be all and end all of economic life:
    wealth stocks/accumulations
    income flows/distributions
    Yet few on the blogosphere display the slightest interest in finding the data or developing a good theory to explain it?

    The twentieth century can be seen as a struggle between two modes of distribution:
    financial capitalism
    political statism

    Am I the only one on this commentary facility (apart from P.M.Lawrence & Pr Q) that sees the importance of this.
    Wake up people!
    Before too long, all the money will be gone.

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