Home > Economic policy > Losing our AAA credit rating is not a harbinger of doom …

Losing our AAA credit rating is not a harbinger of doom …

July 14th, 2016

… It could be a blessing in disguise. That’s the title of a piece I wrote for The Guardian on the news that our rating had been placed on negative watch

The outcome of the election gives little to cheer about: a government elected on a narrow margin, riven with internal divisions, and with little in the way of a coherent plan. But there is one potential blessing in disguise: the likelihood that Australia will lose its AAA credit rating.

The announcement by Standard & Poors that Australia’s AAA credit rating was to be placed on a negative outlook was widely greeted as a harbinger of doom. In reality, however, the loss of the AAA rating would have almost no effect on our economy. More importantly, the central importance placed on the AAA rating by Australia’s political class has seriously distorted our economic policy debate.

Most obviously, the attention paid to the AAA rating reinforces the view, which has dominated Australian policy discussion since the 1980s, that financial markets provide most accurate possible judgements on economic management. This view seemed plausible in the early years of financial deregulation, which followed the crises of the 1970s. But decades of experience since then, included the ‘entrepreneurial’ excesses of the late 1980s, the dotcom boom and bust of the 1990s and above all the Global Financial Crisis have shown that it is false. The judgement of John Maynard Keynes that ‘When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done’ has been shown to be well-founded.

Of all the actors on the financial markets, none have failed more spectacularly than ratings agencies. In the leadup to the GFC, AAA ratings were tossed around like confetti, being awarded to derivative securities that were ultimately based on home mortgages that could not possibly be repaid when prices inevitably fell. Hundreds of these allegedly gold-plated securities went into default. Only when disaster was already obvious did the agencies fix their ratings.

The performance of the agencies with respect to government debt is no better. Agency ratings tell us nothing we don’t already know. For example, after the Brexit vote, it’s obvious that the outlook for the UK economy, and for UK government finances is more questionable than before. The downgrading of the UK credit rating confirms this after the fact, but doesn’t tell us anything that wasn’t already obvious. Clearly the agencies were just as surprised by the Brexit vote as everybody else.

The more serious problem is that the maintenance of a AAA rating requires a policy of holding down debt, even at the cost of forgoing socially beneficial investments.

?Exactly the same logic applies to corporations. The investment policy required to maintain a AAA rating is so conservative as to ensure that many profitable investments are foregone. Only two US corporations (Microsoft and Johnson&Johnson) now maintain AAA ratings on their debt. Microsoft has recently chosen to risk a downgraded by purchasing LinkedIn, a step that makes obvious business sense, but implies a need for more debt. Soon, AAA-rated corporate debt will be nothing but a memory.

The same realization is finally coming to national governments. Only three members of the G20 (Australia, Canada and Germany) now maintain AAA ratings. Germany’s pursuit of the austerity policies needed to maintain a AAA rating has come at a terrible price for Europe, which remains in depression nearly a decade after the GFC.

Advocates of aggressive debt reduction often make an analogy with households, saying that governments, like households, can’t sustain high levels of debt indefinitely. The analogy is problematic because households, unlike governments, have a finite life. More importantly, though, Australian households do not, in reality, behave in anything like the way that this analogy is supposed to support.

Australians use debt as a financial management tool on a large scale. We use credit cards to manage our ordinary income and expenditure from week to week, personal loans to finance the purchase of cars and household durables and of course, mortgages to enable us to buy houses.

The average new mortgage in Australia in 2015 was $371,200, more than 500 per cent of median household income. Moreover, with many loans issued on an interest only basis, these high debt levels are sustained for long periods, often being repaid only when the house is finally sold. By comparison, Australian net government debt is currently around 15 per cent of GDP, or about 60 per cent of the government’s annual income from tax revenue.

There is one reasons we might care about losing our AAA rating. It means that the government will pay a slightly higher rate of interest on bonds issued in the future than it would if we kept the rating and nothing else changed. The margin between AAA and AA+ bonds is typically between 0.2 percentage points. Eventually, when our entire public debt of around $300 billion, that will amount to an extra cost between $600 million and $1 billion per year, if nothing else changes.

Of course, many other things will change. The last time Australia’s credit rating was downgraded, in 1986, the interest rate on government bonds was around 14 per cent. Today, it is below 2 per cent and falling. Whether or not our rating is downgraded, the interest rate will continue to fall along with rates around the world.

The low interest rates we see today will not last forever. But while they do, Australian governments have the opportunity to lock in long-term finance for investments that will benefit both current and future generations. They should not be deterred by the phantom of a AAA rating.

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  1. Ikonoclast
    July 14th, 2016 at 17:15 | #1

    I agree. The empirical record supports a scathing judgement of the ratings agencies.

    “It can’t be overemphasized that the rating agencies have no, repeat no, special information about national solvency…” — Paul Krugman.

    Nobel prize-winning economist Joseph Stiglitz identified rating agencies as one of the “key culprits” of the financial crisis. “They were the party that performed the alchemy that converted the securities from F-rated to A-rated. The banks could not have done what they did without the complicity of the rating agencies.”

    One is tempted to ask why ratings agencies are even still around. It’s a clear diagnostic that this political-economic system is still one very sick zombie full of zombie ideas, zombie corporations and zombie institutions. Even a former Senior President of Moody’s is scathing.

    “William Harrington, a former senior president at Moody’s, claims the organisation’s senior management interfere with analysts’ independent assessments.

    Ratings agencies have attracted international opprobrium after Standard & Poor’s, another of the three big agencies alongside Moody’s and Fitch, stripped the United States of its gold-standard AAA rating.

    Harrington, who worked at Moody’s for 11 years until he resigned last year, said ratings agencies suffer from a conflict of interest because they are paid by the banks and companies they are supposed to rate objectively.” – Guardian, 2011.

    Ratings agencies are another example of corporations trying to tell democratically elected Governments what to do and trying to tell citizens that corporate fabrications are objective truth.

    Must… stop… typing… now… or… will… smash… keyboard. Those frauds just make my blood boil.

  2. Apocalypse
    July 14th, 2016 at 17:26 | #2

    The rates for banks and corporates on their international borrowings will also go up. Not the biggest deal in the world, but everybody will pay a bit more, not just governments.

  3. Ikonoclast
    July 14th, 2016 at 17:49 | #3

    @Apocalypse

    Then who gets the “bit more”? That’s always an interesting question.

  4. Apocalypse
    July 14th, 2016 at 18:59 | #4

    @Ikonoclast

    The non-Australian lenders get a bit more, because they are taking a bit more of a risk lending to Australian governments, banks and companies. It’s not a real risk, because the chances of default haven’t actually increased (or if they have, it’s by an infinitesimally small amount) but that’s how these things are.

    For someone with a $400,000 mortgage, 0.2% more on their interest rate is $800 per year. Not huge, but not nothing either.

  5. Moz of Yarramulla
    July 14th, 2016 at 20:43 | #5

    As someone with one of those “new mortgages”, people outside Sydney must be really dragging the average down. From what I see the new mortgages are split between 80% on expensive properties and 90%+ on cheaper ones, there aren’t a lot of “borrow $200k to buy a $2M house” loans.

    But insofar as the country budget is like a household budget, low interest rates mean it’s a great time to make long-term investments funded by cheap debt. Even our political class are not this stupid in their private lives… look how many are highly leveraged property speculators, for example.

  6. Ikonoclast
    July 14th, 2016 at 23:00 | #6

    @Apocalypse

    It was a rhetorical question. I had a good idea which group was getting a bit more.

  7. James Wimberley
    July 15th, 2016 at 02:48 | #7

    A minor clarification on the boom in US securitised mortgages. This was not only a misjudgement of risk on a large scale by financial professionals who should have known better. There was a large element of outright fraud and malpractice by the bundlers, in certifying titles without documentation and failing to provide buyers with records of mortgage payments. Most US states IIRC don’t have efficient land registries and Torrens titles, thanks in part to lobbying by title insurers, so the amount of work involved in doing it properly is quite large.

  8. J-D
    July 15th, 2016 at 08:23 | #8

    http://www.abc.net.au/7.30/content/2008/s2342917.htm

    BRYAN DAWE: Thanks for coming in. You are with one of the big rating agencies that give ratings internationally to investments yes? Investors look at your ratings when making investment decisions.
    JOHN CLARKE: Can we get my solicitor in here if I’m going to answer these questions.

    BRYAN DAWE: OK Just tell me how the ratings work. That’s all I want to know.
    JOHN CLARKE: Can you just ring that lawyer and tell him I’m with detective sergeant… what’s your name?
    BRYAN DAWE: I’m not a detective sergeant. There’s been a lot of money gone missing we are just trying to establish what happened to it.
    JOHN CLARKE: I just drove the car I didn’t go into the building.

  9. Ikonoclast
    July 15th, 2016 at 08:37 | #9

    I’ve never appreciated Clarke and Dawe humour. I find them really dull and obvious and completely unfunny. Yes, I know not-mimicking the target is the Clarke technique but I completely fail to see what is clever about that, at least done in his manner. And deadpan only works if material is genuinely funny. Their material is dull and completely lacking in imagination, wit and humour. Just my opinion of course. Apparently Peter Cook encouraged John Clarke. Peter Cook had a sly archness which made deadpan and other techniques work. John Clarke has…. nothing. Sorry if I have offended Clarke and Dawe fans. Those fellows are dull beyond belief. Yech.

  10. Troy Prideaux
    July 15th, 2016 at 08:49 | #10

    Apocalypse :
    The rates for banks and corporates on their international borrowings will also go up. Not the biggest deal in the world, but everybody will pay a bit more, not just governments.

    This has always been my impression too (coz that’s what we’re told) but lately, the MMT folk have been instilling lots of doubt in my mind about that.

  11. GrueBleen
    July 15th, 2016 at 10:53 | #11

    @Moz of Yarramulla

    Like Malcolm Turnbull, perhaps ?

  12. GrueBleen
    July 15th, 2016 at 10:59 | #12

    @Ikonoclast

    Well so would you be if you’d been at it for 27 years without a break, Ikono.

    Yair, IMHO, Clarke and Dawe slid silently under the shark many years ago, but obviously the ABC is very reluctant to see them go. They were quite entertaining for the first 5 or 10 years, though.

  13. GrueBleen
    July 15th, 2016 at 11:04 | #13

    @Troy Prideaux

    Do please enlarge on what the MMT folk have been “instilling”, Troy.

    I’ve always reckoned that this “the government will pay more for new debt” thing is a-grade nonsense, especially in the current circumstances where getting any interest on loans is increasingly difficult. If the government goes out to tender for loans – rather than just accepting what Goldman Sachs is offering – then it will continue to get cheap loans.

  14. Troy Prideaux
    July 15th, 2016 at 11:21 | #14

    GrueBleen,
    IIRC, linking to other economic threads are generally frowned upon by JQ, but I’ll just sneak this in this one time: http://theaimn.com/myth-inter-generational-debt/#comment-473435

  15. Ikonoclast
    July 15th, 2016 at 13:27 | #15

    @GrueBleen

    It might well be that I missed them in their heyday. I spent 10 years at least where I simply never watched TV. I wasn’t in prison or on an oil rig or in Antarctica, I just didn’t bother owning a TV. It was strange when I bought one again finally. I just couldn’t believe the rank inanity of it. Sad thing is though after a week of two one acclimates again and one somehow fails to hold on to the true and pure perception of just how inane, insulting and worthless all TV programming is. But to this day I watch very little, just the ABC National News maybe on some nights.

  16. Ikonoclast
    July 15th, 2016 at 13:52 | #16

    @GrueBleen

    The difference between an MMT theorist and an orthodox macro-economist is that the MMT theorist says -1+1=0 and the orthodox macro-economist says 1 – 1 = 0. This is the true sum total of their differences on money creation, money destruction and national accounting. The bizarre thing is that these schools think they are fundamentally different.

    For real items, the sum of 1 (at t1) -1 (at t2) = 0 (at t2 plus an infinitesimal) is possible. For real items, the sum -1( at t1) +1 (at t2) = 0 (at t2 plus an infinitesimal) is impossible. When it comes to notional items like fiat currency both sums are possible and in a circular annual national accounting system they come to same thing. I’ve not yet seen an MMT proponent nor an orthodox macro-economist admit or allude to this. But then maybe my readings or my memories are deficient.

    By “real items” I mean macro physical objects as treated by classical physics.

  17. Ivor
    July 15th, 2016 at 14:26 | #17

    @Ikonoclast

    The orthodox macro-economist may write:

    the orthodox macro-economist says 1 – 1 = 0.

    but they actually think that:

    1 + 1 = 2 + r

    They then scratch their heads and wonder why their credit rating has been downgraded.

    At worse, they then blame the credit agency.

  18. Ivor
    July 15th, 2016 at 14:41 | #18

    @Troy Prideaux

    I am not sure what point you are trying to make here, but surely, the problem with inter-generational debt is more to do with the interest payments such debt imposes.

    If debt increases and does not have to be prepaid, or can be paid by more debt, and there is no interest – then there is no problem.

    Bond holders – incl. super funds and retirees – need their interest.

  19. Troy Prideaux
    July 15th, 2016 at 14:48 | #19

    Ivor :
    I am not sure what point you are trying to make here, but surely, the problem with inter-generational debt is more to do with the interest payments such debt imposes.

    That was kinda-sorta a question I posed in the comments, but received answers that appeared to quash some of my concerns at least, and make coherent sense.

  20. Ikonoclast
    July 15th, 2016 at 15:14 | #20

    @Ivor

    That’s kinda conflating two things (national accounting and returns on capital) but it is still amusing. I have no problems if returns equal real growth. But I do have problems if (a) growth is assumed to be endlessly possibly in a finite system and (b) if returns go to capitalists and not workers.

    The “permission” that our system gives to the potential increase of personal capital indefinitely and without personal effort is morally wrong, socially damaging and environmentally damaging. It sets up immoral and unsustainable dynamics.

  21. Ivor
    July 15th, 2016 at 15:19 | #21

    Investors tended to shrug-off warnings implicit in credit downgrades in Puerto Rica and look at the catastrophe that then followed:

    http://dealbook.nytimes.com/2014/02/06/morning-agenda-a-shrug-at-puerto-ricos-debt-downgrade/

    All they can do now is call in the helicopters.

  22. Ivor
    July 15th, 2016 at 15:27 | #22

    @Ikonoclast

    Yes – it is conflating two things.

    I think we need to combine them – returns on capital are a source of national accountables.

    This all makes sense to me PROVIDED there is no increase in per-capita debt.

  23. GrueBleen
    July 15th, 2016 at 17:19 | #23

    @Ikonoclast

    Teev is just another one of those imperfections we have to tolerate. Personally, I only watch it because I’m sitting in my lounge chair with the cat asleep on my arm. 🙂

    But I only watch FTA, I’m not going to pay direrctly for it – especially Faux Noise.

  24. GrueBleen
    July 15th, 2016 at 17:24 | #24

    @Ikonoclast

    Now don’t do that to me, Ikono, I have a cat I need to go and let sleep on my arm. I’ll try to give it some actual thought tomorrow … maybe. Or maybe I’ll just go mow the lawn whilst it isn’t raining in Melbourne.

  25. GrueBleen
    July 15th, 2016 at 17:35 | #25

    @Troy Prideaux

    Yeah, thanks for that Troy, but I think I still have more questions than answers. The thing I get, however, is that if it doesn’t cause accelerating inflation (ie the NAIRD = the Non Accelerating Inflation Rate of Debt), then a fiat currency state borrowing largely, but not exclusively, from its own citizens and their enterprises in its own currency can just go on flipping bits (which, they tell me, is how money is “printed” these days).

    But being an old pensioner myself who paid all sorts of taxes (including income tax, sales tax, GST etc) for about 50 years (and still paying out around $5000 pa in GST), but didn’t take any advantage of, for instance, the universities that my taxes were paying for, then I’d like to know when those feckless kids who did go to those universities etc are going to pay me back for all of the money they’ve gotten from me.

  26. J-D
    July 16th, 2016 at 09:26 | #26

    GrueBleen :
    @Troy Prideaux
    Yeah, thanks for that Troy, but I think I still have more questions than answers. The thing I get, however, is that if it doesn’t cause accelerating inflation (ie the NAIRD = the Non Accelerating Inflation Rate of Debt), then a fiat currency state borrowing largely, but not exclusively, from its own citizens and their enterprises in its own currency can just go on flipping bits (which, they tell me, is how money is “printed” these days).
    But being an old pensioner myself who paid all sorts of taxes (including income tax, sales tax, GST etc) for about 50 years (and still paying out around $5000 pa in GST), but didn’t take any advantage of, for instance, the universities that my taxes were paying for, then I’d like to know when those feckless kids who did go to those universities etc are going to pay me back for all of the money they’ve gotten from me.

    When they are your geriatricians and palliative care nurses.

  27. Ivor
    July 16th, 2016 at 10:08 | #27

    If Germany is maintaining a AAA rating then there may be other harbingers of doom, such as:

    http://www.nytimes.com/2016/07/14/business/dealbook/germany-bonds-negative-yield.html?src=me&_r=0

    What happens if all EU capitalist economies are forced to do the same?

    Which part of capitalist modelling equations have negative interest rates?

    Unfortunately the helicopters have dumped money on the wrong people. They should have maintained and boosted workers wages.

  28. Ikonoclast
    July 16th, 2016 at 11:41 | #28

    @Ivor

    “Unfortunately the helicopters have dumped money on the wrong people. They should have maintained and boosted workers wages.” – Ivor.

    That is correct. Most academic economists would agree with that proposition except for the neoliberal, market fundamentalist types. For example, Stiglitz and Krugman would agree. Closer to home, John Quiggin, Bill Mitchell and Steve Keen would agree I think. What the business economists say is worthless. They are paid shills for capitalist and market fundamentalist ideology.

  29. Ivor
    July 16th, 2016 at 12:19 | #29

    @Ikonoclast

    I wonder if most Keynesians would agree. As I understand, Keynesians realise that workers will always oppose a cut in wages, but will not oppose a loss of purchasing power due to inflation. Somewhere Keynes said that.

    Keynesians would abhor giving workers extra purchasing power because this would lower the relative purchasing power of Capital.

    Keynesians want to boost investment and profits, not workers wages which they view as a residual.

    If workers wages do not constitute the required effective demand, the Keynesians will allow them to access helicopter money BUT only through the banks.

    So they dump it on the banks, and then try to force the banks to do something sensible by punishing them with negative interest rates.

    Of course this ain’t going to work, and so the only option now is boost military spending and find a pretext somewhere.

  30. Ikonoclast
    July 16th, 2016 at 13:15 | #30

    @Ivor

    I wouldn’t lump all Keynesians together and I wouldn’t lump Keynesians with neoclassicals, Austrians or Monetarists. I respect the Keynesians (of various strains) in a number of ways. First, let me say that yes, they do not radically critique capitalism as such; at least not in the fundamental ways Marxists and Marxians critique capitalism.

    However, Keynesians are a good deal more realistic and empirical about capitalist economics (and political economy) than the other schools I mentioned. Keynesians recognise the importance of aggregate demand, the reality of business cycles, recessions and depressions in unregulated capitalism and the need for an active state sector especially but not only concerned with pump priming, damping booms (anti-cyclical policies), welfarism and keeping unemployment low. They did in the end fail to deal with inflation and stagflation. Or did they? There are complicated arguments about that period (1970s) which I don’t pretend to understand yet, if I ever will.

    Keynesians understand the political economy is a complex system with more to it than just markets. A good proportion at least are social-democratic in tendency. But ultimately yes, there are aspects of capitalist economics about which they appear to have a blind spot or to be in some denial about. That is just my opinion of course and Keynesians of various types will disagree with me.

  31. Ivor
    July 16th, 2016 at 15:17 | #31

    Yes there is a problem using the term “Keynesian” as many opportunist politicians and academics have manipulated and misused this term.

    Wasn’t it Keynes who said at one time that he was not a Keynesian?

    However I tend to lump in all those who essentially follow Western undergraduate economic dogmas that are propagated in OECD universitys and numerous youtube courses.

    In essense this can all be lumped together as Yankee economics epitomised by Samuelson who arrogantly noted:

    “Let those who will, write the nation’s laws if I can write its textbooks.”

    See: Yankee Economics

    This is the real point. This is what I lump together under the strictly misnomer of Keynesian. It is the fluff in our graduates heads with all the dogmas and misunderstandings they then use to write papers, newspaper commentaries, policy papers, construct models, and cut wages to save their skins.

    In fact Samuelson describes his economics as a Neoclassical Synthesis at described in the inside back cover of ed 5. of his textbook (1961).

    IN reality none of these terms are accurate. They are all vulgar forms of bourgeois theory differentiated from real economics by their common denial of Adam Smith’s, David Ricardo’s and Karl Marx’s work developing the labour theory of value.

    Their core tenet is that you can have capitalist profit (a continuous return on capital) and still avoid catastrophe.

    And as denialists, since Marshall, they have by now created a crazy world which in fact is denying them.

  32. GrueBleen
    July 16th, 2016 at 16:29 | #32

    @Ikonoclast

    Re your post #16 (15th July at 13:52) above, well the cat is now happily asleep on the chair on its own, and I did.t mow the lawn. Instead, I read several blog post on intergenerational equity and I can now unequivocally state that I have’t the faintest idea what you’re talking about.

    I read two posts by ProfQ (on this blog) and two posts by Nick Rowe (on the Worthwhile Canadian Initiative blog), one by Noah Smith (on his Noahpinion blog) abd I even read a Wikipedia entry about Timur Kuran and his work on “preference falsification” and still I don’t get what you said.

    Oh well, so it goes and such is life. But I did find an interesting though in the Noah Smith post which I will copy into here:

    “But see, here’s the interesting thing about Rowe’s model: the government doesn’t need to use debt to impose this burden on the young. It can achieve exactly the same result with zero debt, just by taxing the young directly and spending on the old (i.e. a Social Security system with unsustainably large contributions). In Rowe’s model, debt is just an accounting system that keeps track of how much consumption has been transferred from the young to the old. But the debt itself doesn’t really matter; only the consumption transfer matters.”

    So, no debt required – Pareto efficient or Ricardo equivalent: you choose.

  33. Ikonoclast
    July 16th, 2016 at 17:23 | #33

    @GrueBleen

    I was deliberately being a little humourous. However, there is a central truth in what I say.

    1. Orthodox economists tend to say you must tax before you spend. To the orthodox economist a balanced budget is N – N = 0 where N is a given large number of dollars. The plus N is the tax receipts and the minus N is the budget spend.

    2. MMT economists say fiat money can (and must) be created and spent before you tax it. To an MMT economist a balanced budget is -N + N = 0. The minus N is the national accounting entry after N fiat dollars are created. The plus N is the tax receipts which rebalance the national accounts for that year and give a balanced budget. (The balanced budget example makes the whole demonstration simple.)

    3. From the above, we can see that it is absurd, in the case of notional quantities, fiat dollars in this case, to argue about the sequence of money creation and money destruction. Notional quantities (fiat dollars) can have a positive or negative sign. We can have plus $10 or minus $10 in an entry or accounting system.

    4. It is absurd to argue which comes first in the annual budget cycle (a circular process), the money tax or the money spend. Accounting conventions could be made to work it either way.

    5. The final absurdity of the controversy between MMT and orthodox economic accounting is that when they come back to talking of real quantities they end up saying the same thing. Both schools end up asserting (as they must do if they are to be empirical) that what finally matters is the government’s call on real goods and services. And they both say that for the government’s call to be effective these must be real goods and services available (or at least unutilised capacity available). Thus with real quantities only the sum +1 – 1 = 0 is possible. You can have a pool of purchasable cars. Let us say the pool is down to 1. The government can purchase that car and thus take (“-1” as a verb) a car from the pool. If that was the last new car in the land, nobody else in the land can now buy a new car until another is imported or made. On the other hand, you can never have a car pool with minus 1 cars (“-1 car” as a noun) in it. The quantity of -1 car (as an extant real thing not as a mathematical operation) cannot exist.

    The above demonstrates the essential absurdity of the MMT / Conventional Economics controversy about fiat money and government budgets. MMT advocates do have a kind of point but it is against the sort of crude or naive economics where a national budget is claimed to be just like a household budget: where people don’t understand the national accounting mechanics of money creation and money destruction. Most conventional economists, in turn, tend to run dead or run a bit cryptic on the realities of money creation and money destruction. In this way, many conventional economists pander to politician speak, media bulldust and layperson misunderstandings, thus allowing monetarists and neoclassicals to get away with outrageous untruths and/or omissions about how our money system really works.

  34. Jordan from Croatia
    July 16th, 2016 at 21:09 | #34

    “Then who gets the “bit more”?”

    “The non-Australian lenders get a bit more”

    It is a wrong question, Ikonoclast, but you should keep asking questions untill they themselves realize how stupid their own answers are and how they believe in dogmas that have nothing with reality.

    A question like : But where did those “non-Australian lenders” got the dollars that only Australia can print? are they printing AD or how?

    I am quite sure that Apocalypse canot answer that because orthodox does not dare to go there. If by accident Apocalypse says :”they earned it” then you can follow it by “but why they are not spending it but lending it back to originators of that money?”

    Non-MMT people can not answer such a question because they never tought of that. Only MMT economists dared to think of such issue. And some Marxists.

  35. Jordan from Croatia
    July 16th, 2016 at 21:16 | #35

    J.Q.

    You have killed those zombies in this post, but left one, the biggest, zombie alive there.
    It is the zombie that rating agencies can affect level of interest rates. Why you did not kill that zombie? Is there some basic orthodoxy still clawing you back into wrong thinking after so much effort you gave to kill them?

    When talking about a monetary policy every economist accepts that Central Bank is deciding the interest rate which is what the state get when going for new debt. But then why would any economist abolish such knowledge when talking about rating agencies? Why suddenly it is not CB that decides interest rate but rating agencies?

  36. Jordan from Croatia
    July 16th, 2016 at 21:28 | #36

    Ikonoclast

    Oh, come on..”4. It is absurd to argue which comes first in the annual budget cycle”
    Which comes first is the crucial proof that country’s debts do not matter. Since you accepted that fact and know it as a fact it is of no importance to you.
    But when it comes to deficit worrying people it is the crucial fact that can show them how orthodox and dogmatic such beliefs are. And such facts can not be used with low level economist because it is too far ahead of them but for those that know a lot but still do not want to connect the dots.

  37. Jordan from Croatia
    July 16th, 2016 at 21:49 | #37

    GrueBleen @#25
    “but didn’t take any advantage of, for instance, the universities that my taxes were paying for, then I’d like to know when those feckless kids who did go to those universities etc are going to pay me back for all of the money they’ve gotten from me.”

    So you have decided to pay attention to tax payed benefits that you did not use. What about those that you did use but take it for granted but which was payed for by taxes on previous generations and you enjoyed it? Roads were there when you were born, those roads were built and payed by previous generations. Health providing infrastructure was there before you were born and it was also payed by previous generations…. and so on and on.

    But it was your choice not to use education system fully at the time when you were young. It was your choice how much you will use it. Your complain should be about your own choices not about someone elses choices. What is important is that everyone is allowed to acces the benefits of the state, choices are theirs.

  38. Jordan from Croatia
    July 16th, 2016 at 22:12 | #38

    Troy Pridaux & Ivor

    “but surely, the problem with inter-generational debt is more to do with the interest payments such debt imposes. ”

    The truth is that NO STATE EVER LOWERS ITS DEBTS and intereest payments are made with new debt, also.

    So, what intergenerational debt problem? Where is it? did state pay any of old debts by taxes of later generations?

    The best way to look into that is deficit, primary deficit that is. Primary deficit says that state is not paying CURRENT expenditure on CURRENT beneficiaries by CURRENT taxes but by borrowing more, but people are talking about paying for previous generations???????

    Is this proof too simple to be comprehended? Why do people can not grasp it but keep coming back for imaginary problems while real problems are being neglegted?

    John Kelly gave good explantions but it is much simpler to show it by state deficit. If deficit year then it is not paying but it is borrowing more to spend on current generation, if surplus then it is paying for previous generation. How many years the states are in surplus? About 5% of the time.

    Just a simple fact that states do not lower their debts almost EVER show that there is no intergenerational problem, but it is given as bait to masses to hide class war that is going on and wealthy are winning. It is a bone for lower classes to fight over while wealthy are eating juicy ribeye steaks

  39. GrueBleen
    July 16th, 2016 at 23:09 | #39

    @Ikonoclast

    Ah, well the being “humorous” bit gets me every time. It’s not one of my notable accomplishments. But thank you for your longer explanation to which I will give some further thought (and up with which, I will put).

  40. GrueBleen
    July 16th, 2016 at 23:16 | #40

    @Jordan from Croatia

    No, no Jordan, devant moi il n’y avait rien.

    Besides, I’m not at all concerned about the justice due from me, only the justice due to me. And anyway, who cares about the so-called ‘Nation builder’ generation (the one before the Baby Boomers), they’re mostly dead anyway.

    PS: it’s spelt “paid”. mate. This is English, the world’s most irregular major language.

  41. Ivor
    July 17th, 2016 at 00:52 | #41

    @Jordan from Croatia

    If you add in the extra condition “intereest payments are made with new debt,” then you are talking about something else.

  42. Ernestine Gross
    July 17th, 2016 at 23:05 | #42

    The role of rating agencies in the development of the GFC cannot be over-emphasised. IMO, it ought to be repeated at least once a month everywhere in ‘the global economy’.

    Why have these 3 major rating agencies not gone out of business – like woolsclassers would, if they were to totally misclassify wool grades, assuming there would be only 3 in the ‘free world’?

    Some may say the difference lies in the lack of ‘competition’ in financial markets (knowing that woolclassing is a trade with qualifications and there are many woolclassers).

    IMO, the ‘lack of competition’ story is not credible.

    Wool is classed after it has been produced. Financial securities relate to future returns denominated in units of account (‘money’). In a ‘competitive financial market’ every individual would have to ‘price’ (value) each financial security before buying any one of them. How does an individual evaluate the millions of financial securities on any one day? I don’t believe it can be done, particularly not for people who work 8 or more hours per day to earn a living and put a little aside for the future.

    The role of rating agencies, in practice, is to provide centralised signals to the traders of financial securities – a ranking – because the traders wouldn’t know how to ‘price’ the millions of financial securities in ‘the global economy’ without it.

    The question of interest to me is, can rating agencies’ signals be used to undermine the stability of the EURO (or any national currency)? Can these signals be used to gain a ‘comparative advantage’ by ‘nations’?

    It is said that before the GFC Greek, bonds were ‘priced’ similarly to German or Dutch government bonds on the premise that Greek bonds are issued in EURO currency units. It surely worked – to the detriment of the Greek economy. The ‘market signal’ was wrong – very wrong. The Greek economy boomed in terms of GDP growth and relative to the 2 named other EURO juristictions prior to the GFC. The ‘boom’ was debt driven, private and government, more so the latter.

    The important problem of ‘who gets the money’ was ignored. The mirror image is the problem ‘austerity for whom’? The Tsipras government in Greece is the first government in my living memory, which takes income and wealth distribution into account when deciding how to ‘save’, that is, how to reduce the government debt.

    The same applies to households, viewed not as illustrated in micro-economics, namely one single household, but rather as generations of households.

    Keynesian aggregate demand management is only a short term management tool, as reflected in the phrase ‘balanced budget over the cycle’.

    Keynesian economics worked very well for West Germany after WWII. It worked well because physical ‘capital’ had been destroyed in a massive fashion. To create money for the purpose of rebuilding, given the information that it had existed before (ie a bit like wool classes) was an almost sure bet that financial returns would follow.

    Keynesian short term aggregate demand management worked well for Australia in 2008 and for Germany in 2008 in response to the GFC (I don’t have all numbers securely in my head to include a few other countries).

    I don’t trust rating agencies’ ratings. However, a slight increase in the structure of interest rates may indeed be a blessing in disguise – to dampen debt driven ‘prosperity’.

  43. Ikonoclast
    July 18th, 2016 at 08:04 | #43

    @Ernestine Gross

    I agree with all you say as far as it goes. What you argue for are adjustments within the given system. Of course, what I argue “ought to be repeated at least once a month everywhere” is that the system itself is the problem.

    (a) If there are limits to g now tending to hold g below r permanently; and
    (b) If while r > g then inequality tends to increase; and
    (c) If a continuous increase in inequality leads to critical system instability; THEN
    (D) The system is headed for system collapse.

    Limits to growth need not exist as absolute limits to satisfy condition (a) above. Indeed, in Piketty’s formulation “g” is a rate. Relative long run stagnation (a low rate of growth) is enough to satisfy condition (a) if r is held, what one might call, “artificially” high.

    Condition (b) is clearly met notwithstanding Greg Mankiw’s absurd and sneering defence in his essay “Yes, r > g. So what?” I strongly suspect there is a fallacy in Mankiw’s argument which I could refute with a spreadsheet projection. Of course, this mere claim on my behalf is not enough. In a separate post (if we get a sandpit) I will attempt to deal with this. Suffice it to say here, it relates to the exponential growth path of divided wealth still exceeding (as it must) the flat path of the non-accumulating wealth position of weekly subsistence of a worker who has nothing left to save after all living expenses (a condition more and more common now even in Australia and certainly in the USA.)

    A continuous increase in inequality will lead to critical system instability. This is attested to by all of history basically. The more or less absolute end point is arrived at with food and fuel riots. When a critical mass of citizens begin being starved of necessities, food, water and fuel being the main ones in urbanised settings, the situation becomes ungovernable and uncontrollable. There is then temporary or possibly permanent system collapse.

    It is clear that, under the current system, the powers that be are not prepared to permit r to fall below g. Almost any measures, including highly repressive and reactionary measures, will be taken and indeed are being taken right now, to prevent this for as long as possible. The question remains what would happen if they did permit or could not prevent r falling below g? Would we go back to a golden Keynesian age of capitalism? Or is there another system limit involved when g is very low (secular stagnation), flat or negative. How would (will) capitalism function with a very low range, zero or negative r? Is there a system impulse to continue the circuits of capital, as investment in productive enterprises, when r is very low, zero or negative?

  44. GrueBleen
    July 18th, 2016 at 08:57 | #44

    @Ernestine Gross

    When I read economics experts – eg Paul Krugman, Brad DeLong, Simon Wren-Lewis etc – the consensus appears to be that raising interest rates at this stage of ‘demand management’ would be deleterious to the various economies that are involved. You seem to be confirming that, but you also say it could be a “blessing in disguise” because it will “dampen debt-driven ‘prosperity'”.

    Does this mean you consider that, if we continue down (up ?) this slippery slope, we will land on the road to hell, lubricated by a Steve Keene “bubble burst” ? In (residential) property, for instance. And thus we might finally get our very own Great Recession, and squander our record of time passed since we last recessed (1990/91, I believe) ?

    Otherwise, yeah, the so-called “credit rating agencies are nothing but the junk medicine of economics. How anybody can even remotely think they are worth consulting about anything – except how to pump up rampant fraud into a business plan – I just can’t understand.

  45. GrueBleen
    July 18th, 2016 at 09:26 | #45

    @Ikonoclast

    “(D) The system is headed for system collapse.”

    I recall, Ikono, the 1961 Federal election won by Menzies (I was there, but not yet old enough to vote in those ’21’ days) because Jim Killen won by 130 votes including 93 Communist Party preferences.

    And why did Menzies’ man get CP preferences ? Because they believed that Labor might ameliorate the situation but that Menzies would exacerbate it, thus bringing on the People’s Revolution all the sooner.

    Let me see, that’s 2016-1961 = 55 years and still eagerly waiting. But I can’t hang around for much longer, I’m afraid.

  46. GrueBleen
    July 18th, 2016 at 09:34 | #46

    @Jordan from Croatia

    “Just a simple fact that states do not lower their debts almost EVER …”

    But Australia does, Jordan, Australia does. That country which has given the world a record recession-free period (25 years and counting) also paid down its (federal) government debt twice in fairly recent years: ~1971 to 1975, and ~2005 to 2008. In both periods the Australian Federal Government went ‘surplus’ for a short, but noticeable, while.

  47. Ivor
    July 18th, 2016 at 10:34 | #47

    @Ikonoclast

    Yes, interesting attempt by Mankiw to launch smoke and mirrors at Picketty. It is all nonesense of course.

    r the rate of return on Capital is net of any payments to the rich for their riotous living. Mankiw has deliberately misunderstood Picketty inorder to launch a nicotine-argument against his conclusion.

    It is worth thinking about his equation (1). Workers should receive from taxation what they paid in taxes. This should balance out (except for what capitalists steal, so the second term is effectively zero.

    Anyway well worth reading:

    http://scholar.harvard.edu/files/mankiw/files/yes_r_g_so_what.pdf

  48. Ivor
    July 18th, 2016 at 10:34 | #48

    @Ikonoclast

    Yes, interesting attempt by Mankiw to launch smoke and mirrors at Picketty. It is all nonesense of course.

    r the rate of return on Capital is net of any payments to the rich for their riotous living. Mankiw has deliberately misunderstood Picketty inorder to launch a nicotine-argument against his conclusion.

    It is worth thinking about his equation (1). Workers should receive from taxation what they paid in taxes. This should balance out (except for what capitalists steal, so the second term is effectively zero.

    Anyway well worth reading:

    http://scholar.harvard.edu/files/mankiw/files/yes_r_g_so_what.pdf

  49. Ikonoclast
    July 18th, 2016 at 11:21 | #49

    @GrueBleen

    I had some “if-then” conditions before my point (D). Let’s not forget that. Also, a single human lifespan is clearly not long enough to test for all historical (or natural) possibilities and tendencies. “It hasn’t happened in my lifetime” does not equal “It has never happened”, nor does it equal “It will never happen”.

  50. GrueBleen
    July 18th, 2016 at 15:45 | #50

    @Ikonoclast

    Yeah, yeah, Ikono, but those If…then… things are only just escape clauses aren’t they, in case you have to refudiate what you’ve just said.

    And besides, yes, if it doesn’t happen in my lifetime, then it never will have happeneth at all. Because, you see, the universe didn’t exist until I was born, and it vanishes the moment I die, and when that happens, you simply won’t be able to persuade me otherwise.

    Now, do you perhaps know of a good pitchfork sharpening agency ? We might need one ‘real soon now’.

  51. Ernestine Gross
    July 18th, 2016 at 16:19 | #51

    @Ikonoclast

    No, I don’t argue for adjustments within the system. I argue that macro-economic models (Classical, Neo-classical, Keynesian, MMT) are at best mis-used and at worst they are useless because they do not adquately (even on the conceptual level) model any economic system.

    For example, you state conditions found in Piketty regarding the relationship between the growth rate (of GDP) and the rate of return (on ‘capital’) and you relate it to growth in wealth inequality. I agree. Here a macro-economic relationship (the two growth rates and implications for wealth distribution) are, IMHO, a very important diagnostic tool. But, having a diagnostic tool isn’t sufficient. One then has to come up with policy measures to solve the problem. I am saying debt driven growth of GDP isn’t necessarily the best solution. It depends.

  52. GrueBleen
    July 18th, 2016 at 16:45 | #52

    @Ernestine Gross

    Everything always “depends”, Ernestine; that isn’t the question. The question is, as always, what, when, where, why, who and how.

    Would you be able to ‘refudiate’, or at least seriously critique, Krugman’s use of the IS-LM model ? He argues that, contrary to your assertion about “do not adequately […] model any economic system” that it very adequately modelled the USA, and much of the world’s, economic system during and after The Great Recession.

    Or at least that’s what I sincerely think he’s been saying.

  53. Ernestine Gross
    July 18th, 2016 at 16:54 | #53

    @GrueBleen

    Recently I listened to a streamed lecture series by Steve Keen. Steve was an examiner of a PhD thesis I supervised. He surely was the right choice. I was delighted to hear Steve talk about the reality of how ‘money and finance’ work. He is gifted with words. In the past I had a bone to pick with Steve because of his criticism of ‘neo-classical economics’. In the lecture series he made it clear what he meant, namely micro-economics which never deals with ‘the aggregate’ at the same time (in contrast to agent models under alternative assumptions about the institutional environment).

    So, as to the apparent contradition of policy advice, I say it is an artifact due to the implied assumption that conditions are the same all over the world.

  54. Ivor
    July 18th, 2016 at 17:06 | #54

    @Ernestine Gross

    I hate to admit it but I agree with GrueBleen here and only here:

    It is not good enough to say,

    I am saying debt driven growth of GDP isn’t necessarily the best solution. It depends.

    The Bank for International Settlements’ Claudio Borio is saying the same.

    If you have capitalism – you must find some means to fight off its crisis tendencies, and debt is one of these.

    Growth under capitalism can “depend” on debt.

  55. Jordan from Croatia
    July 18th, 2016 at 19:29 | #55

    Ivor
    Debt fueled growth is THE essence of capitalism. There is no other kind of growth in capitalism.
    Either the government debt or private debt has to fuel additional money in circulation. If banks stop doing it to private sector.

    Why there is a neccesity for additional money into the system?
    Savings take money out of circulation.

    So, even without population growth that requiers larger amount of money or higher velocity, savings drain liquidity out by being kept into banking accounts and then transfered as reserve to Central bank, such is the law of most banking systems in world.

    Savings are permanently put in reserve at CB by law, only governments can borrow that and return it into circulation. That is called government deficit, or accumulated public debt.

    Government debt is private savings returned into circulation.

    Since savers in agregat keep saving more and more, governments never have to return/pay off their debts.

  56. Jordan from Croatia
    July 18th, 2016 at 20:21 | #56

    Why Steve Keen was right that just a slow down in debt growth will cause recession?

    If government does not go into debt and returns savings back into circulation, then growth of private debt has to.

    As banks create money by credit and put it into circulation, paying off the debt is destroying that money out of circulation.

    Since recent decades show growth of profit/ savings, it says that there was accelerated size of money taken out of circulation. Only the new credit can replace it if government doesn’t with deficit. Growth of profits/savings/ inequality is causing lack of liquidity in the system. This forces unemployment/less circulation given unchanged velocity. But velocity also slows adding to problems. Without government going into higher debt to refill liquidity it can spiral out to unescapable depression.

    This view clearly leads to Marxist point of view which is why wealthy prevented discussing about money, banks and debt among economists and especially among jurnalists.

  57. Jordan from Croatia
    July 18th, 2016 at 21:33 | #57

    Even Pikkety stays within mainstream economics and doesn’t discuss debt as main part of inequality and lowering g while r barelly lower. He doesn’t mention the money and debt, but class power relations.

    The reason for falling demand is the price of debt to poorer agents against price of debt for wealthier, more powerfull, people, corps or states.

    Institutional set up of cradit rating agencies automaticaly makes poorer pay more for credit.
    Credit rating agencies give better rating to those that already have wealth which lowers their burden of debt by lowering the price/interest rate for credits.

    How? Having assets/wealth gives you more points which lowers the interest rate.
    By changing those institutions so that having assets takes away points and with it raises interest rates wealthy pay for credits, forces that contribute to inequality would be weaker.

    This matters to states that owe in foreign currencies and their CB governors follow orders from their creditors instead of debtors. Those states that owe only in their own currency have much less problems to deal with. Their CB governors can easilly control monetary policy.

    I have spent last year searching for a solution to debt in foreign currencies and foreign control of state debt and i believe i have it now.
    I have found out how banks can print foreign currency, not only domestic one.

    Another institution that raises inequality, besides credit rating agencies as a main one, is government debt. It incentivizes investing into paper assets instead of real capital production. Over long time it will make investments into paper assets more profitable then real investments. How?

    Savings are forced into bank reserves and then borrowed by government to put it back into circulation. But, over time, since many people keep saving more and more without ever spending their savings and those savings incurr income, there is a self enlarging part of savings that keeps circulating between more savings and government paying more interest on interest on interest on interest that paid it before. “”””It becomes ever enlarging self perpetuiting cirlce separated from economy.”””””””Only thing it does is enlarging government debt while those savers never spend such incomes that keeps growing.
    This becomes the safest and easiest income to large savers which incentivizes them to abandon capital investments and invest ever more in paper aassets.

    Conclusion;
    two ways that inequality is increasing is
    i) by credit rating scoring so that poor pay more in interest proportionaly to income and debt in contrast to wealthy
    ii) government debt over time makes investment in paper assets more profitable then in real capital investment.

  58. Jordan from Croatia
    July 18th, 2016 at 23:12 | #58

    @GrueBleen
    “But Australia does, Jordan, Australia does.”

    YOu should ask australian states how their debt is doing. Please check it out. As far as i know, federal budget is reducing expenditures and giving bills to states instead. Over time much more it got to be states responsibility while federal gov is paying of debts.
    They really cheated you into believing that fed gov can reduce its debt without causing unemployment after iliquidity. HA HA HA HA HA

    When you learn accounting you will learn that it is impossible for government to reduce its debt due to accounting rules and needs of the real world.

    Just not to confuse you again we should call it consolidated government. But how precise we have to be? untill you do not understand words anymore?

    In acctuality, consolidated government should include banks, and comercial banks. But now we are going too technical which is going to confuse you even more. But, QE shows that banks should be part of consolidated government against private sector for the purpose of economic calculations and predictability. But that is even more technical for you since you have not studied accounting and banks, or money and debts in agregate play.

  59. GrueBleen
    July 19th, 2016 at 10:29 | #59

    @Jordan from Croatia

    Ah, Jordan, enlightenment has dawned that you have said all that you can say.

    Do have a nice life, if you can find one somewhere.

  60. GrueBleen
    July 19th, 2016 at 15:04 | #60

    @Ivor

    That’s very decent of you, Ivor. And in that case I might just explain Edmund Burke to you one of these days. In the meantime, you might like to contemplate this:

    “I disapprove of what you say, but I will defend to the death your right to say it.”

  61. Jordan from Croatia
    July 19th, 2016 at 19:38 | #61

    @GrueBleen
    I must have hit the right spot considering your reactio.

    How many minutes of your life did you use to study bank and state accounting?
    Probably not a single one, right? Yet you would tell me that i am wrong about banks and states which i studied for couple of years and reading laws about banking from few countries.
    What is such behaviour like yours called? Hipocrisy? Dogma? Ignorance?

  62. Jordan from Croatia
    July 19th, 2016 at 19:46 | #62

    I know that prof. J.Q. did couple of post abut federal aus government placing more burden on individual states by shifting spending while keeping the same income. This is how federal gov could reduce debt while placing the burden on states, forcing them to take on more debt just to keep the level of service on par.
    Nice trick, but it can work only for some time.

    And then states are forced to do much more public-private-partnerships just to hide levels of debt under PPP corporations. It is all trickery just to allow lovering taxes on the wealthy.

  63. GrueBleen
    July 19th, 2016 at 20:40 | #63

    @Jordan from Croatia

    No, no Jordan, try as you might to make matters worse, you’ve already stated all that you possibly can.

    But if you keep procrastinating like this, there won’t be any good lives left anywhere that you could aspire to live.

  64. Jordan from Croatia
    July 19th, 2016 at 23:08 | #64
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