We don’t hear too much about “foreign debt” these days.
Neither the foreign debts owed by our private companies and private banks nor the foreign debts owed by our governments especially the Federal Government in Canberra.
So it was quite a retro moment when an editorial in the Australian was titled “Our complacent reliance on foreigners’ savings”
Note: It appears Ross Gittins decided yesterday to don the hyper-colour T-Shirt, spin some late 80s stadium rock and run the “foreign debt is cool” nonsense again in the SMH yesterday. More on that creaky skeleton of the 1980-2000s in a separate post.
Now to be sure the point of the editorial in the Australian was mainly to rage about the need for some very selective ‘austerity’ at budget time. You know the narrative, we need to cut spending on the less well off because ‘we cannot afford it’ but we should spend more/tax less those that are well off because that will make them work harder/smarter etc. Fairly standard fare LNP myths with the twist for this editorial being that everyone should support these recommendations because we are relying on the savings of foreigners for our horrible budget binges.
Ever the optimist, the Glass Pyramid saw an opportunity amongst this old thin gruel and seized the chance to point out that regardless of what one’s position was with regard to the size of the budget deficit, it should never be funded with sales of Australian Government Bonds “AGB” to foreigners.
This is a critical point.
Why allow the Australian Office of Financial Management (the bond shop for Treasury) to sell bonds to foreigners when all they are going to do is push up the Australian dollar when they acquire the $AUD they need to buy the bonds? The $AUD are already here, selling AGBs to foreigners does not create any new ones. The location of existing $AUD deposits simply changes in the banking system.
Why undermine the competitiveness of Australian workers and business by selling bonds to foreigners? Why allow foreign buyers to own so many (circa $300B)?
The answer is clear and was helpfully provided by one of Australia leading economic commentators, the loquacious and ever charming Mr Michael Pascoe.
What Mr Pascoe is pointing out is that the attraction in allowing the Federal Government to sell AGB to foreigners arises because foreign interest rates are lower and foreign central banks are running zero interest rates policies (ZIRP) or lower negative interest rate policies (NIRP) and therefore the Australian government can sell its bonds for a higher price to foreigners (via the primary dealers) than to locals. They will bid more because they are more easily pleased – anything is better than zero or a minus number.
In other words what Mr Pascoe is saying is that allowing the Federal Government to borrow cheaply is more important than avoiding unnecessary upward pressure on the $AUD that kills jobs and local businesses.
A funny set of priorities right there.
According to Mr Pascoe (yes, we are extrapolating from limited data points in a single tweet) it is better to allow Mr Morrison to access the cheapest possible foreign capital to help pay for his company tax generosity and middle class welfare than to stop him and in doing so avoid upward pressure on the exchange rate?
The Glass Pyramid thinks that is a dud deal and that anyone with an interest in Australian jobs and Australian industry should be arguing that Australian Government Bonds should ONLY be sold to foreigners when the proceeds are clearly and unmistakably going to be invested in the expansion of the productive economy. Just pumping up the GDP numbers with a bunch of parasitical financial sector transactions does not cut the mustard.
Our exchange rate should reflect our trade performance and not our ability to export title to our assets and claims on the future income of the Federal Government.
In other words heavily restrict unproductive capital inflows.
What about other interest rates?
Might Mr Pascoe be referring to other interest rates? Possibly but he would not elaborate when asked. One assumes he was talking about the yield on Australian government securities if they could not exchanged for predatory unproductive capital inflows.
Australian mortgages rates will not be affected by limiting the Australian Government to selling AGB to locals. Though Australian mortgage rates are the result of a growing mountain of privately owed foreign debt and also place unnecessary upward pressure on the exchange rate (and help drive the great Australian House Price bubble)
Other interest rates will only be affected IF the government also sought to restrict some of the other exchange rate bloating unproductive capital inflows. And yes the Glass Pyramid reckons most unproductive capital inflows should be restricted.
It is not just Mr Pascoe who has a problem with the idea.
But Mr Pascoe was not the only person to find fault with the idea of restricting the Federal Government from selling bonds to foreigners. Some of the Praetorian Guard of basement based commentators at the Australian chimed in as well, presumably because they detected, at several parts per million, a possible hint of criticism, of the wonderful Malcolm Turnbull government in Canberra.
Matthew (see below) chimed in with some the old classics of Australian economics forelock tugging. Despite being one of the largest economies in the world (top 15 out of 200+) poor little Australia is still incapable after 200 years of generating surplus capital and relies on the stuff exported by the USA, UK and increasing the ‘savers’ of the developing world.
How do people not gag when they find their brains trundling this stuff out is a wonder. Mr David Uren has a particular strong gag reflex as he recently wrote a whole book spouting rubbish about how first world Australia could never hope to generate surplus capital as that was the job of poor people who love building things. Our job in Australia according to Uren and his boomer/Gen-X army of fellow neoliberal commentators is to sell assets and issue IOUs as free of government regulation as possible and consume the proceeds on imported cars and asset price frenzies.
But it was not long before the switch was flicked to vaudeville with one keen Fonzi leaping the shark and landing on the compulsory acquisition of retirement savings at 2%. Take care readers…. the logic can give you whiplash.
One would think the denizens of the deep depths of the Australian’s comment threads would fall over themselves applauding a policy proposal that by increasing the cost of Federal Government borrowing (by forcing them to borrow from voters like mum and dad) might cool the enthusiasm of the “socialist hordes” from spending quite so freely in the future.
It might even cool the enthusiasm of Mr Morrison who has been setting new records for exploding deficit spending.
But nope – defending the indefensible is too important.
Much much better to drive up the $AUD with the predatory unproductive capital inflows of our trade rivals and watch our jobs and industries depart offshore.
But there are more important things we need to worry about?
One the great bits of economic obfuscation comes from the crowd who insist that to chew gum and walk is a health risk. The moment they think they are losing the debate on an issue they will leap on another issue, any issue, and claim it is more important and must be done first.
Classic examples include:
- Don’t worry about the banks and their misbehaviour – “shadow banking” is worse – even if it is not even banking to start with.
- Don’t worry about public debt – private debt is worse.
- Don’t worry about the mining industry – feminism is the real enemy
- Don’t worry about corporate criminality – union thugs are the real enemy.
on and on they go, throwing up dust and making the world seem so complicated that everyone loses the energy to do anything.
In the context of selling AGBs to foreigners the “there are more important things” crowd will say thing like:
- But private foreign debt is much worse, with the external liabilities of our banking sector (effectively guaranteed by the taxpayers) now of mammoth proportions and much of that has been “invested” unproductively as well in bidding up the prices of our existing housing assets and making us feel “wealthy”.
To that the Glass Pyramid’s response is – well yes the taxpayer guaranteed external liabilities of the banking sector are not much more than foreign owned debt that is not yet publicly owed foreign debt (in time my pretties).
But we can walk and chew gum and even pat our bellies at the same time, as all major forms of unproductive capital inflows should be identified and heavily restricted. The Glass Pyramid identifies them and their features all the time.
This is just an evil plot to starve the beast by forcing up government borrowing costs?
As noted above, there is a price to be paid if you restrict the Australian Government to borrowing from the people who elect it. The cost of borrowing from those people will be higher – especially in places like Australia where ‘saving’ is for wusses.
But keep in mind that those interest rates are paid to Australian taxpayers and not foreign banks and other international lenders. Surely it is better that Australian invest their super savings in risk free government securities that pay a return rather than have them punt via their self managed super funds on the house price bubble (driven with cheap foreign debt) reaching ever greater heights.
Plus if the government really wanted to avoid paying interest on its deficits it could simply instruct the AOFM to sell and for the RBA to buy – 0% AGS bonds. Cut out the banker middle-persons and have the AOFM just sell direct to the RBA. The RBA can pay for them with just a few taps on the keyboard.
Such bonds would be held by the RBA and could not be resold. They would pay no interest and so most of the fears of making the future generations pay do not apply.
Naturally if the “0% bond sold to the RBA” recommendation was undertaken the measurement of CPI would need to be conducted with great care as inflation will be the limiting factor. There are no free lunches – sorry Milton not even for you.
Considering that the economy is on the verge of being crushed by the deflationary forces generated by creating one of the greatest debt bubbles (public and private) in Australian history, a bit of direct monetisation of the federal deficit is probably the only thing that will save us from the consequences of believing everything we were told by neoliberal economists.