Thursday, May 07, 2009

This debt nonsense...

Tim Colebatch, who actually is worried about debt, puts it in its place in today's brilliant article
"Debt can be dangerous: in 1990 it almost brought down Rupert Murdoch's News Corporation, and in 1992 it did bring down the Kirner government. But Murdoch has kept on borrowing, more prudently now; he pays $1 billion a year in interest, but keeps borrowing because what he does with the money is worth more."

"POOR little kid. If you believe the Herald Sun, "little Tiziana Perez was born yesterday with a $6000 debt". And all because she was born in Victoria, and the Brumby Government projects that the net debt of the state's non-financial sector will reach $31 billion by 2013.

What a start to life! Only a heartless pedant would point out that Tiziana could hardly be born with a share of the debt as it might be in 2013, but at most, with a share of the debt as it is now. On the budget numbers, that's $11 billion in the non-financial sector - with 5.4 million Victorians, that's roughly $2000 a head.

But on the budget numbers, that debt is expected to grow to $31 billion by 2013, when Tiziana turns four, or $5450 a head. Isn't that too much debt for a little child to bear, or even for you and me to bear?....

Continued in The Age

Derryn Hinch takes the same line.

And Jessica Irvine

And me


Andos said...

That is a great article. Thanks for the point, Peter.

Ian Lucas said...

The Libs and their media mates are being shameless and/or ignorant in professing concern about government counter-cyclical spending. When private demand falls, government demand has to step in, and they know it.

Likewise, Turnbull's argument that debt is OK, but not so much, is an appeal to prejudice that is based on nothing. The Opposition could make itself more useful by pressuring the government to spend the money sensibly.

That said, concern about excessive debt more generally is definitely not nonsense. As Steve Keen explains, excessive indebtedness in Australia and elsewhere, that has been building up for years, is a (maybe the) major source of our current economic woes. That the economics profession, and commentators by and large, didn't see the current crisis coming is....well, it should give them cause to have a long hard look at themselves.

It would be good to see some wider discussion of Steve's line of argument. Steve makes a lot of sense to me, but I haven't seen anyone make a serious attempt to take his arguments on.

MkeM said...

For most of its history as a nation, Australia has been ingesting foreign capital. This is likely to continue until the continent consists of a gigantic hole surrounded by a populated fringe, and there is nothing left to dig. (Perhaps early explorers' dreams of an inland sea could finally come true.)

Foreign debt becomes an issue if the cost of its interest becomes a burden that weighs down the economy. That hasn't happened yet. As much of the foreign capital has arrived as direct investment (and Chinese firms are begging us to accept more of it) there is not problem unless we don't want to live in a rented country that we once owned.

The bigger concern is the foreign debt incurred by our banks to fuel the housing price bubble. Geographically, we have been fortunate. We have no inland cities like Dallas or Phoenix where there is unlimited land available to build endless housing, whose surplus is now causing prices to crash. Nor do we have rust-belt cities like Cleveland and Detroit, where collapse of manufacturing has caused almost terminal decline. (Victoria had a small taste of this in the early 1990s, but Newcastle has survived the departure of BHP with surprising aplomb.)

Australia's bureaucratic zoning and building regulations have ensured that because there is still a housing shortage nationwide, the property bubble will continue to do what it is doing, namely, to deflate slowly.

Personal and business bankruptcies are up. There has been a significant trail of failing companies, some leaving a residue of weeping elderly investors who thought they had been financially secure for life. Many people have been hurt, but we are not looking at a repeat of 1933.

Steve Keen's argument holds for the US although it may be a consequence rather than a cause. A far more significant one has been regulatory capture by the finance sector. In the decade from 1998, the financial services sector spent $3.5 billion lobbying Congress, the most of any business sector, and another $2.2 billion in election campaign contributions,,

Government got out of the way. The market was left to manage itself. And look what happened.

There's a number of economists who perform the role that Eeyore did in A.A. Milne's Christopher Robin stories: to search around every silver lining to see if they can find the cloud. Steve Keen is one and Nouriel Roubini is another. They are a necessary counter to the breezy optimists who so often dominate our news media.

But they are not always right - sorry, correct.

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