Tuesday, February 24, 2015

Pay no attention to the Telegraph. We need more debt, not less

I am worried about debt. I am worried about some of the things News Corporation newspapers are saying about debt. For most of its life News Corporation has been up to its eyeballs in debt. That's how it grew big.

In 1990, a few years after buying Twentieth Century Fox, it was paying more than $1 billion per year in interest. One billion dollars was an awful lot of money back then. News Corporation owed more than it was worth.

It split itself into two in 2013, leaving all of the debt in what it called 21st Century Fox and leaving News Corporation (the Australian arm) debt free. Fox owes 2.8 times its annual earnings, a sum that would make the Australian government blush.

But the Australian arm hasn't given up its attraction to debt. Michael West reports in this newspaper that News Corporation with its partner Telstra has lent the best part of $1 billion to their part-owned subsidiary Foxtel, much of it at a generous rate of 12 per cent. Foxtel has lent money back to News Corporation at an interest rate of zero.

Whatever the ins and outs of the eyebrow raising deal, it's hard to argue that News Corporation is unfamiliar with debt. And yet its newspapers commit howlers.

This month one of its tabloids headlined its front page: Australia's debt crisis is a staggering $1 trillion nightmare".

"Australia's mounting federal government debt will be $1 trillion by 2037 if urgent action is not taken," it said.

It backed it up with an editorial saying $1 trillion was a figure "most people are unable to fully comprehend".

One trillion is indeed a figure most people are unable to fully comprehend, perhaps because the newspaper won't put it in context...

By 2037 the Australian economy will be turnover around $6.5 trillion per year if trends persist, many times more than the $1.6 trillion it turns over today.

By then a debt of $1 trillion will be worth 15.3 per cent of the enlarged turnover, somewhat less than the 16.7 per cent it accounts for today.

That's right. The newspaper was reporting what would most likely be a reduction in Australia's debt to GDP ratio, but it didn't say so.

"I for one reckon Australia will be doing really well in 2037 if net government debt is $1 trillion, because it will probably mean the budget has travelled on a sustainable path for two decades," the economist Stephen Koukoulas noted.

Then the paper came back for more.

"A baby born today will have paid $90,000 worth of interest on servicing government debt by the time they hit 40," it said. The thinking wasn't clear. The story itself said the interest paid on government debt would reach $1000 per person by 2031-32, which is less compared to the size of the economy than it is today.

The government doesn't have a debt problem. It has a deficit problem. Its debt is a fraction of what corporations with growth prospects owe as a proportion of their income.

Its deficit problem is worrying. It is taking in $40.4 billion less per year than it is spending. It'll have to fix it by taking in more and spending less.

But that doesn't mean it should be borrowing less. Borrowing for long term projects has served Australian governments and corporations well. With the interest rate currently on offer at all time low (just a touch above the long-term rate of inflation) it's almost being offered money for nothing.

Former US treasury secretary Larry Summers sees the ultra low rate as a once in a lifetime opportunity.

"If a moment when we can borrow money, in a currency we print ourselves, for ten years at 1.8 per cent, in a moment when male unemployment is at record levels, is not the moment to fix Kennedy Airport, I do not know when that moment will ever come," he told the London School of Economics last month.

Australia is being offered money at 2.55 per cent, a somewhat higher rate than is the US, but almost as cheap as the US when consideration is given our higher inflation rate.

"A time when there is too little investment and therefore more people are out of work - that is the right time to replace all the old coal-fired power plants that are wrecking the planet," Summers went on. "There are plenty of very valuable things to do, we just need to be willing to make those kinds of investments in the future."

Australia's mining workforce has slid 44,000 in the past year. The unemployment queue has climbed 64,600. There are 100,000 more Australians unemployed than there were when Labor left office. Borrowing for big projects for which there are skills available makes complete sense. If the government is worried that the present ultra low rates on offer won't last it could borrow for 30 years instead of 10. The treasurer Joe Hockey suggested it in opposition.

His job isn't easy. But isn't helped by talk of a staggering debt crisis when debt is one of the few things that could help.

In The Age and Sydney Morning Herald

Related Posts

. Budget explainer: It's the debt, not the spending. Why the budget is bleeding

. Low bond rates. Abbott prepares to pass up the deal of the century

. Debt free. Got any other ideas to stifle growth?