Property busts preceded by large run-up in household debt tend to be more severe; Australian household debt to disposable income quadrupled in 30 years
Tweet Topic Started: 10 May 2012, 09:16 PM (4,532 Views)
It's worth remembering that government debt is usually repayable at a much lower interest rate than households have to deal with. So the component of household debt will act as a stronger drag on the economy than the government debt of the same size.
A low interest rate on Government debt is a BAD thing. It reduces the flow of net financial assets to the private sector.
That is why QE2 was bad. It deprives the non-government sector of much needed savings.
As I said - we never need to pay-off Government debt. It is the same as saying "we need to reduced private savings". It is the wrong perspective.
OK we don't NEED to pay off the debt, but if its largely overseas debt then it must be serviced, and the cost of that money will rise if our house is not in order, so it's important to not allow the debt to run out of control. The UK prints its own currency, and yet it is still in trouble with both high private debt, and high public debt. Every country must cover the servicing cost of their debts. If they just print then creditors in other countries will alter the exchange rate accordingly. A country that spends more than it earns is in a bad position, and it will only get worse.
Given the often hysterical response from both politicians and the public, it's still relevant to see what the total debt is per person.
Any expressed market opinion is my own and is not to be taken as financial advice
As I said - we never need to pay-off Government debt. It is the same as saying "we need to reduced private savings". It is the wrong perspective.
OK we don't NEED to pay off the debt, but if its largely overseas debt then it must be serviced,. .
It does not matter who ownes it. So long as it is in Australian dollars, we can service the interest via electronic keystrokes & we can do so forever if we so choose.
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and the cost of that money will rise if our house is not in order, so it's important to not allow the debt to run out of control.
No. The RBA is the sole monopoly issuer of AUD. Like any monopolist it can set interest rates for AUD at any level it chooses. No different to Japan, USA, UK etc, but very different to Spain, Ireland, Greece etc.
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The UK prints its own currency, and yet it is still in trouble with both high private debt, and high public debt
The UK is NOT in trouble with public debt. The current yield on 10 year UK gilts is 1.98%. An in case you are worried that may increase over time, Japan's (debt 2x the UK's) rate is 0.87%.
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Every country must cover the servicing cost of their debts.
No.
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If they just print then creditors in other countries will alter the exchange rate accordingly
What..Like Japan? Japan has been dealing with an OVERVALUED currency since 1990.
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A country that spends more than it earns is in a bad position, and it will only get worse.
So when a country like Australia spends more than it taxes, where does this net spending end up? Answer: The private sector. So to suggest the that " A country that spends more than it earns is in a bad position" is to also suggest "private sector savings is a bad position". To that, I can not disagree more.
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Given the often hysterical response from both politicians and the public, it's still relevant to see what the total debt is per person.
Just because the masses and politicians say "it is", does not make it true. For 20 years Japanese politicians have worried about their solvency. Hedge funds routinely short Japanese Bonds. And just as routinely, they lose money (and clients). Kyle Bass will be the next victim. http://mikenormaneconomics.blogspot.com.au/2012/05/kyle-bassdumb-dumb-clueless-dumb-and.html
Private debt is used to buy houses in Australia. It's not debt. Get your shit together guys.
We're the richest country in the world and that isn't going to change. You can talk all your mumbo jumbo like you think you're a professor, but this is a fantasy.
Private debt is used to buy houses in Australia. It's not debt. Get your shit together guys.
We're the richest country in the world and that isn't going to change. You can talk all your mumbo jumbo like you think you're a professor, but this is a fantasy.
Just because the masses and politicians say "it is", does not make it true. For 20 years Japanese politicians have worried about their solvency. Hedge funds routinely short Japanese Bonds. And just as routinely, they lose money (and clients). Kyle Bass will be the next victim. http://mikenormaneconomics.blogspot.com.au/2012/05/kyle-bassdumb-dumb-clueless-dumb-and.html
Thanks for the reply.
Countries simply can't just increase their supply of money ad infinitum. At some point the market loses confidence and the currency is debased.
Countries simply can't just increase their supply of money ad infinitum. At some point the market loses confidence and the currency is debased.
How can we calculate that tipping point?
In Australia, (and I think in Japan, US, and the UK), the government operates under a *policy* which requires the deficit to be funded via bond issuance (AOFM in Australia does this). What this means is in effect a government deficit does not actually add to the money supply - it simply results in money being spent on things the government wants it spent on (ie mobilisation or acquisition of real resources), and it comes back in the form of private sector savings due to the need for the same amount of $$$ to be used by the private sector to purchase the corresponding amount in bonds. This is done deliberately so that monetary policy is driven exclusively by the RBA, and not via government fiscal policy. So the broad money supply can only actually be expanded via the banking system (including the RBA who controls physical currency issuance).
Have I got that right b_b?
For Aussie property bears, "denial", is not just a long river in North Africa.....
Just because the masses and politicians say "it is", does not make it true. For 20 years Japanese politicians have worried about their solvency. Hedge funds routinely short Japanese Bonds. And just as routinely, they lose money (and clients). Kyle Bass will be the next victim. http://mikenormaneconomics.blogspot.com.au/2012/05/kyle-bassdumb-dumb-clueless-dumb-and.html
Thanks for the reply.
Countries simply can't just increase their supply of money ad infinitum. At some point the market loses confidence and the currency is debased.
How can we calculate that tipping point?
Inflation.
As I have mentioned, the constraint for Australia in not financial - its real resources.
Taxation reduces aggregarate demand from the private sector. This frees up real resources from the economy which allows the government to purchases these resources (labour etc) without pushing up prices, so as to meet its social and economic objectives.
Taxation is not required to meet interest payments.
Countries simply can't just increase their supply of money ad infinitum. At some point the market loses confidence and the currency is debased.
How can we calculate that tipping point?
In Australia, (and I think in Japan, US, and the UK), the government operates under a *policy* which requires the deficit to be funded via bond issuance (AOFM in Australia does this). What this means is in effect a government deficit does not actually add to the money supply - it simply results in money being spent on things the government wants it spent on (ie mobilisation or acquisition of real resources), and it comes back in the form of private sector savings due to the need for the same amount of $$$ to be used by the private sector to purchase the corresponding amount in bonds. This is done deliberately so that monetary policy is driven exclusively by the RBA, and not via government fiscal policy. So the broad money supply can only actually be expanded via the banking system (including the RBA who controls physical currency issuance).
Have I got that right b_b?
Pretty much.
The only thing I would say is Bonds are issued to remove excess liquidity from the banks accounts with the RBA. Without issuing bonds, banks will have too much cash from deficit spending (deposits from their customers), and will try to lend this excess to each other - pushing down interest rates. By issuing bonds via the AOFM, the RBA can target interest rates.
Whether the government issue bonds or not does not alter the broad money supply. That is determined independantly by the banks.
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