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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
Topic Started: 10 May 2012, 09:16 PM (4,530 Views)
miw
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Sydneyite
11 May 2012, 12:25 PM
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?
I think this breaks down when the purchasers of the bonds are from overseas.

1. The debt is not offset by an equal saving.

2. Someone outside the system has just got a claim on future production in Australia (the interest).

3. As the outside indebtedness grows, the interest premium will grow and the value of the currency vs. other currencies will drop.

4. As the currency drops in value, you have to spend more of it on imports, giving more of our currency to them and hence even more claim on our production.

Eventually all our base are belong to them.

In the end I don't think any monetary theory can free you from the constraint that the factors of production and labour supply are limited at any given time. You can print money, but you can't create wealth out of thin air.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
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Sydneyite
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b_b
11 May 2012, 03:21 PM
The operations people at the RBA understands this very well. They are the ones who credit the Government accounts electronically. They are the ones who conduct Open Market Operations (OMO) every day to target their desired interest rate. People who join the RBA in the "front office" are oblivious to the realities of the system. They remain slaves to their newly acquired Economics degree - much to the detriment of Australia.

I do not know anyone in Treasury, but I suspect they understand it too since they NEVER have to wait for tax receipts or a Bond Auction before spending.
I think people in Treasury understand all this very well. Check out this site: http://www.buoyanteconomies.com/ - seems to have been written by a guy who used to work in Treasury, and talks a lot about MMT type mechanics, but no mention of MMT whatsoever, just economic workings / observations.
For Aussie property bears, "denial", is not just a long river in North Africa.....
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Sydneyite
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miw
11 May 2012, 05:08 PM
I think this breaks down when the purchasers of the bonds are from overseas.

1. The debt is not offset by an equal saving.

2. Someone outside the system has just got a claim on future production in Australia (the interest).

3. As the outside indebtedness grows, the interest premium will grow and the value of the currency vs. other currencies will drop.

4. As the currency drops in value, you have to spend more of it on imports, giving more of our currency to them and hence even more claim on our production.

Eventually all our base are belong to them.
Nope, I don't think the idea breaks down, as the bonds must be purchased with AUD, and the buyers, even if from o/s, have to first acquire AUD through the banking system, and someone has to sell them the AUD. The new owner of that foreign currency will either use it to purchase goods from o/s, or to invest in assets that are o/s. There will be an impact on the current account though.

Quote:
 
In the end I don't think any monetary theory can free you from the constraint that the factors of production and labour supply are limited at any given time. You can print money, but you can't create wealth out of thin air.
This is true - MMT is very clear on this point I think? That's why monitoring and controlling inflationary forces is key to MMT driven policy ideas.
Edited by Sydneyite, 11 May 2012, 05:20 PM.
For Aussie property bears, "denial", is not just a long river in North Africa.....
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Elastic
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I still don't understand why it is necessary to turn to MMT when in practice, our current system should be sustainable.
I think it is just a symptom of the fact the banking system has run out of debt slaves and is looking for a way to dig themselves out of a hole.
Only a rat can win a rat race.

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Elastic
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As far as I understand it, monetizing debt is an illegal practice as far as countries are concerned.
The US has about 15T of government debt.
They have benefited from the spending of this money mostly by importing foreign goods and resources.
The 15T of government bonds are effectively interest bearing IOUs for the holders.
How can it possibly be ethically fair to dilute the value of those bonds by paying the interest on these bonds with unfunded money.
The US has a responsibility as the reserve currency to operate in a way which upholds the integrity of the financial system.
The way things are heading I'm not surprised they are making sure their military is powerful because people are not going to be happy when they find out they've been rogered.
Only a rat can win a rat race.

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Elastic
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And a question for you b_b.
Is the banking system an elaborate scam?
Only a rat can win a rat race.

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miw
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Sydneyite
11 May 2012, 05:18 PM
Nope, I don't think the idea breaks down, as the bonds must be purchased with AUD, and the buyers, even if from o/s, have to first acquire AUD through the banking system, and someone has to sell them the AUD. The new owner of that foreign currency will either use it to purchase goods from o/s, or to invest in assets that are o/s. There will be an impact on the current account though.

The claim on future production is the interest, not the principal. I agree with you that the principal balances out.

Every year Australia has to give more Australian currency to the overseas entity which can be used to buy the fruits of Australian production. (And note that according to MMT, that is a nett loss to Australia, not a nett gain because they got real stuff and we got our own fiat money back.)

As long as that principal is used in Australia to create nett production that is greater than the amount that can be claimed using the interest, we win.

But Australian production is limited. You don't keep getting more production out of more money forever. Once that curve flattens off you are creating claims without creating production. Hence, you lose.

What happens, of course, is that the claim on production per unit of currency drops. (inflation). As expected inflation rises, the rate of interest you have to pay rises. Also, the amount of claim you have on other countries' production through your own currency (the exchange rate) drops and you lose that way as well.

I think that MMT is telling us that we should create enough money to allow the investment for the economy to reach full productivity, but no more. Any less and you are constraining productivity to no good end. Any more and you create arbitrage opportunities for outsiders.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
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Sydneyite
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miw
11 May 2012, 06:15 PM
The claim on future production is the interest, not the principal. I agree with you that the principal balances out.

Every year Australia has to give more Australian currency to the overseas entity which can be used to buy the fruits of Australian production. (And note that according to MMT, that is a nett loss to Australia, not a nett gain because they got real stuff and we got our own fiat money back.)

As long as that principal is used in Australia to create nett production that is greater than the amount that can be claimed using the interest, we win.

But Australian production is limited. You don't keep getting more production out of more money forever. Once that curve flattens off you are creating claims without creating production. Hence, you lose.

What happens, of course, is that the claim on production per unit of currency drops. (inflation). As expected inflation rises, the rate of interest you have to pay rises. Also, the amount of claim you have on other countries' production through your own currency (the exchange rate) drops and you lose that way as well.

I think that MMT is telling us that we should create enough money to allow the investment for the economy to reach full productivity, but no more. Any less and you are constraining productivity to no good end. Any more and you create arbitrage opportunities for outsiders.
Yes I think that all makes sense!
For Aussie property bears, "denial", is not just a long river in North Africa.....
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miw
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Elastic
11 May 2012, 06:06 PM
As far as I understand it, monetizing debt is an illegal practice as far as countries are concerned.
The US has about 15T of government debt.
They have benefited from the spending of this money mostly by importing foreign goods and resources.
The 15T of government bonds are effectively interest bearing IOUs for the holders.
How can it possibly be ethically fair to dilute the value of those bonds by paying the interest on these bonds with unfunded money.
The US has a responsibility as the reserve currency to operate in a way which upholds the integrity of the financial system.
The way things are heading I'm not surprised they are making sure their military is powerful because people are not going to be happy when they find out they've been rogered.
So true.

I find it deliciously ironic that the fact economists say that the US's much enhanced ability to print money to pay its debts due to the fact that the US$ is the dominant reserve currency and the currency in which world trade is done is a form of "siegnoirage".

"Siegniorage" literally means "the right of the lord" and one of the rights of the lord in feudal times was the right of first fuck whenever two vassals got married.

Highly appropriate.
Edited by miw, 11 May 2012, 06:32 PM.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
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genX
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Future
11 May 2012, 02:00 PM
How does this theory help us Gen Y cats and how is it related to our property empire dreams?
You're not a very good sock puppet, but for the sake of conversation, here is how MMT can help you with your property empire dreams.

If you don't own property right now, then the very best thing that can happen, from the point of you getting your property empire, is asset deflation and CPI inflation. (Simply, house prices going down, food, electricity and toilet paper prices going up).

This phenomenon is very rare, and very scary to the managers of MMT. But for you, it's perfect. Here's why:
Let's say you want to buy a 700K house, but you can't afford it. With declining house prices, you may be able to get the house for 500K in a few years time (29% discount).

So you save 50K and borrow 450K and buy the house at 500K. It might drop a bit more in price, but it doesn't matter, BECAUSE, your principle outstanding will never go above 450K in notional terms as long as you service the loan (pay the vig). However, in a high inflation environment, the value of the principal is decreasing in real terms, even though in notional terms it stays constant.

For example:
- if inflation hit 14%, then in 10 years time, the principal on your loan is worth roughly $121,384 in today's money.
- if inflation hit 7%, then in 10 years time, the principal on your loan is worth roughly $228,757 in today's money.

So if you waited two years for the price to drop, and at that point there was raging inflation, then you could lever up your savings and start your property empire. You would own a '700K' house for between 171K and 278K in real terms.

Of course, biflation is extremely rare. Usually when inflation hits, asset prices respond in kind and rise with it. However, if the majority of the population are already saturated with debt, and they have negative equity, there will be a short window while wage inflation is lagging behind CPI inflation, in which you can buy at a discount, and ride the inflation wave up. That opportunity usually only comes along once in a century. (Last time was the Great Depression, which made more millionaires than any other period except the dot-com bubble.)

More likely than biflation is a long drawn out period of deflation, like the Japanese have experienced for over 20 years. They only stopped their economy from completely imploding because they were a powerhouse in manufacturing and their zero interest rates kept the Yen weak against the currencies they exported to. Once Korea and China manufacture everything from cars to computers, the Japanese economy is toast. We in Australia don't make anything, so we won't suffer that fate.

So get ready Future, your opportunity is on the horizon, but you will need an income. I suggest joining the Army. When the shit hits the fan, we are going to need boots on the ground for a long time.

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