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 (4,529 Views)
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".
I wonder if they are being deliberately misleading when they say 'world trade', when really it is the Oil trade that keeps the USD as the world's reserve currency. All empires have imposed a tax over all in their domain, and the US is no exception. The Petrodollar tax is 'pax americana', and they will keep collecting it too for as long as the USMC can deal with any dissenters.
Quote:
"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.
I think in modern times it means the right to fuck over anyone and everyone all year long.
Australia is deleveraging on both private and public debt, and has been doing so for 6 years.
If you look at the firat graph, you can see that households have deleveraged relatively slightly, and you can see that the total debt has deleveraged at a slighty faster rate.
No. Public (government) debt has been increasing since the GFC because we are running deficits.
It is actually very hard for Australian households to delever without the government deficits because of the national accounting identity;
Private savings + government surplus (- deficits) + Current account deficit (- current account surplus) = 0.
Since we are running a CAD = 3% of GDP, we need the government to run a deficit = 3% of GDP for the private sector to net save zero.
SO, it is mathematically impossible for the public AND private to delever without a current account surplus.
The relationship between the three identities is summarised below
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.
Dude, that was awesome. I don't know much about all this shit but I can see why you wise men are way into it. Seppos and Euro fags need to read the right books!
Dude, that was awesome. I don't know much about all this shit but I can see why you wise men are way into it. Seppos and Euro fags need to read the right books!
I agree. You should be in the army. You sound very impressionable and amoral. Perfect. Go and shoot some arabs then come back here and point your gun at some property "investors" facing bankruptcy.
stinkbug omosessuale Frank Castle is a liar and a criminal. He will often deliberately take people out of context and use straw man arguments. Frank finally and unintentionally gives it up and admits he got where he is, primarily via dumb luck! See here Property will be 50-70% off by 2016.
No. Public (government) debt has been increasing since the GFC because we are running deficits.
It is actually very hard for Australian households to delever without the government deficits because of the national accounting identity;
Private savings + government surplus (- deficits) + Current account deficit (- current account surplus) = 0.
Since we are running a CAD = 3% of GDP, we need the government to run a deficit = 3% of GDP for the private sector to net save zero.
SO, it is mathematically impossible for the public AND private to delever without a current account surplus.
The relationship between the three identities is summarised below
You're right of course. Public sector is levering up. The graphs look like other graphs of the same things, though so I don't think they are wrong.
I guess the private sector must be doing all the deleveraging, and since households are deleveraging slower than the total, the business sector must be delevereriging faster than the household sector.
The truth will set you free. But first, it will piss you off. --Gloria Steinem AREPS™
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.
I don't disagree with the fact that governments can create money as they need it but from the way b_b describes it there is no financial restraint on governments to create as much debt as they like. Does MMT always require funding of this debt or at least the soaking up of excess money(debt) by selling bonds? If that's the case then they are financially restrained by how much debt the market is prepared to purchase at particular yields.
Looking at the US i can't see that there are enough banks/investors prepared to purchase 1.5T a year of government bonds at shitty yields which is why the US Federal Reserve keeps stepping in to facilitate the buying of these bonds. Now the Federal Reserve has "expanded it's balance sheet" and effectively lent out money to enable this. The Fed doesn't have to borrow from anyone, they just create the money and the debt and ultimately it makes no difference to them whether or not they ever get repaid. It seems they can just keep expanding their balance sheet forever. The same happened after the GFC when they purchased all the crap RMBS and exchanged them for cash above market value. So they are stuck with these dodgy assets but does it really matter?
Now if the RBA had all these dodgy assets and debt on their books supporting the Australian economy what consequences would it have for us?
I don't disagree with the fact that governments can create money as they need it but from the way b_b describes it there is no financial restraint on governments to create as much debt as they like. Does MMT always require funding of this debt or at least the soaking up of excess money(debt) by selling bonds? If that's the case then they are financially restrained by how much debt the market is prepared to purchase at particular yields.
Looking at the US i can't see that there are enough banks/investors prepared to purchase 1.5T a year of government bonds at shitty yields which is why the US Federal Reserve keeps stepping in to facilitate the buying of these bonds. Now the Federal Reserve has "expanded it's balance sheet" and effectively lent out money to enable this. The Fed doesn't have to borrow from anyone, they just create the money and the debt and ultimately it makes no difference to them whether or not they ever get repaid. It seems they can just keep expanding their balance sheet forever. The same happened after the GFC when they purchased all the crap RMBS and exchanged them for cash above market value. So they are stuck with these dodgy assets but does it really matter?
Now if the RBA had all these dodgy assets and debt on their books supporting the Australian economy what consequences would it have for us?
There is no requirement to sell bonds to "fund" government spending.
When compared to a business or household, the the whole spending process happens in reverse.
When Julia Gillard & Wayne Swan spend the School-Kids bonus next month the process will work like this;
Step 1. Treasury will request the RBA to "fund" their account with $2.1bn. The RBA will do this via electronic keystrokes (in the old days they would print money & place in a vault). It is at this point of the process the money is "printed".
Step 2. Treasury will then spend the money into the accounts of all family's who are eligible for the bonus.
Each family has a bank account. Each bank account increases according to the payments ($2.1bn in aggregate).
Family deposits are a liability of the banks. The corresponding asset for each bank is "cash" at the RBA (often called reserved or Exchange settlement accounts). This cash came from the electronic key strokes which occurred in step 1..
Step 3. Banks are penalised by the RBA (-0.25%) if they hold excess cash / reserves. So if nothing else happens at this point, the Banks will try to lend their excess cash to each other to maximise their interest income (since their interest expense has increased by the fact their deposits have increased). Since the banks are all in the same position, interest rates would fall by 0.25%, and the RBA will have lost control of the cash rate.
Step 4. To prevent this from happening, the RBA and the AOFM issue short and long term Government Securities to "mop-up" the excess cash from the Banking system and allow the banks to earn income from their cash assets.
So that's the process. The Bonds are only issued so the RBA can maintain their desired interest rate. Bond issuance is a choice of the government, and it is done as an act of corporate benevolence.
Edit: The USA, Japan, UK, New Zealand, Canada all have the same systems. So even though the US debt looks huge, it never requires funding. They do not need bonds to finance spending. Even if the deficit hit US$1,000 Trillion, there will never be a failed bond auction, because the money is always spent first, and the bonds are only issued to mop-up the new dollars created by the spending.
The USA, Japan, UK, New Zealand, Canada all have the same systems. So even though the US debt looks huge, it never requires funding. They do not need bonds to finance spending. Even if the deficit hit US$1,000 Trillion, there will never be a failed bond auction, because the money is always spent first, and the bonds are only issued to mop-up the new dollars created by the spending.
Is inflation the only danger, or are there other possible problems?
Any expressed market opinion is my own and is not to be taken as financial advice
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