Government cheques don’t bounce

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Check out the chart below. It’s of the breakup of the US GDP with the last bar being the results for the 4th quarter of 2011 released Friday night. I got it out of The Atlantic on Saturday Morning and tweeted it. The reason I was so excited, well not excited really but rather whatever the word for heightened senses is, was the size of the Government drag on growth – the grey bar.

Now regular readers know what’s coming next – GDP = C+I+G+(X-M). These 5 Sectors, consumption, investment, government and net exports make up the 2.8% annualized growth rate for the last quarter. Leaving aside that this recovery is so bad each quarter of it so far has been below the post WWII average it’s the G that I’m interested in here today and particularly the negative contribution (don’t you love economics – negative contribution!) for the 4th quarter of 1%.

Austerity is the new black these days. Whether its Australian households, European governments or the United States Treasury everyone I’d saving and cleansing. But what is true of households is not true of sovereign nations per se. Sure the behavioral similarity in tightening your belt to pay you bills is understandably similar but the reality is the situation is very, very different. While myself and my family have to earn income in order to pay our bills or the cheques I write will bounce the same is not true of the government.

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Government cheques don’t bounce – not if they dont want them too and dont put artificila constraints on themselves – it is as simple as that.

Last night I was reading Warren Mosler’s, the father of Modern Monetary Theory, book “Seven Deadly Innocent Frauds of Economic Policy” again because of how this concept of Government cheques not bouncing tied back to austerity.

One of the things you would have heard over the past year is that the problem in Europe and potentially the United States, United Kingdom and maybe even Australia eventually is that debt could become “unsustainable”. In his book Mosler talks about an exchange he had at a conference in Sydney with a David Gruen who was RBA Head of Research at the time.

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“David, so tell me, what do you mean by the word unsustainable? Do you mean that if the interest rate is very high, and that in 20 years from now the government debt has grown to a large enough number, the government won’t be able to make its interest payments? And that if it then writes a check (sic) to a pensioner , that the check will bounce?

… No, we’ll clear the check , but it will cause inflation and the currency will go down. That’s what people mean by unsustainable.”
So government cheques don’t bounce – not least for economies like the US, Australia and the UK which have their own currencies.

Mosler again:

The fact is: government deficits can never cause a government to miss any size of payment. There is no solvency issue. There is no such thing as running out of money when spending is just changing numbers upward in bank accounts at its own Federal Reserve.

Yes, households, businesses, and even states need to have dollars in their bank accounts when they write checks, or else those checks will bounce.”

But not sovereign governments with their own currencies.

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So in the US the fact that the G in the GDP equation is dragging on growth is to my mind negligent as it is in the UK and Australia. Greece and Portugal don’t have their own currencies but have been living like they do so Europe still has its issues (think of them as states of Europe in the quote above). But for those of us with a choice it’s important to remember Government cheques don’t bounce – its ok to support your economy when it needs it. But if Governments are caught in a political and philosophical straight jacket then rates are going much lower in Australia and are going to stay low around the world for some time yet.

Risk assets will love that!