Chart of the Day: Current Account Deficit

Today’s chart comes from Cameron Murray’s recent expose on Australia’s persistent current account deficit.

The chart (and Cameron’s analysis) highlights the key difference between Australia and Norway (and other stable advanced economies), if we were ever to attempt to create a SWF, or indeed change from a debt based economy to a productive one.


  1. Nice graph,
    clearly, if we cannot get into positive territory with the best terms of trade in decades, it seems inevitable we will remain in negative territory and presumably it’s worsening terms of trade which is responsible for the trend forecast?
    However, most of the economies that are currently above the line (positive balance) have spent some time in negative territory….sometimes for a decade or more. So it’s possible to slump into negative territory and to get out of it over time. Presumably in the cases of Saudi and Norway it’s due to the price of energy exports (oil), but other countries have done it without that natural advantage.
    There must be some chance our predicted gas exports over the next decades could lift us north of the line?
    I also wonder whether Australia ever made it into positive territory pre 1980?

    • Countries that have acomplished it without the use of natural resources have done it by exporting human resources (labour).

      This is the case with China, Germany and Japan. Labour in these economies is exported as through various mean (education/wage restraint) they have achieved a compeditive advantage in labour.

    • “if we cannot get into positive territory with the best terms of trade in decades, it seems inevitable we will remain in negative territory and presumably it’s worsening terms of trade which is responsible for the trend forecast?”

      We would be in positive territory if we didn’t take big loans from foreign banks to fund purchases of the existing overvalued houses. We spend around $30b a year just on interest payments to foreign banks.

  2. Likewise it illustrates why wanting balanced budgets is inherently bad for the private sector.

  3. I believe the major issue with Australia’s CAD is historical, we have always apart from WW2 and early 1950’s been a net importer of capital and poduct and exporter of raw materials, firstly back to England and thence later to Japan and now China.
    The point I believe is that no nation can be or should be always in either deficit or surplus

    • I am indifferent to a countries current account , they only signify the trade flows between different nations, unless you are not giving up your strategic resources and skills in exchange for ipods.

      It is however important for politicians to look at this and think?

      If they are going tax more than spend and if the country has a persistent CAD , then where is the money for economic growth going to come from.

      Private sector credit(debt) creation ,and in Australia you can see that private debt levels now represent circa 160% of GDP.

      So if we dont slip into Current Account Surplus and if the private sector is de leveraging then the Government will never return to surplus , infact the government will go more and more into deficit. If the government is hell bent of cutting services to come up with savings , we will enter recession territory .

      The general population who do not understand these things , will likely boot the government out only to install another government who are as clueless as the first one.

  4. Chris, I know it wasn’t your intention to portray Australia as the only country with a CAD, but I think you’ve captured the majority of the ones with a significant ongoing CAS on that chart. It’s a simple mathematical fact that not every country can run a CAS and those that do aren’t all a picture of booming growth either ie Japan.

    • No its not, just thought the chart was a standout, especially as we try to compare ourselves to Norway and Germany.

      These two countries and economies are much more robust (even with the latter’s exposure to European debt) than Australia’s.

      • Saudi Arabia sits on the worlds richest oilfield and Norway sits on probably the richest non-OPEC oilfield. Both are effectively state-owned. It’s probably little wonder that these two run a persistent CAS.

        And the thing we need to remember about Germany is that it’s CAS is only possible because other countries are willing to run a CAD with it. If this fact were to change in a major way, Germany would be in trouble.

    • Lefty we probably should decouple these issues. CAD: good or bad? SWF (balanced budget) good or bad?

      My analysis is CAD agnostic. I’m simply saying that if there is a CAD you haven’t got sovereign wealth in the way that several oil exporters and Singapore, Switzerland, Finland etc. have. It follows that setting up a SWF or having a balanced or surplus budget will hammer the private sector given persistent CADs. Advocates for SWF and/or balanced budgets need to explain how they can be funded without further indebting the private sector.

      Countries with persistent CAS’s probably need to run SWF to avoid overcooking their economies (e.g. the high speed part of our two speed economy).

      Self evidently not everyone can run a surplus just as not everyone can be above average.

      As to whether CADs are bad, Cameron goes into detail breaking down the CAD.

      • “Countries with persistent CAS’s probably need to run SWF to avoid overcooking their economies (e.g. the high speed part of our two speed economy).”

        Interesting point, thanks.

      • That is a gut feeling, a hunch, rather than fair dinkum analysis!

        But when you think about it if you have shiploads of money flooding in it is probably going to be inflationary unless you can withdraw some and settle things down …I’m thinking what happens in places directly effected by the mining boom here, imagine that nationwide.

      • Yeah I like your thinking on that one.

        I can’t see where ‘economists’ would really be talking about this kind of thing. But the fact that you raise it doesn’t make it any less possible.

        Makes sense to me anyway – I like to speculate on these matters.

      • Ah OK wilde…sorry I see your point re decoupling the SWF argument and the CAD argument. I agree. I missed a few posts put in as replies and not appearing on the bottom line!!!

  5. Whew!!! Thanks Prince!!!
    Thank goodness one or two people in this country are starting to pay attention.
    As AB quoted we have run a CAD in every year but one of the last 50. That year was 1972 where we had about a 1 Billion dollar surplus. Prior to that I think we ran a small surplus in 1959.

    Rave swei we NEED to take big loans from Foreign banks. The CAD causes the loans to be necessary. So it is we owe some Net $700B and Gross $1.2B (I’ll allow i might be a few months out of date there but near enough for the argument) Now I’ll admit it is a somewhat circular argument but the reason we have a CAD is because we over-consume and under-produce.

    The reason our foreign Debt is not now MULTIPLE TRILLIONS is that we have perhaps the greatest natural resources per head of population in the world. We have sold these off not as production but as assets – just to finance our profligate lifestyles. My rough calculations of about 5 years ago that about 78% of our mining industry was Foreign owned have been recently affirmed by Stephen Mayne on a company by company analysis of Public Companies on the ASX. Further, recently, the Greens came up with a figure of, from memory, 83%.
    In addition pretty much the whole of our food chain from the farm gate has been sold and almost all our significant Secondary industry. We are now busy selling vast tracts of premium farmland. For what? To maintain consumption, a bloated Service Sector and a bloated Public sector. We’re busy trying to tax anyone who produces anything (except houses)out of existence.

    To those not worried about CAD’s what happens when we have no more to sell and find it difficult to borrow on the international markets?

    The problem with most economic research in this country is that its time frame is too short. Almost no one is considering the impacts of CAD’s over the 50 year time frame. I see the long term often listed as 10 years. As a result we have fantasy and children’s fairy tales masquerading as real economics.

    Lefty…as others have said, we need to run a Current Account Surplus some time. The Anglo world, US, UK, Aus NZ etc have been able to run CAD’s for a very long time. The US because of resources and the fact it was an extremely wealthy country whose currency became the world reserve currency. The UK survives on the basis Sterling has been still something of a Reserve Currency and on the stupid belief that CAD’s and foreign debt don’t matter. Aus and NZ because we have been selling off our heritage.

    Just because other fools have been following the same policy doesn’t mean it is not irresponsibly foolish.

    • flawse, +1.

      Watched a debate between opposite sides of the Coal Seam Gas extraction debate on ABC earlier this week.
      Pro resource extraction guy described access to the mineral wealth of Aus in these terms:
      Govt “releases resources” to the private sector to develop.
      In exchange for our caring and sharing govt “leaders” ‘releasing our collective resources’ to (in the main) foreign companies, we (Aus Treasury) get some nominal royalty payments.
      Perhaps that is why Norway & other oil-rich countries have CAS – they own the resources and hire developers.
      Singapore has a govt that behaves more like a business, and a good one at that.
      China has a mantra: Use their resources first.
      Perhaps in the case of Aus, China has a sub-mantra: Lease the resources, pay a royalty and cream the profits.

      Scattering our resources to the wind like confetti in exchange for a nod and a wink from sweet-talking multi-nationals and a 2% royalty fee is not the only reason for CAD.
      Mismatch between cost benefit of large scale immigration vs infrastructure & services expansion to cope is costing a bucket.
      The ever expanding housing bubble is a sacred milch cow for the banks, with funds sourced offshore to build the bonfire of unsustainable debt.
      Manufacturing is gone, deliberately whiteanted.
      Add to the above, a govt that is spendthrift ($Bs wasted on pink batts, various Bribes and the centrepiece $50B NBN) and the scene is set for a country to never have a CAS.

  6. Re establishment of an SWF
    IF we ran a Current Account Surplus, rather than investing overseas why don’t we try buying back some of our own country?

  7. Indo
    The general population who do not understand these things , will likely boot the government out only to install another government who are as clueless as the first one.

    That’s certainly the situation so far!!!! Have a look at the explosion of the CAD under Howard / Costello !!!! The great economic managers!!!
    I won’t even start to comment on the current lot!

    • That bunch even managed to eke out a Budget Surplus as private debt exploded under their watch.

      VCE exams should be only a 30 min exam on what this equation means
      CA = (T – G) + (S – I)

      Then we will well and truly be a prosperous conuntry πŸ™‚

  8. This is posted on Cameron’s as well, but I thought I’d reproduce it here:

    I’m not sure I get this…

    A SWF funded by payments for non-renewable resources has a specific source of sovereign wealth. The idea behind it is to invest the wealth and not consume it, investing your inheritance rather than blowing the lot.

    The CAD’s show that as a country we are blowing the lot? And this makes a case not to try to ringfence royalty payments and invest them?

    I know on the whole it’s as pointless as setting up a savings fund for someone hooked on credit cards, but isn’t it a step in the right direction by transparently assigning revenue to specific goals? Isn’t this what Alaska and Wyoming have done successfully?

    I agree that there should be more focus on ‘addressing the source or cause of the debt.’ but I don’t think that’s an argument against a non-renewable funded SWF.

    • Why do you want to trade your resources for electronic wealth into a SWF when the Aus Central Bank can create that electronic wealth with a push of button.

      • If Western Australia (by itself) started putting royalty receipts in a SWF in 1996 without touching the principle or interest and achieved 5% return, by now that fund would be bigger than Australia’s GDP.

        I’d be happy with that.

      • Only problem would be that their GST share would go from 68c/$ to nothing, or more likely less than nothing.

        One of the key reasons why there are such huge disparities between the states royalty rates.

      • The CGC would rework the GST distribution process somehow (good or bad for WA, I dunno), but yeah, the fact that GST redistributes royalties is a big factor in the debate.

    • Big problem with following the examples of the states is that the federal gov will reduce payments to the states that set up a SWF using mineral royalties, thus negating its effect.

      The other issue is the disconnect between the minerals industry and the population in australia. SWFs work well when the populance can see the fund as security when the resource runs out.

  9. “Likewise it illustrates why wanting balanced budgets is inherently bad for the private sector.”

    wildebeest can you expand on that thought.

  10. My understanding of a SWF is that the SWF itself would act to close CAD. CA = (T – G) + (S – I) is an accounting identity not an equilibrium condition. It explains the current account balance at the current real exchange rate and GDP level.

    If Australia adopted a SWF, the aim would be to increase domestic saving or offset private sector dis-saving. Increased saving goes hand in hand with a depreciated real exchange rate (or a real exchange rate lower than it would be absent the SWF). In this way the SWF actually does close the CAD. This is just another way of saying that a SWF, if managed correctly, would reduce the surplus on the capital account, simultaneously reducing the deficit on the current account.

    • If we could wave a magic wand and a SWF of many tens or hundreds of billions already existed then that may be fair enough. We could ask whether the future fund has helped in that respect. However the analysis ignores the effects that occur in getting to that stage. A SWF can’t be funded by anything other than taking money away from sectors that are already in net debt.

      And as a quibble irrelevant to the CAD/SWF discussion, economies are never in equilibrium. This is another one of these myths based on faulty beliefs. For the mathematically minded here is why:

      • “A SWF can’t be funded by anything other than taking money away from sectors that are already in net debt”… I don’t think thats right. The SWF would actually be funded by taking income away from our trading partners.

      • when originally that income should have flowed to sectors in the OZ economy to reduce their net debt.

      • This is how I think it would work:

        Let’s say tomorrow the government announced they would set up a sovereign wealth fund which would immediately start saving 2% of GDP. Provided the private sectors desired saving doesn’t fall by 2% at the announcement, aggregate desired saving has to rise.

        If desired saving increases (and the interest rate is held constant) GDP has to fall, unless the real exchange rate falls. If the real exchange rate falls then aggregate saving increases and the CAD closes.

      • Your scenario seems to be asking for a recession? Because I cant see the floated exchange rate falling for any other reason. In a recession, CAD can potentially close as consumption also drop.

      • There wouldn’t need to be a recession. the government would just be replacing domestic demand with external demand. My model is over-simplified though.

  11. Why is it assumed we MUST run a CAD and then we calculate what will happen from then on.

    The SHORT term outcome of trying to fix debt is disloacation. No doubt about that. Is that a reason to expand the same policy that brought the problem in the first place and making the problem even larger.
    I’ll say it again. The answer lies back in time and I have said for many a long year, in fact decades, that the answer lies back in 1959 (or before). Every postponement in dealing with the problem since then has made the problem worse.
    Now the whole country is totally out of whack with a bloated service sector requiring the borrowing of hundreds of billions of dollars per year or alternatley selling off our country to the same extent.
    The only solutions I see proposed by economists is more foreign borrowings (a free and unlimited source of funds in most models) The only problem with that is we now have $30B interest repayments. Just wait till the repatriation of dividends really gets going.
    Then again if you just build into your model that the interest payments can be added to the debt at no cost, and that the CAD therefore doesn’t affect the value of the A dollar, you can come up with any fairy story you want to tell.

  12. Wildebeest In the near future it is not going to matter whether we like it or not. There is a massive shift happening in China and the earlier Phat Dragon thread should be run in conjunction with this thread.
    Pretty much all economists in this country are looking backwards and saying ‘All clear ahead’

  13. “As AB quoted we have run a CAD in every year but one of the last 50. That year was 1972 where we had about a 1 Billion dollar surplus. Prior to that I think we ran a small surplus in 1959.”

    Did you notice that they were quickly followed by recessionary conditions/economic upheaval and uncertainty. Arthur Fadden presided over the 59′ surplus – the economy quickly contracted.

    I must refresh my knowledge of banking flawse – it will probably be rather different to yours. I’m really not certain of this idea that our CAD is financed by foreign borrowings and selling off the farm as such.

  14. It is Lefty…how else would it get financed? We’ve had this conversation in depth before. Of course once you understand that simple point one of the main channels of economic thinking currently espoused around this country is revealed for the stupidity it is.

    Indo to fix this thing will require quite a lot of things to happen None of them will because it is both politically impossible and the economic consensus in this country is dominated by stupidity.

    Any attempt to fix it will necessarily involve dislocation. On the other hand take a drive through rural Australia and get to know the people. The whole social structure, facilities etc has been destroyed as we ran a Current Account Deficit financed by external borrowings and asset sales that effectively redistributed income from rural centres to cities.

    However if we are not going to try to deal with this problem now while we have what is acknowledged as the best terms of trade in our history…exactly when are we going to deal with it?

    Indo the exchange rate could be dropped dramatically just by ceasing to borrow so much or by putting limits on Foreign ownership. We just have to be prepared to tolerate the fallout. You are right. The immediate effect would be a recession massive inflation (again visit the phat dragon thread)but I consider you confuse cause and effect.
    Again I’ll acknowledge that most economic arguments are a circular feed-back loop.

  15. Lefty you asked me “Did you notice?” Any time you try to move from an economy reliant on debt for growth to production for growth you will get dislocation. So the solution now proffered is more and more debt?

  16. Just one more thing Lefty. I happen to remember 1960. Aus at that time was very dependent on rural industry. 1960 was a year of very bad drought and wool prices had by then lost their real lustre as well. We fed sheep in 1960. To say that the Surplus caused the following recession is simply not correct.

  17. The SWF would actually be funded by taking income away from our trading partners.

    Unless I misunderstand you this equates to funding a SWF by reducing the CAD. Won’t comment any further until that is clarified in case I have misunderstood you.

    Coming back to the proposition that a SWF could reduce the CAD I think you need to get the timing and causality in the right order. A SWF has to exist before it can have an effect (on anything). Timing wise it must come first. My position is the creation merely makes the net government and private sectors more indebted.

    CAD = (T – G) + (S – I)

    I’ve tried to explain the way I see this a few ways. Here is another way based on looking at an SWF as a way to increase domestic saving. In the first increment of the SWF, the government would get revenues from the private sector of an amount, call it dS, and stick them in a SWF. In other words taxes have increased by dS (e.g. mining tax?) and private sector savings have reduced by dS. If the contribution to the SWF was not funded by a tax increase then the amount of taxes available for other things has reduced by dS. So we now have an amount dS in a SWF that has come at a cost. The question then is can this “pay for itself” by reducing the CAD by dS.

    Presumably we’d want to make a structural change to the CAD rather than some sort of transient change. It appears that a major component of the CAD is interest on foreign borrowings. A structural fix to that would be for a SWF to buy out some of the foreign loans of our banks thereby reducing this interest burden. So if the foreign loan was reduced by dS then the the CAD would be reduced by the interest on that r*dS. So to my way of thinking, and obviously this is not an exhaustive treasury paper πŸ™‚ we would have taken dS out of the economy in order to reduce the CAD by r*dS, where r is less than 0.1. Also, from a philosophical point of view what this example equates to is a SWF that is basically an Australian Fannie Mae. If that is what people want then fine but perhaps the debate should be framed in those terms.

    There are probably other options available for investment of a SWF that may structurally change the CAD. If Cameron is reading this comment thread maybe he can nominate other areas where the CAD can be reduced.

    • The SWF would actually be funded by taking income away from our trading partners – This is correct analytically.

      There is no timing, causation or order, the current account deficit and capital account surplus fall simultaneously. It’s just different ways of explaining the same event from an income and wealth perspective. An increase in net wealth (SWF) has to be funded by an increase in net income (fall in CAD). This is what I mean when I say our trading partners would be funding the SWF. To reiterate, it happens simultaneously.

      To see how this happens you need to stop seeing CA = (T – G) + (S – I) as an equilibrium condition, where S is fixed and only the source of S (public or private) varies. Obviously in an accounting sense, if total saving = $100 and the government saves $30 the private sector must be saving $70. But being the balance of Income less Consumption, actual Saving is irrelevant. What matters is the % of expected income the public and private sector together plan on saving.

      When desired saving increases (interest rate fixed) either GDP falls (and the accounting identity remains the same in % terms) or GDP remains the same and the real exchange rate falls. If the real exchange rate falls, desired saving is realized and the CAD (being Investment – Saving) must also fall. That is how the SWF would close the CAD.

      • The SWF would actually be funded by taking income away from our trading partners – This is correct analytically.

        There is no timing, causation or order, the current account deficit and capital account surplus fall simultaneously.

        What do you mean by “taking income from our trading partners.” How do we do that?

        You say there is no causation but there must be causation — for those who want to interject and say things can be random, and so on, yes you’re right but an unpredicted random event is still a cause — otherwise why hasn’t this happened already. In other words in your scenario what needs to happen in order for us to take income from our trading partners. Australia has run a current account deficit for 49 out of 50 years so clearly this doesn’t happen spontaneously. Why hasn’t anyone taken income from our trading partners before if that’s all it takes — not that I actually understand what you mean by that explanation anyway.

        CA = (T – G) + (S – I) isn’t an equilibrium condition it is an accounting identity. By definition it is always true. Each of the terms is time dependent but the left hand side always equals the right hand side at any point of time, just as the company you work for will have assets A minus liabilities L equaling equity E at any point in time. Equilibrium doesn’t come into it.

        Regarding the correcting of exchange rates, in the textbook world exchange rates change and trade imbalances shrink. In the real world currency trading is hundreds of times the total value of world trade. There doesn’t appear to be much evidence that currencies respond to real world flows of goods and services in the way textbooks describe. The momentum seems to lie elsewhere.

    • There are no easy options. We are in a stable pattern of selling off our assets and borrowing from abroad to consume more than we produce (and have accumulated substantial debts in the process). Any significant change will have severe impacts on the dollar and interest rates, and be particularly disruptive. The very long term solution is to improve productivity faster than our trading partners.

      Some other ideas (not well thought out just yet)

      1. Reduce capital inflows to Australia (limit banks ability to borrow abroad). This is the main case of the primary income balance being so skewed. We pay $7.6billion/qtr to foreign lenders in interest, but receive only $277million/qtr from our lending abroad.

      The probem with this is the impact on the dollar and interest rates. I suggest that our dollar would tank while interest rates could, well, who knows. In the current gloabl economic environment anything is possible.

      2. Tighten lending criteria.

      3. Somehow nationalise the debt, pay it off with printed money, and hope that our trading partners are happy about that (that’s my best MMT proposal).

      If Sweeper is suggesting an SWF will reduce the CAD because it will be funded by reduce government expenditure, this is probably true. But this is not the case as far as I know. All the talk is of a new tax to fund any SWF.

      If what you are saying Sweeper is that an SWF will be funded, net, by our increased savings, then yes it will close the CAD gap and decrease GDP(also partly because an increase in savings goes hand in hand with decreased borrowing). But simply saving more in total will close the gap anyway without the need for a SWF.

      • Sorry Cameron. I’d need to deduct a point or two from my +1 πŸ™‚

        MMT is simply a fraud because it treats the external account as an unlimited free source of funds. It clearly isn’t and this will become more and more apparent over the next few years.

      • Yeah, I have my hesitations about MMT, the main one being that politicians will make decisions about how much money to circulate.

        But since there are readers who know more about it than I do, I threw it in anyway. I stick by my comment that there are no easy answers – work hard, produce more, save more, stop speculating on houses πŸ˜‰

      • Firstly, I agree that the current account deficit (and associated foreign debt) is bad and probably can’t be fixed overnight.

        The worst part about it is our net income deficit, which should never have been allowed to get to where it is. And is mainly the product of 1. unsustainable CAD’s year after year for the past 25 – 30 years and 2. the fact that capital inflows are largely seeking risk whereas capital outflows are largely seeking safety.

        But I think there are only 2 ways the current account deficit can be reversed:
        1. Our terms of trade deteriorate abruptly, there’s are sudden stop in external financing (capital account crisis) GDP falls.
        2. Over an extended period we save more and in the process allow the real exchange rate to depreciate. A SWF achieves this. Wildebeest seems to be saying that a SWF doesn’t achieve this, because an increase in public saving will simply increase the indebtedness of the private sector and CA = (T – G) + (S – I) says so (that could be a misinterpretation). But the CA accounting identity does not say this. It just says that at x date, at x real exchange rate at x GDP, the CA = x. To understand how an increase in aggregate desired saving (which is what a SWF is) would change saving (and therefore the CAD) you need to consider how GDP or the real exchange rate would change. Unless GDP falls (which I assume wouldn’t be the goal of a SWF) the real exchange rate must depreciate and therefore the CAD must close. So yes, I think a SWF would add to total saving. And the private sector deciding to save more would have exactly the same effect. But we don’t save enough to finance investment, which is why we need a SWF.

      • We run a CAD here and right now.

        Therefore net government & private sectors are in deficit here and right now.

        If the government says we are going to stick e.g. $10 bill in a SWF right here and now where has it come from?

        For that matter if it puts $1 in a SWF right here and now where has it come from?

        A: It comes from sectors that are in net deficit hence “what sovereign wealth?”

        that’s pretty much it.

        All these things are covered in the articles so a bit hard to keep responding in sound bites. It is probably more useful if people actually read through the articles and then fire in some questions.

      • Indo if you treat the internal funding as an unlimited source of funds you are effectively treating the external account as an unlimited source of funds.

        This particularly applies to our current economy. Of any money created by Government or the Banks a large proportion of it ends up spent on imports one form and another. So, as I said, presuming that Govt funding is an unlimited and free source of funds is pretending that the external account is also an unlimited and free source of funds.

        Governments in the past have built great projects in this country and still can do so. However to pretend that it can all be done without cost is fraud. Further to look at Govt stimulus spending without looking at its effects on foreign indebtedness within the economy as it is now structured is simply wrong.

        The economy has to be reformed and rebalanced. The service sector has to be dismantled to a large extent. Our manufacturing sector has to be rebuilt and we cannot continue to deprive rural people of basic rights to have communities and appropriate services.
        At the most fundamental level our education system has to be reformed. Then we can get back to producing things again.

        The mind boggles as to how any of it can be done but to take the MMT approach that all we have to do is get the Govt to run continuous deficits is fraudulent.

  18. Australia has a lot of land. However, it does not have easy way to transport goods due to the lack of a good river. That inhibits capital creation, and therefore capital have to be imported. Australia has therefore always been ‘foreign owned’.

    When you consider that all our foreign debt us mostly used to finance housing and digging holes, it is very depressing. Unfortunately, there are no market solution to the situation. It can only be solved via capital control and/or a managed exchange rate, along with the corresponding economic malaises.

    As to the definition of a ‘Sovereign Wealth Fund’, a ‘Sovereign Debt Fund’ just isn’t feasible to sell politically. The purpose is to prevent the money from showing up as surplus, as the push to spend more and to reduce taxes will be unmanageable, and the Opposition of the day will use the fund to bribe the voters with bread and circuses.

    Because we keep voting clowns into power, the problem will never be solved until it blows up.

  19. I follow your maths wilde. You are right in that really what is required here is a determination of where we are heading and setting policy accordingly. But let us not pretend that we can keep on expanding the service and govt sectors, reducing the manufacturing sector, keep rural industries and communities as second class citizens, increasing the CAD, selling our country off at an ever increasing rate, as well as creating higher and higher Foreign debts, forever.
    Simply we need to both reduce imports and/or increase exports. The mining industry on its own will not bring us what we want in terms of our society.

    So what is necessary to do these things? I know the answers which are apparent if one keeps following your maths right through and they are politically unpalatable.

    However can we at least have a recognition of the real changes now occurring both here and overseas particularly in relation to China. Again I refer you to the phat dragon thread. Economists here are looking backwards not forwards into the future.

    One of the sacred cows is the ‘flexible’ exchange rate. It isn’t flexible so much as rigged to be way above what the nation can support in the long term. Leigh Harkness has had some input in this regard.

    • flawse perhaps if I just summarize by saying I suspect how this all came about is that people became conscious of the investment power of SWFs and looked at places like Norway with its oil boom and figured that with our mining boom we oughta have one.

      My position is and was that we have run CADs “forever” and will probably continue to do so, so “What sovereign wealth?” That is basically a CAD agnostic statement, i.e. in saying that we do not have sovereign wealth to fund a SWF I am not directly saying CADs are good or bad, I am just saying they “Are.”

      Whether CADs are good or bad and how you alter them is a separate but related discussion as is whether you might want to tax miners and use the proceeds as transfer payments to the slow speed economy and so on.

      The SWFs that people seem to look admirably at are from countries that run surpluses. As above it is possible that the formation of a SWF in those circumstances may actually be needed in order to cool their economy down. In any event there are a few issues that are coupled together in this discussion.

      • Wilde, as you say there are quite a few issues that are coupled together. I’d suggest it is necessarily so. I can’t help but feel that one of the problems with modern economic thought is the tendency to ignore a whole heap of inconvenient variables.

        Just as an example. An esteemed professor concluded that there is no correlation between CAD’s and the exchange rate. Therefore he concluded there was no need to worry about CAD’s.

        Of course there is no correlation between the two if the CAD is being mostly covered through asset sales and borrowings. So I’d say there is good reason to be concerned about CAD’s.

        Further at the moment you cannot look at all the borrowings and asset sales, without considering their effect on our society in terms of employment and social structure. I saw first hand the effect this had on rural towns and communities. They didn’t deserve what this nation did to them.

        So sure it ends up a complicated and wide ranging argument but one we need to have.

        I think perhaps we agree as to people thinking the establishment of a SWF is a simple thing. It isn’t and there are serious costs. Further to think of the SWF as being able to be established by putting a 70% effective tax rate on miners without the rest of us having to forgo any lifestyle is simply short sighted erroneous thinking. It won’t work.

        Anyway it is one heck of a complicated argument but one it is crucial to have.

      • There is no correlation between the exchange rate and heart disease either but that is no reason not to worry about heart disease!

        Are you sure he wasn’t qualifying his remark in terms of no need to worry about the effects of a CAD on exchange rates (due to weak correlation) rather than no need to worry about a CAD per se?

      • Wilde what he actually said was that there was no need to worry about Current Account Deficits or foreign debt because it is NEVER repaid…(never has been never will be). So effectively the external account, in MMT, is an unlimited free source of funds.
        Somewhere in one of my computers I stored the exact quote and one day I’ll find it again.
        Wilde I won’t hide my antipathy to MMT. As far as I’m concerned it is one large dangerous fraud. The only thing useful in it is the accounting model concept. However this is NOT new and was part of economic learning back in about my time at Universities. Admittedly it was about that time that the whole academic economic train started to go off the rails and it caused me a lot of aggravation in lectures and tutes.
        The problem with MMT accounting model is they adopt the accounting model concept but refuse to apply its simple principles to the external account.
        I have never yet crossed swords with a MMT advocate who was prepared to answer even the simplest question on the external account.
        I once saw MMT described as a revelation. The last bloke I heard of who had a revelation was Saul on the road to Damascus and he was blind afterwards as well.

        This is not to say that somehow, having magically started from scratch again that only trading in your own currency would necessarily be a totally bad thing. It would certainly limit how much foreigners would lend you if you were not willing to sell your country off…but then what would be the difference between what we have an MMT?
        Of course just because we wanted to trade in A$ that doesn’t make it the world reserve currency and a lot of people might have very good reasons for not wanting to trade in it…particularly if they had adopted MMT in their own country!

  20. I know it is probably what you mean wilde but let’s be specific.
    As others have stated you can’t fund a CAD by REDUCING the CAD. We must run a Current Account Surplus. Otherwise we are just still doing what we do now and selling the country off and borrowing at a faster rate than the SWF can grow.

  21. Jack the problem with that whole scheme now is that of the money you create a large percentage of it ends up in the current account creating an even higher CAD and more foreign borrowings or national asset sales.
    There is now NO EASY ANSWER.

  22. I agree Flawse, there is now no easy answer, however it is as plain as day that this country needs both political and economic reform and any attempt gets hit by the vested interests (witness the RSPT or carbon tax via the miners).
    From an accounting perspective, maybe a new national bank that takes over a failed state ( tasmania) debts and its assets and starts from there.
    This would involve however getting rid of the state system, pushing some of the services to a local/regional structure that was renumerated via efficency /GST structure and having the balance funded by the Fed system such as health, law and order etc.
    As i said before, our historical legacy of separate colonies, that exported raw materials to England and imported from them remains to this day.

  23. Unfortunately Jack what most people are advocating as reform is just a supercharged debt system.
    IN Economic studies these days the external account is simply ignored. So most modern economists have no concept of it nor its effect.

  24. It is possible to reform the monetary system to eliminate the current account deficit.

    However, before you can prescibe a solution, you must diagnose the problem.

    First some basic anatomy of the economy.
    The money we earn from selling our products and services enables us to buy products and services of an equivalent value. Therefore, if we spent only the money we earned, we could never buy more than we have produced and cause current account deficits.

    The only way we can create a current account deficit is to create additional money. If we all had a money printing press, we could use the money we printed to buy more than we produced. That money would cause current account deficits.

    Of course we do not all have printing presses. However, we all have access to bank loans. Bank loans have the same effect as a money printing press: they allow us to buy more than we produce.

    When we borrow from a bank, we receive current entitlements to buy products now against a debt; an obligation to supply products in the future. That time shift betweed demand and supplyu causes current account deficits.

    If we borrow money from someone who has earned that money, they reduce their spending to allow us to spend.

    But if we borrow from a bank, they do not take money out of someone else’s account to put money in our account. When they lend they create additional money (current entitlements to products).

    When we repay the principal of a loan to the bank, that reduces the amount of money in the economy.

    Therefore, when new lending is greater than loan repayments, banks are adding money to the economy and that money enables the economy to buy more than it produced, causing current account deficits.

    It was not always that way. When we had fixed exchange rates, there was a form of saving that the banks lent legitimately, without causing current account deficits.

    With fixed exchange rates, if we increase our exports more than our imports, we would generate additional money in our economy and at the same time raise foreign reserves. Those foreign reserves were a form of savings. Bank lending allowed us to use those savings.

    However, we had to manage bank lending because if banks lent excessively, they would deplete our savings or foreign reserves. In other words, excessive bank lending would cause current account deficits.

    Foreign capital was another way of causeing current account deficits. If foreign funds entered our economy, they would also increase our spending. However, when that spending generated additional imports, there would be the foreign reserves to pay for those imports. It would not cause catestroophic failure in our economies.

    Our problems started when excessive lending in the US in the early 1970s caused the US government to respond, not by reducing bank lending, but by floating the dollar to protect foreign reserves.

    Floated the dollar meant that the money leaving the country had to equal the money entering the country.
    It also meant that the money entering the economy from exports growth equaled the money leaving the country.
    That meant no additional national savings in the form of foreign reserves for the banks to lend.

    All future growth in bank lending caused current account deficits.

    Yet bank lending was required as it was the only source of additional money. It left the economy in a catch 22 situation. The economy needs money to grow. Yet bank credit is the only source of money and it causes current account deficits and raises domestic and foreign debt.

    The only way to bring about current account surplusses and reduce our foreign debt is to allow our economy to increase foreign reserves. That would require us to move from the “pure” form of the floating exchange rate.

    Norway has generated current account surpluses by excluding the revenue from its oil wealth from entering the economy. That is one approach.

    Other countries have tried other approaches, including managing their “floating” exchange rates.

    I have recommended an alternative monetary system that manages bank credit and the exchange rate.

    There may be other solutions. But the prognosis relates to the diagnosis and we need to understand the cause of the problem before we can rectify it.

    • Leigh are you saying expansion of credit causes CADs? Apologies if I have misunderstood.

    • I would argue that the prognosis misses the root cause. Australians are consuming more than they’re producing, and a floating exchange rate was introduced to enable this. Otherwise Australians will have to stop spending once the foreign reserve is depleted.

      Any solution which involves making Australians ‘live within their means’ is no longer politically possible. The rentier class are perfectly happy for Australians to sell off their country, and the political class kowtow to the rentiers.

      • Ronin
        People cannot consumer more than they are producing juste because they want to. They have to buy their products.
        That requires money.
        If bank lending is guided by appropriate rules, the economy will live within its means.
        But give the banks unbridled license to lend and they will lend the nation deep into debt.
        It may not be politically possible to apply such guidelines at this time. But unfortunately, we only have to look at what is happening to Greece, and has happened before to many South American countries to see where it leads.
        We have changed from a system that produced prosperity to one that produces debt.
        While our credit is good, we will continue to live reasonable lives. When that credit runs dry, our lives and livelihoods will suffer.
        Is there any other possible outcome?

  25. “When that credit runs dry, our lives and livelihoods will suffer.
    Is there any other possible outcome?”

    Or we run out of mines and industries to sell off to finance the consumption!
    Cheers Leigh

  26. All I see is a chart that doesn’t distinguish between projections and reality.

    The reality – we currently have a very low current account deficit.