Steve Keen continues his recent good use of sectoral balances analysis today to make sense of Clive Palmer after the latter noted that:
…Our debt at the moment is probably around about $300 billion so that’s… about two months of our activity. Is your personal debt less than two months of your activity? That’s what we are as a nation. You know, we’ve got debts which are less than one year of our total activity. I mean that’s not difficult.
Keen goes on:
…there is a relationship between output and the amount of money…There are basically three independent methods to increase the money supply:
- The government can run a deficit;
- The country can run a current account surplus; or
- Banks can lend money to households and businesses.
…the success of Hockey’s budget strategy is dependent on a rising level of private sector indebtedness, whereas a “no panic”, business-as-usual policy would have allowed the private sector to delever slightly without causing a recession.
…Rather than setting Australia up for future growth, the Coalition budget policy puts the Australian economy in danger of contraction, and for no good reason.
All very sensible except for one small point. Because the Budget guarantees the bank’s offshore borrowing, credit ratings agencies have insisted that Australia aim for a fiscal surplus across the cycle. If we ignore that then then the AAA rating will be stripped sooner rather than later and the cost of funds that underpins the giant private debt pile will rise.
You can choose to consume fiscal or monetary capacity to kick the can on the current account deficit model but either way you’re running it down to its ultimate denouement.
The only way out in the end is structural reform that raises productivity and where the Budget aims to do that it deserves support. That’s why Leith and I backed the end of entitlement (though the cuts have obviously been weighted too heavily towards the young).
Clive isn’t making any sense on that front.
