AAA balls-up as RBA calls out Budget lies

From The Australian comes Mr Rainbow who has saved the best for last:

Plans to balance Australia’s federal budget by around 2021 are implausible, says Reserve Bank policymaker and economist John Edwards, adding that the nation risks losing its prized AAA credit-rating status.

Mr Edwards said the plan outlined by Treasurer Scott Morrison in the government’s 2016-17 budget to bring the budget back into balance by 2021 was too slow as it relies on rising income tax collections to be achieved.

“I don’t think we can disregard the possibility that the ratings agencies will lose patience with a fiscal trajectory which is simply not plausible, relying as it does on increased personal tax collections,” Mr Edwards, a Reserve Bank of Australia board member, said in an interview with The Wall Street Journal.

If Australia lost its AAA rating, it would be a “big deal,” he added.

“Given that we have higher foreign liabilities than similar rated countries, and given that debt as a share of GDP is rising more rapidly than many other highly rated countries, there is always a risk we are going to be kicked out of the (AAA) club,” he said.

Mr Edwards said a return to budget balance over the next two years would be a smarter idea, saying the government has favored tax cuts for corporations over the mounting task of lowering the budget deficit, which would protect the economy against shocks.

The RBA has been telling the government to fix the budget in the “medium term” for some time. Glenn Stevens reiterated it recently. We also know that the RBA has been advising the government to go slow on anything that disrupts growth.

Over the next two years is not “medium term”. They know the AAA is gone in a matter of months and the butt covering is in full swing.

David Llewellyn-Smith
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Comments

  1. What is it about Sectoral Balances that these clowns do not understand?

    https://erablogdotcom.files.wordpress.com/2012/01/sectoral_balances1-14.png

    It’s sickening that playing political argy-bargy takes precedence over educating Australian citizens about how the government’s budgeting actually works.

    Trying to move the budget into balance, let alone surplus, requires that this shrinkage be offset by an equivalent shrinkage in private sector credit or a decrease in the current account deficit. The disaster we’re heading into, caused by a bone-headed explosion of private sector squandered on real estate speculation, combined with collapsing terms of trade, will ensure that the government can indeed pull back spending equivalent to the collapse of the private sector if they just wait for the crisis before imposing Austerity measures.

    But how’s that going to go down with the electorate? Not spending in a time of crisis? We’ve already seen it in action in Europe and it’s a total disaster.

    On the other hand, if they tighten actively and early, rather than passively, then they will CAUSE the aforementioned collapse, as they suck money out of the private sector to fuel an increased tax take, or deprive the private sector of money through decreased spending. There would be no collapse in a healthy economy, but in an absurd Ponzi Finance economy like this one, a little contraction reflexively causes a collapse.

    So this talk of “getting budget back in order” is utter nonsense (and they actually know it), as it means either causing an economic collapse, or refusing to do anything about the collapse once it happens. What kind of idiot government promotes that unless it actually wants to lose power?

    Fact is, the economy is going into a hole and, when it does, despite all the Austerian blow-hards, the Australian government is going to rack up enormous debt and pump it into collapsing financial assets, just like what happened in the USA and Japan. They know it, so I wish they’d stop bullshitting about getting the budget balanced and start priming people for the coming reality. Public debt is going up and the plebs are going to beg for it!

    The Titanic already hit the iceberg and is starting to sink while they’re chatting about how to arrange the deckchairs and what tunes the band should play.

    (There is, of course, a very obvious way to avoid all of this but if you suggest it you’re a “Leftist Keynesian” which is worse than the devil -> let it implode, run up huge public debt in offset and spend it in a way that definancialises the economy. Japan, USA and Europe did NOT do this, why? Because banks call the shots and they won’t willingly commit suicide).

    • I reckon nobody is going to do anything. Government, the FIRE scum and the general public are going to motor along pretending nothing is wrong, or in many cases not aware that anything is wrong, as long as possible. It will only stop when some external force causes it to stop. Then there will be much hand waving, finger pointing and hoocouldanoding.

      Sometimes I think it would be nice to be one of the ignorant, as I was up until a few years ago. As it is, it’s kinda like being in The Matrix at the moment, with the FIRE crowd playing Agent Smith.

      • They’ll follow the US example. QE and ZIRP. It doesn’t work for the wider economy, but it saves the banks and that’s the RBA’s #1 mission. Justified with the M.A.D. rhetoric that if the banks aren’t saved we’re all a goner.

        That’s BS of course. Just figure out how much the banks need, then pump it into their CLIENTS’ accounts where it becomes available as reserves exactly as if it had been pumped straight into banks’ reserve accounts, and then enables bail-ins.

        That leads to the next point. I assume that they will not pump money into clients’ accounts, that they’ll follow the US model. So my only real query is whether or not they’ll implement bail-ins, as these seem to have now become official IMF/BIS policy. Bail-ins won’t work without client injection, not fully anyway, but that doesn’t mean they won’t try.

        You’ll know that they’re going down that route if the talk of eliminating physical cash suddenly ramps up to a sure thing.

      • @jelmech

        Whoops….looks like my secret identity has been uncovered. Time to come up with a more politically correct userid. 🙂

    • I liked that take on MMT. One of the more seemingly grounded I’ve read (possibly because it accepts reality and is expressed in the common vernacular).

      • I’m not a card-carrying MMT’er, though I agree with an awful lot of it.

        I find that MMT’ers tend to under-appreciate the role of private sector banks in the monetary system.

      • MMT’ers are not an ideological or political movement, much too the cringe of such stripes, only attempt to describe the accountancy in the most accurate manner wrt functional monetary and financial reality’s.

        Disheveled Marsupial… its the aforementioned trying to paint it as such in order to put a target on its back to shoot at…. because that is how the far left and right roll….

    • Hi Mediocritas, can you please explain the connection between eliminating physical currency and bail-ins?

      • If physical currency is prevalent one can simply avoid a bail in by taking one’s money out of the bank and putting it in a bag under your bed. If your only option is to have your money represented as bits in a banksters computer, come bail-in time you’re buggered. A press of a button will transfer 10% of all account balances to the Gummint account in a few milliseconds, and that’s all she wrote.

      • What he said, only your money won’t be going to a government account, it will be going to the counter-party of the bank to which a debt is owed, leaving you with an IOU, which may take the form of fresh bank equity (which will be increasingly worthless).

    • So this talk of “getting budget back in order” is utter nonsense (and they actually know it), as it means either causing an economic collapse, or refusing to do anything about the collapse once it happens. What kind of idiot government promotes that unless it actually wants to lose power?

      Because most of the people currently in power (public sector, parliament, corporates, etc.) don’t give a shit! They have the money and they have the power right now, they’re going to be fine once everything hits the shit because they’re currently using their money and power to make sure they’ll be fine. The ones that know what is coming are too busy stripping the nation of anything of value to feather their nest. Everyone else can go and get fucked as far as they’re concerned.

    • Australia is different to Japan and USA. Japan has the highest net foreign assets of all countries and the USA creates the global money supply, at no cost, so their net asset position is unlimited on the upside.

      The Australian banks have created a rock and a hard place that they are wedging the country into with rising defaults and increasing foreign obligations. Even if they do not continue to increase foreign borrowing the exposure increases as the exchange rate falls, hedging costs increase and credit rating deteriorates. The government will find it difficult to bail them out when the reckoning comes. Where does the country source the foreign currency to service loans the banks need. I expect the business model of Australian banks will change after the crisis. As Steve Keen so clearly determined in the 1990s – institutions able to create money, given a profit motive, will eventually financialise the economy until it implodes.
      https://youtu.be/RaDRu9ZSNBA
      Jump straight to 1:08 if you do not want to work through the Minsky model expansion from very basic to more complex.

      I cannot see the current system holding together beyond 2018 as that will be the time China should reach peak debt as Japan did in 1996 when population median age was was 38.6 years. For Australia, China followed Japan, Korea and Taiwan but with an even bigger bang. I do not expect India to provide enough boost to offset China’s demise.

      The RBA should be setting interest rates to suck savings into bank deposits rather than allowing same savings to be leveraged into asset speculation using offshore borrowing. The lack of focus on private debt levels and allowing such high levels of offshore borrowing will prove disastrous for Australia – far worse than Japan and USA, Australia’s position now is similar to Spain roughly a decade ago.
      http://www.theautomaticearth.com/wp-content/uploads/2015/01/PrivateDebtSpainGreeceUS.png
      http://1.bp.blogspot.com/-RN-GbiK0fhA/VTlBrYlCaDI/AAAAAAAAdhk/n2-H4FsGRI4/s1600/Spain%2BUnemployment%2BRate2.png
      http://www.creditwritedowns.com/wp-content/uploads/2013/04/Spain-government-debt-to-GDP.png
      Although Spain has the EU to act as guarantor and the EU net financial position is manageable whereas Australia has to stand alone in the world.

      This will be a crisis for the country not the banks and definitely not the senior people in the banks who will be looking for safe havens for their wealth just like Joe:
      https://en.wikipedia.org/wiki/Joseph_Cassano
      In that regard Australia will be like the USA following the crisis. I doubt the ex-bankers will have their money deposited with their current banks.

      • You’re right. Japan and the USA are powerhouse economies with much more fat to burn in an emergency. Both nations still maintain a wealth of creativity and industry, although it has eroded since the 1980’s.

        But here? What little we had, we let it all go, a victim of Dutch Disease that we were too stupid to avoid (even though it’s a well known phenomenon). We won’t be able to earn or work our way out of a hole through international trade because the brains and the infrastructure we need to do it are gone. Our only option to repay foreign debt will be a big selloff of national assets (including land), or running up huge public debt which will come with a collapsing dollar, leading to diminishing returns on debt-servicing.

        We followed the neoliberal script to the letter and it has wrecked us.

    • +100
      Sectoral balances, how banks create money when they make loans and the powers of a currency sovereign with a fiat currency and able to enforce taxation are an inconvenient truth to the body politic, driven by those in the thrall of the pathologically greedy rich and power hungry.

  2. You know I’m glad they are useless, it almost guarantee’s we’ll have a correction. We won’t fix anything until we have a crisis. So bring on the crisis lol…

  3. So what’s the implication ?
    3% home loans but no bank lends ?
    Or 7% home loans and everyone is busted ?

    • 3% home loans and everyone is busted.
      That’s the situation we face, because we haven’t faced up to it before. We could have had 7% home loans and most people would have been safe. But not now……

    • The former. Like everywhere else. Possibly some helicopter money too. Don’t expect to buy a new phone for a half-decade.

      You may need to get a life! 🙂 Not you personally, Mike, just general advice for a recession. Picnics and bike rides are free.

      • Someone will steal your bike; there’s going to be a lot of people with a lot of spare time and no money at all.

    • Ronin8317MEMBER

      7% home loan, but Mac Bank can borrow at 1% and buys up all housing in Australia.

  4. Dazza197MEMBER

    If you think this has a happy ending, then you haven’t been paying attention.

    • Depends on how you classify sad ending…
      Last year we were talking about a crash with some 30% price slashing, houses increased by 20%
      If loosing value of houses by say 50% it only means 10% of what it was in 2012 and that big IF is Still not a big deal

      • It depends on what the ‘owner’ (most people don’t own their own home; the bank does until the loan has been discharged) has done in the last 4 years with any equity translation gain. If it’s been pledged or spent on ( whatever) then any fall in prices, even a paltry 10%, could wipe them out along with any newer entrants to the market right up until yesterday.

  5. haroldusMEMBER

    where is ASX at at the close? if MB can’t be arsed no worries, just put up a denoted page for friday night comments. i am sure i’m not the only one hanging out for the pre-weekend commenting.