The Mythic Catastrophe Of Government Debt

Taro Aso's Version

Japan's government is deep in debt. Some are claiming this is catastrophic, if not today, some time soon. Taro Aso, the Finance Minister for Japan - former Prime Minster and manga aficionado - begs to differ. In fact there's a video of him explaining why, that dates back to 2010. It's interesting so I'll try and pick the eyeballs out of the little lecture.

Basically, everybody's jumping up and down about government debt. What nobody stops to consider is just to whom the government of Japan owes this money. The answer is simple, it's the people of Japan. If you have any loan book, you'll have a column for debts and column for credits. So on one side of the ledger the Japanese government is borrowing, say 100yen, and then on the other side there must be somebody correspondingly lending that 100yen.

Now, people might disagree and say they don't hold any national bonds for Japan, but actually, they do. They put their money in the bank, and the bank then has to either invest or park that money somewhere, and it turns out, they buy national bonds of the government Japan. And it all happens in Yen.

As for the Banks, they are in their essence simply money-lenders, so if they don't lend out the money deposited to them, they're not going to make money. Unfortunately nobody's borrowing in Japan. There's roughly 30Trillion Yen = AUD$300billion each year of the money, looking to be invested with nowhere to go. And if it doesn't get invested, you get deflationary pressures from the money not getting invested - so the government borrows it to stave off asset deflation.

So yes, the government has borrowed a lot, but the lenders by and large are the people of Japan. Something like 94% of bonds are held by Japanese people, and the rest by foreigners. And even those people are buying those bonds with Yen, so 100% of government debt in Japan is in Yen and no other currency. This is in stark contras to Greece, where only 30% of Greek government debt is held domestically, and it's all denominated in the Euro and not a domestic currency. Greece thus puts out 70% of its government debt to be financed by international markets, who in turn don't trust the Greek government so the going interest rate for their bonds sits at (in 2010 figures) 13%. By contrast, Japanese bonds are going for a return of 0.9% or so, which means Greek debt is going around with 13times more risk.

Even if the debt comes due, the Japanese government can simply print the Yen and pay it. If the money was owed overseas in foreign denominations, the story would be different. It's a totally different kettle of fish to Greece, according to Taro Aso.

How Much Of This Applies Here?

This is the interesting bit. How much of Australia's Government debt is issued in foreign currency? One imagines the international market version is denominated in the US Dollar, so if the AUD goes down, it gets harder to pay back the government debt. Even so, in a pinch, the Government of Australia could just print what's necessary to pay it back. If the debt is enormous, then presumably this would lead to a currency collapse, but in most part nobody's going to be calling all the debts at once, and the RBA knows exactly how much money there ought to be in the market place to the extent as to know what the currency price should be, or whether printing that money is going to usher in massive inflation or not, as the case may be.

So even if government debt in Australia were to reach, say, 100% of GDP, it's probably not going to be the same as the Greek government's debt situation. And because it is more like 20-odd% and not 100%, there probably isn't a case for making the kind of fuss the Coalition made in opposition and then during 2014 with their fateful budget. Which is all an elaborate way of saying, all this fixation about government debt that the Coalition keeps using to bludgeon the ALP is a load of bullshit.

Not only is Australia not in any kind of debt crisis as the Coalition alleged at the top of their lungs this decade, even the debt we have is not going to have the kind of dire consequences for us as private sector debt is going to have. If the Coalition government under Tony Abbott had had a shred of decency and intellectual honesty, they would have formulated policy to tackle the ballooning private sector debt instead of banging on about the government sector debt. After all, if there are savings there looking to be invested and the government doesn't utilise that money, it contributes to a deflationary pressure on assets, as per Taro Aso 's lecture.

As things stand, the Australian Dollar is stubbornly high by the RBA's estimation; money is flooding in to Australia, buying up property and commercial assets. It's hardly the picture of currency collapse. People want 'in' on the Australian economy as it is. The constant banging on about the government debt essentially exposes the Coalition as inferior economic managers, who will necessarily hurt the Australian economy through their policies that always centre around cuts. You'd certainly wonder if this government actually understood what it was dealing with when it talks about government debt. One wouldn't advocate endless stimulus packages, going deep into the red like the Japanese government has done in the last 25years (it isn't necessary), but one probably shouldn't be fretting about the debt level when there are other things to worry about like a looming economic slowdown.

Twenty-Five Years, No Recession

This leads me into this weird anomalous state of affairs, of what's been happening for twenty-five years. There is a whole generation of people walking around Australia who have never experienced a recession. Back in the 1980s, Australia spent half its time in a recession of one kind or another. There are many explanations for how this came about, one of which is the rapid expansion of the Chinese economy and our role in supplying that demand; but also the cumulative effects of the macro-economic reforms and deregulation that unleashed the massive growth in the domestic economy as well as the enormous impact of IT on productivity.

If you look at any one of these elements, we're not likely to get them again. So, if you think about the slow down and change in China's economy, the limits of deregulation, and the limits of IT-induced productivity growth, we're not likely to see the same sort of stretch going forwards. That would indicate that at some point we'll be back to the 1980s scenario of a recession every few years, and by then we'll well be wondering just how lucky we got when we had 25years of uninterrupted growth.

It really is hard to see where the next big growth engine is going to be. Some have suggested India, but India is wilfully avoiding the kind of manufacturing-&-export led growth that east Asian nations have undertaken. They've gone straight into developing a high tech sector based on computers, IT and services. This means it is unlikely to duplicate the Chinese scenario for Australian commodities exports. Both the Gillard and Abbott governments banked on housing and construction as growth engines to take over after the mining boom but it ignores that constructing buildings or infrastructure isn't a growth engine for an economy in of itself. If anything, it's a recipe for sending us back to boom and bust cycles of the 1980s.

Of course we could get lucky again and have another mining boom. It's hard to see who would fuel it, but we tend to get lucky that way - hence our self-inflicted moniker, the lucky country - but the problem remains that we don't really have a good plan for when the luck is not there. When the luck is not there, the Federal government is going to have do a lot more than run around talking about government debt; we've seen how austerity in down times simply does not work. If anything is likely to lead us to being like Greece, the obsession with cutting government debt at all costs just might be the path that leads us there.