ONE of the classic fallacies of logic is to believe that what works for one person, will naturally work for everybody, and that therefore surely all of us can do the same thing at the same time and expect a beneficial outcome.
In economics, this is highly unlikely to be true.
“If everybody tried to sell GM stock at the same time, probably really, really bad things are going to happen to GM stock, which is not going to stay at 65” says economist Professor William Black.
Black is an American lawyer, former bank regulator and Associate Professor of Economics and Law at the University of Missouri-Kansas City.
“It’s going to get pushed downwards and, at the limit, essentially to zero,” he said.
But all of the people who bought that stock still have to pay back the loan. This is what is known as ‘Buying on Margin’ and can lead to severe liquidity crises to boot.
Likewise, when a government analogises its budget to that of a household, bad, bad things happen. It is this very logic of composition that contributed to this terrifying moment in history. The bid to balance the budget has sucked trillions of dollars out of the economy, destroyed productivity, put downward pressure on wages and employment, encouraged unprecedented levels of private and household debt and has encouraged financial deregulation which has led to inflated property, equity and auto-loan bubbles in a desperate bid to keep the economy afloat.
Contrary to popular opinion, government spending does not leave a debt that future generations must repay, at least not if you use your own currency and are not on a gold standard.
This is because a government budget is not the same as a household budget.
Ways in which the government is not like a household
A household does not print or issue its own currency. When funds are running low & rent or mortgage payments are coming up, we can’t just put in a phone call to our mates at the RBH (Royal Bank of Households – not a real thing) and tell them to issue more money.
But the government can. And does. In fact every time the government spends on public services, it does so by pumping newly created dollars into the economy.
Whether a government can run out of money depends on what kind of government it is, and what kind of money it issues.
A Federal Government that issues its own currency (what is known as ‘sovereign currency’), only borrows in its own sovereign currency and a floating exchange cannot run out of money.
Governments that can run out of money
State and local governments can run out of money because although their budgets are often largely financed by federal spending, it is the Federal government which limits that funding. State and local taxes, and borrowing by state and local governments are then applied to make up any shortfalls. So if a state government raises its spending without an increase in its funding from the Federal government, it must also raise state taxes, or issue debt, which it will later need to repay. It is not a currency issuer. The Federal Government is in a very different position.
Of course, a federal government can also choose to run out of money by forbidding itself to make any: for example the US debt ceiling. The imposition of this ceiling in the US was originally a political gesture, 100 years ago, and has no economic justification or motivation. It has always been lifted, down the years, when reached, and could be scrapped by Congress at any time. So-called debt ceilings are not to be found in most other monetary sovereigns. They are artificial limits.
“You can simply say you cannot have more money, in which case you would be putting artificial limit on yourself.”
“You could say ‘you simply cannot have more money’, in which case you would be putting an artificial limit on yourself,” says economist Professor William Black. “People can choose to default. Russia, for example, chose to default in 1998, even though it had a sovereign currency. (This is the only default on monetary sovereign government debt in modern times). Periodically Republicans in the US context have tried to make us default, by refusing to pass the debt ceiling, even though the debt is going to go above the ceiling.
“If they succeeded long enough the US Government would have defaulted on its debt. It would be the stupidest thing in the western world, but it could be done.”
Professor Black likens the US debt ceiling to the infamous scene in cult film Blazing Saddles where the newly appointed black sheriff in a confederate town avoids a lynching by threatening to shoot himself in the head:
“The whole idea of that being funny is that it is nuts,” says Professor Black. “But that is actually what they try to do with the debt ceiling. Ok, we’ll shoot the US economy in the head.”
Countries that do not have sovereign currencies can run out of money, because they are essentially borrowing in foreign currency. In this context, it makes sense to have a debt ceiling.
“A debt ceiling makes sense if you don’t have sovereign currencies,” says Professor Black. “Then you can default. You can get in lots and lots of trouble if you behave like you have a sovereign currency when you don’t.”
Countries that could potentially run out of money include Argentina, some of the smaller countries which use the Euro including Greece, Cyprus, Malta, Slovakia, Estonia, Latvia and Lithuania. Probably less likely if you’re France, Italy, Spain, Austria, Portugal, Finland or the Republic of Ireland but it’s not impossible. Any government with obligations in a foreign currency, or in a currency it does not issue, can run out of that currency.
The lesson is to keep your own currency, have a floating exchange rate, and not borrow in foreign currency…
Except for the whole inconvenient fact that it was Labor who created the Manus and Nauru situation in the first place under Rudd. Bit rich to say Labor doesn't play politics with national security, @SenatorWong. Nice piece of PR but utter hubris. #auspol.
Dislike this musing on this 'not since 1929' thing. It should be normal for a government to lose a vote. Especially this one. That is how democracy should work. It is the opposition's obligation to ensure the public interest is upheld, especially if the government won't. #auspol