Those who live in fear of credit ratings agencies, and those who do not, would be well advised not to read this article that appeared in the Financial Review. Those who buy into the fear-mongering will only remain terrified of the monster they are told is hiding under their beds that lies in wait for them to turn out the lights, so it can pull the covers off, scream “boo!” and then eat their shoes. Those who know that these credit ratings have no meaning whatsoever to national governments that issue their own currencies will only be left cleaning up a huge mess when blood shoots out of their ears from the extreme stupid.
The author makes a very poor attempt at explaining the issue. To his credit, he does explain that the Government of Australia is monetarily sovereign, but then proceeds to argue as though he has no clue what monetary sovereignty means:
“We are not quite there yet. But what would happen if the unthinkable did happen? What if we lost that all important AAA rating?”
I wish to be clear for anyone reading who thinks that credit ratings matter.
Credit ratings applied to sovereign currency-issuing governments such as Australia are, essentially, Paranormal Economics. The question, “What if we lost that all important AAA rating?”, is literally the equivalent of asking, “What if we opened a portal to hell in an otherwise unhaunted house by provoking negative entities?” People who push these credit ratings fantasies are paranormal investigators who claim to have proof that fiscal hauntings are real, and they will tell you that if you provoke ratings agency spirits, they will get really, really mad, taking revenge by downgrading their ratings, which will then open a portal to hell and the government will become oppressed by demonic activity, unleashing all sorts of evil on the government and the economy.
The credit ratings fear-mongering isn’t science. It isn’t even pseudo-science; it’s entertainment. It is a grand fiction. It’s a scary story told around a campfire for fun. It’s a Stephen King novel. It’s “The Great Pumpkin Charlie Brown”; it’s “Night of the Living Dead”; it’s “World War Z”; It’s “Friday the 13th Part 666” – it’s entertainment.
“The conventional wisdom is that a downgrade of Australia’s credit rating will cheapen the value of the bonds which comprise our government debt, raising borrowing costs and compounding budgetary pressures.”
Paranormal Investigator: “What will happen if you downgrade our credit rating?”
Spirit Box: “…..Government…..”
Paranormal Investigator: “Government? What will happen to the government?”
Spirit Box: “…..Go broke…..”
*Cue storm drum and foreboding orchestral chord in D minor
Paranormal Investigator: “Whoa! It said the government will go broke!”
This statement is a total fiction. Firstly, the words “conventional wisdom” belong in quotes, because it’s not wisdom – it’s an old wives tale. It is thoroughly impossible within a free-float, inconvertable fiat currency regime. The Government of Australia does not have to borrow to fund itself. There is absolutely no pressing financial need to do so. Bonds do not conduct fiscal policy in a fiat regime; they conduct monetary policy. Regardless of the storyline fed to the public by politicians, bonds themselves are a holdover from an era long past and do not have to be issued, for any reason whatsoever. It is a flagrant lie to claim otherwise. There is no public debt – none! Even though the government issues bonds, the “cost” of “borrowing” is irrelevant in terms of affordability in AUD – The government can always afford to pay the interest on those bonds, no matter how high the interest might be, because every dollar used to purchase bonds FIRST came from the Government of Australia’s deficit spending. What this means in plain English is that bond markets simply have no power over the Australian Government. They cannot bring the government to its knees, because it is the Australian Government that funds the bond markets in the first place.
Next, there is no such thing as “budgetary pressure” for the Government of Australia, because there is no currency or gold peg that would necessitate taxation or borrowing to defend the stock of foreign currency or gold that the Australian dollar is pegged to. So, the claims of what would happen if Australia lost its AAA rating are a flat out lie.
Currency issuers are operationally unaffected by credit ratings. Currency users can be affected, precisely because they do not issue currency. Because users do not issue currency, they can run out of “money”, go deep into real debt, involuntarily default on that debt and go broke. The Australian Government cannot.
“In reality, this is not likely to happen. This is because all of Australia’s government debt is denominated in Australian dollars, of which we have full control.”
Not likely? Wrong choice of words here. In reality, it cannot happen at all.
“Since Australia can, in theory, print all the dollars it needs to service its debt, an actual default is impossible – although printing money to pay debt will feel like a default for foreign investors because it debases the currency.”
Here, Mr. Peabody set the WayBack machine to the year 1920, and the author took a trip back in time to the gold standard era. The author is correct in saying that default is impossible, but incorrect as to why.
People: There is no such thing as “printing money” to fund spending anymore.
The Government of Australia does not and cannot “print money” to fund spending. “Printing money” is a gold standard funding operation that has absolutely nothing to do with federal spending today. Today, all federal spending is currency manufacturing. The government enters bank accounts and simply raises the numbers up when it spends, and lowers numbers down when it taxes. It’s just a manipulation of numbers, up and down. The author’s failure here is to understand the major differences between a gold peg and no peg.
If the government has a gold peg, it must keep a stock of gold on hand so that it can exchange dollars for gold on demand. It must defend the gold reserves at all costs, so it must keep the amount of AUD in circulation consistent with the supply of gold on hand. How does it do that? By taxing and borrowing. Taxing and then spending what was taxed does not increase the amount of AUD in circulation. Deficit spending through the use of bonds does not either. But if the government wanted to expand the amount of currency in circulation beyond what the gold supply could handle, it would…
There is no gold peg today. There is no gold supply that must be defended. Today, all deficit spending increases the amount of AUD in circulation. The government doesn’t even print paper cash to increase the amount of circulating AUD. Cash today is based on bank customers demand for cash. For the last 40 some years, the Australian Government has been increasing the amount of AUD in circulation every time it runs deficits. Has the currency been debased? No. The reason why that is, is because the “value” of the AUD is not fixed to a certain amount of gold. It is impossible to increase the amount of AUD in circulation over and above the gold supply, because there is no gold supply attached to the AUD. Therefore, it is impossible for federal spending to devalue the AUD, because there is no gold pegged to the AUD to fix its value to a certain amount of gold. And again, it is impossible for printing money to devalue the AUD, because the Australian Government does not and cannot print money to fund spending. There is no gold standard. The author is entirely wrong here.
Now then, can the Government of Australia default? Not involuntarily, but it can default voluntarily. In other words, politicians must choose to default by preventing the government from paying its obligations. It’s a choice to default in a fiat regime – always. It has nothing to do with affordability – you simply refuse to pay.
The rest of the article seems to be an attempt to keep the readers interest through a fear-based plot twist, or perhaps it is simply the author’s intent to find common ground between orthodox mysticism and reality, thus allowing his article to reach the broadest audience possible:
“But that does not mean Australia is immune from the consequences. In fact, as some experienced bond investors have argued, the existence of twin deficits – a budgetary and current account – means Australia remains vulnerable to capital flight, which will manifest in the form of a weakening Australian dollar.”
Big red flag just waving in your face – the old Twin Deficits nonsense. For the uninitiated, I’ll explain.
Orthodox mystics claim that the presence of a current account deficit means that Australia is writing cheques that its body can’t cash; that it is living beyond its means by financing imports through foreign lenders. Essentially, Australians are demanding too much, spending wildly and doing it all with loans from foreigners, and at the same time, they’re jacking up inflation, thus damaging exports.
Then you’ve got the Australian Government’s deficit to worry about too. That means the Government of Oz is dependent upon foreigners purchasing more bonds. “Spare a dollar for a broke Australian government, China? God bless ya, brother.” As we all “know”, because mainstream mystics have told us so, deficits drive up interest rates, making the cost of borrowing for the government near unaffordable.
If the government cannot manage to convince foreigners to “lend” it some money, the only choice left is to take a chainsaw to growth, which means – gasp – that the Government of Australia might be forced into default! Oh Bubba, no! God help us all! So, the government must slash that deficit immediately, and tighten monetary policy too.
Well, shit! What do we do now?
Better watch that damn AAA credit rating!
Sound finance is not the solution here. A total failure to understand a current account deficit is a problem here. Foreigners do not lend the government Australian Dollars – They first earn Australian Dollars and then they buy bonds.
The only way in which the nation of Australia can develop a current account deficit is if the rest of the world wants to accumulate a savings in Australian Dollars. In order to accomplish that, the rest of the world must earn Australian Dollars by selling its goods to Australia. In doing so, each nation in the rest of the world has decided to take their own production, and give it to Australians rather than allow their own populations to consume it. In return, they are paid in Australian Dollars which they then use to purchase Australian government bonds. In other words, they stick their earned dollars in a savings account at the RBA. Australians get a nice rise in their standard of living and the rest of the world gets a bank statement. Scary shit, huh?
Thus, what I am telling you is that Australians are happy to buy stuff from foreigners which then allows those foreigners to save in Australian Dollars. As long as the rest of the world demands Australian Dollars, then the current account deficit will persist. When the rest of the world no longer wishes to save in Australian Dollars, the current account deficit will evaporate. What am I saying then?
I am saying that when you want an iPhone, you will go get one, and an iPhone will exist in your house. When you no longer want an iPhone, you will get rid of it, and there will be no iPhones in your house.
I am saying that as long as you want bananas, there will be bananas present in your house. And when you no longer want bananas, there will be no bananas in your house.
I am saying that when the rest of the world wants Australian Dollars, it will go earn them from Australia, and it will possess them. When the rest of the world no longer wants Australian Dollars, it will stop selling Australia its goods, it will get rid of all of its Australian Dollars that it previously earned, and as a result, it will no longer possess Australian Dollars and Australia will no longer have a current account deficit.
Knowing, then, that a current account deficit means that Australian Dollars are flowing out of the hands of Australian citizens and into the rest of the world, we also understand that the currency issuer – the Government of Australia – must replace those dollars flowing out or it will cause a recession. So, it must expand its deficit towards full employment and the public purpose. Slashing the deficit in pursuit of a balanced budget or a surplus when there is a current account deficit, as we can see, is pure madness. So, you can safely ignore the twin deficits talk.
The author continues on, citing so-called “expert” opinions which are mere expansions of pure nonsense upon the initial nonsensical claim, until he arrives at this:
“But does that mean we should adopt a complacent attitude? What the rating cut signifies – that deficits are widening into the horizon – matters more than the loss of the rating itself. The AAA rating has been the constant badge of honour at a time of economic prosperity. Its loss will almost certainly signify an end of this era.”
Honor before prosperity, damn it – always. Australians cannot find a decent job at a living wage, they cannot afford a car, they cannot afford even food, but at least they can flounder in poverty knowing that their government has maintained a constant AAA rating. That makes it all worthwhile, right? I mean, a vast swath of the populace is floundering in private debt and broke, but they still maintain their honor. They’ve got a nice, shiny badge that says, “My Government is Fiscally Responsible” from Moody’s and S&P. It’s kind of like an “employee of the month” award that the Australian Government can hang on the wall. That’s real special.
That’s fucking madness, the lot of it! The AAA rating doesn’t mean jack squat to anyone but the ratings agencies themselves, and to those who pay them handsomely in an attempt to bully national governments that cannot be bullied. These people know that they have absolutely no power over sovereign currency-issuing governments, so they use illusory credit ratings to scare the public into demanding that their governments give these private entities what they want. What do they want?
They want more corporate welfare, They use government bonds to manage their risk.
They want more wage suppression, so that the national income keeps flowing to them and away from workers.
They want forced involuntary unemployment maintained, so that they can threaten workers with unemployment who refuse to obey them.
They want the entirety of the Australian Government’s economic policies to benefit them alone.
“One scenario shows how ugly things could get – and it’s hard to judge how much the AAA rating would help. Let’s assume that China’s economy hits the skids much harder than we think. The decline in growth would hurt commodity prices, lower the terms of trade, reduce national income and widen the budget deficit.”
The above shows you that the author fails to understand monetary sovereignty. His commentary about widening the budget deficit is all that you need to know here. In other words, he wants his article to stick close to as much of “conventional wisdom” as possible, shielding his article from rejection outright, and himself being called “a loony”. And that only applies if he actually understands monetary sovereignty.
My opinion is that the author does not fully understand monetary sovereignty and needs to learn more before writing further articles.
As far as the people of Australia go, they should ignore any and all talk about credit ratings, and rid their government of the current crop of politicians that are running it. Rip the neo-liberal infestation out by the roots and plant a new crop of politicians who understand macroeconomic reality and are willing to expand the deficit towards full employment, the public’s well-being and prosperity.