Wednesday, 21 November 2012

Public debt

I am astounded by Andrew Robb's latest  proposal.

I will make a number of points in no particular order.

First of all  it appears He has no idea of our obligations under Basel 111 as the Kouk outlines. ( go to his links of previous articles as well.)

He obviously has no idea of the history of this. Peter Costello had the 'brilliant' idea of reducing government bonds. The market very quickly told him they wanted government bonds. It is much better price corporate bonds off government bonds than swaps which is what happened when government bonds became too scarce to do this.

It is impossible to say crowding out is occurring when spreads have narrowed to what they have today.
It is also pertinent to add here that the corporate sector has been reducing debt as quickly as possible since the GFC.

This brings us to the macro-economic problem. if you are attempting to reduce net debt as much as possible then you are saying you will be detracting a lot from GDP. This means nominal GDP will be hit hard and it has been below trend for some time ( unlike real GDP).

This means you are expecting the RBA to take up the slack. It means taking up a lot of slack given the $A propensity to stay well above levels you might expect given where commodity prices are (which is contractionary ).

All in all Andrew Robb hasn't really thought through his thought bubble at all. Also remember he was one of the main men responsible for the irresponsible costings