Friday, November 25, 2011

The Sky is Falling, the Sky is Falling. Australia is in massive Debt.

Here's a response to an email a friend forwarded to me.
The chain-letter had said "we'll all be ruined", like this:
The total Government debt could end up around $200 billion.
(plus some Big Scary calculations showing our grandkids would have to be indentured servicing this horrifying debt.)
It included quotes from trusted financial commentator(s) and well known radio personalities.
Things are actually pretty good here in Australia.
Not just compared to the USA, UK and Europe, but historically to ourselves.

Post GFC, that rates as a considerable accomplishment.
Sorry to write such a long piece - it's meant to "pour oil on troubled waters", to address the concerns that previous piece might have raised.

Hope you like it and it restores some balance in your life :-)


PS: why would Shock Jocks say 'Looky, looky, the Sky is Falling'?
Because it's a Story and Fear Sells...
Saying "it's all really good here" does nothing for their ratings.
Would I lie to you? :-)

PPS: [for this blog entry] The whole email was a "call to arms" to remove the Gillard Labor government. Obvious that the Shock Jocks would be quoted - they love bashing Gillard and Co.
Not so obvious that the email probably constitutes party political advertising and if deemed so, the issuer and those authorising it should be duly noted [or it's a prosecutable offence under the Electoral Act.]

The only problem is that it seems to have first appeared in August, 2010, just three weeks before the Abbott/Gillard Federal Election. Would have had to have been part of, or inspired by, the conservative election campaign. An electronic version of the infamous "push polling".

I feel sorry for the good folk who picked up this piece, especially for those that forwarded it on or posted it to the web, either back then or again now.
What's the chances that it is not unrelated to the conservative campaign against Labor's Mining Super Profits Tax, passed just this week?? Again, either initiated by people within an Opposition political party, known or affiliated to them, or just sympathetic.

Great technique and extremely cost effective!!!

The correct way to deal with/understand these large National figures is two-fold:
  •  Debt as % GDP.  ['normalised' and comparable across inflation, country and time]
  • Debt expressed as per household or per person.
If you look for "A history of public debt in Australia" from The Treasury, there are some hard facts in there. It seems to have been written in 2010.

Federal Government Nett Debt in 2010 was 1-2% of GDP, pretty good considering it was ~20% in 1992, the most recent peakl. And outstanding compared to the "G-7" USA, UK, Germany, France, Canada, Italy, Japan (the 7 largest economies in the developed world) - running between 50-100+% of their GDP's.

If you go back to 1900, Australia had over 100% GDP of Public Debt, reaching an all-time high of around 120% GDP at the end of World War 2.

The headline figure you passed on is 10-15% of GDP, depending on the date of "could end up" - inflation devalues the currency.
[I believe the 2011 GDP is $1.3T, or A$1,300,000 Million]

Without giving a date, the author is just scaremongering.
Is he saying "things could get bad within a year" or "within a couple of decades"???
There is no current sign that we'll borrow 20% of GDP within the next year.
Federal Tax receipts are around 30% of GDP.
They would have to increase spending at a rate not even seen during World Wars.
If any Government borrowed and spent at that rate, it would cause a massive over-heating of the economy and induce hyper-inflation only seen in our lifetimes in South America in the 1970's.

Neither side of politics is that ill-disciplined/reckless nor ill-informed. Nor does it need to be done. Federal Tax revenue has declined below expectations, but not by around 60%!!!

How to deal with understanding this %GDP is to make it personal-scale.
  •  -Compare to the average wage (currently ~$55,000/year)
    • If you knew a person with a mortgage of $5,000, you'd laugh,(in Sydney at least).
      That's a whopping 9% of their income.
    • The current Public Debt 1-2% is $550 - $1,000 equivalent. Small bikkies.
    • That completely headline reckless 10-15% figure is $5,000-$7,500 equivalent. Not something to cause incredible heartache or concern.
  • Median Household Income is over $70,000/year.
    • For the 11-12 million households in Australia, our current Public Debt is under $1,000 per house.
      And as %GDP, the headline figure is under $10,000.
    • For comparison, Americans, once the world's wealthiest nation, currently owe $100,000+/household in Public Debt.
      [Avg. weekly earnings are ~US$35,000]  
   Australia is in good shape.
  •  There are around 22M of us in Oz.
    Our current Public Debt is  under $1,000 each.
    That massive debt headlined isn't so scary at $10,000 each.
You might be wondering, how can I get a maximum of $10,000 per household (10-11M of them) and the same for individuals (22M of them)?

Because only around half the GDP is from wages/Individuals.
The Federal Government collects taxes from many sources, not just wage earners. The Government doesn't have to repay its borrowings just from our pay packets, though that is a significant portion.

But, Oh My Goodness!, look at "The Australian Office of Financial Management". The official government site that counts what we owe.

It says we owe Heaps!!! [As at 25 November 2011]

Total Commonwealth Government Securities on Issue - $219,102m
How can the Federal Government Accounts (and ABS estimates) say we have 1-2% Public Debt, yet they have loans of almost TEN TIMES THAT AMOUNT!!!

It's simple accounting without any fudging.
If you had a $10,000 mortgage and earned $70,000 a year, you'd have some savings as well if you were prudent and organised.

Especially if you knew you had some large bills (Insurance, Medical, Car Maintenance, Car payments, ...) coming later.
The Federal Government owes a lot on Bonds, but has around the same amount in the Bank.

Nett Debt is that low 1-2% of GDP.

The Government issues short- and long-term "Bonds" for a variety of reasons - these are the numbers listed on the AOFM site.
There is a very active market in, and strong demand for, Government Bonds, especially for a country in such good financial shape as Australia. It would be a very, very bad idea for any Government to have Zero Borrowings.

Why? Because Government Bonds are "Risk Free". And investors love that.
Government Bonds are, by definition, the very safest place you can put your money - much better than under a bed, your Aunt Flo or a Bank! They pay the lowest interest rate around, banks and everyone else uses them as the benchmark and adds a 'risk premium' on top.

This is the Risk/Return balance:

  • if you want NO RISK, you get the lowest return.
  • If you want HIGH RETURNS, you take a real change of losing everything.
This is what happened with the 2007/8 GFC:
  •   people invested in high interest 'instruments' and didn't understand
  • they were HIGH RISK. When things changed just a little, they lost ALL
  • their investment. It's Risk/Return...
But Bonds on issue are only half the equation, we can't see what they have socked away in their Reserve Bank of Australia account (yes, they really do have a Bank and an Account there.)

We've been told just *one* side of the ledger/story.
There's no Deep Dark Financial Hole waiting for our grandchildren.

If you want to go scary places, look at the Greek and Italian Bond markets (currently ~20% and 7% I believe).
Investors think there's a high risk of losing their capital ('a haircut').

Or the USA where they borrow 10-20% of their GDP every year to cover the shortfall in Tax collections, so they can pay for the necessities of Life.

You'd think both Political Parties might understand this can't go on indefinitely, but they don't.
Hence the recent news about the "Super Committee" not meeting its deadline. Things will get ugly there. We've already seen normal folk take to the streets with the "Occupy Wall Street" movement and it franchises. They seem yet to develop a set of demands or policy platform. If they ever do, it could be the start of a major chapter in US politics.