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Beazley Economics

If the Labor Party wants to restore its credibility on economic policy, it will have to do much better than this:

“Our country is at a crossroads; every day we sink further and further into unsustainable debt,” Beazley told the conference. “On average, foreign debt has gone up by more than $2.5 billion in every single month of the Howard-Costello Government.

“My deep worry for Australia is this: I believe John Howard and Peter Costello are taking us to the edge of the debt cliff. I fear Australia’s credit card is nearly maxed out.”

Net foreign debt increases under every government, for the very good reason that we need to borrow abroad to make good the shortfall between domestic saving and investment that drives the current account deficit.  If Beazley is seriously proposing to reduce foreign debt, then he is arguing for some combination of increased national saving or reduced investment.  We can maintain higher levels of both consumption and investment by borrowing abroad than would otherwise be possible.  Beazley is effectively proposing to cut our standard of living for the sake of a lower current account deficit, a self-defeating policy prescription.  It is the capital markets equivalent of an import substitution policy.  The gains from trade in goods markets are equally applicable to capital markets.  Australia’s debt servicing ratio is in very respectable bounds and the foreign currency risk is fully hedged, so Australia’s foreign liabilities are well below the level that would give rise to any concern.

Beazley’s populist rhetoric on foreign debt is of course no different from that the government used when it was in opposition, but it doesn’t do much for his credibility.

posted on 14 June 2005 by skirchner in Economics

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Stephen, at what point do you start worrying?  You seem comfortable with the current level of foreign debt, and the cost of servicing that debt, but there must be a point at which even you begin to worry.

As I understand it, with global interest rates rising (particularly in the US) and Australia’s credit rating under pressure, the cost of servicing our foreign debt is likely to increase in coming months.

My greatest fear is that imbalances in the US economy prompt a collapse of the USD, and rapid appreciation of the AUD (which is the last thing we can afford).  Possible?

Posted by .(JavaScript must be enabled to view this email address)  on  06/14  at  03:31 PM

The market tells you this through interest rates and exchange rates, which imposes the necessary adjustment.  Remember it was only a few years ago the current account deficit was at record lows.  It is only when countries fix their exchange rate or close their capital account that the warning signs come too late.

Long-term rates in the US and Australia are falling not rising, which suggest markets are a long way from being worried.

Posted by skirchner  on  06/14  at  04:59 PM

Good comment,S, the street has lost a great of money on the last few months betting against the bond market.
Rumours aboud on the street that the biggest bear on the US Dollar, Warren Buffet, who publicly! stated he had a position of Euro21 billion is getting out of his position. Every time the Euro flips 1 big figure (100 points) he is down US$210 million. It seems he is now down US 2 billion over the last month. Love to be a fly on his office Wall! Of course he was another one of those “I think the US trade deficit is too large” kinda guys.

Posted by .(JavaScript must be enabled to view this email address)  on  06/15  at  01:58 AM

JC, yes, the ‘bubble trade’ (short USD and Treasuries on current account concerns) has taken a beating.  Even Stephen Roach has capitulated on bonds.

Posted by skirchner  on  06/15  at  08:49 AM

“The market tells you this through interest rates and exchange rates, which imposes the necessary adjustment.”
So you’re saying the AUD will automatically fall when our foreign debt (and CAD) becomes unsustainable?

“Long-term rates in the US and Australia are falling not rising”
Yes, but rates have risen steeply in the US recently (admittedly from very low levels) and surely that means the cost of servicing Australia’s foreign debt will increase?

I’m glad to see so much confidence in continued strength of the USD.

Posted by .(JavaScript must be enabled to view this email address)  on  06/15  at  08:55 AM

I have no problem with high debt levels per se. Interest rates are much lower and therefore people are able to carry more of a debt load than they did in the Keating era. Trouble only starts to brew when you have higher interest rates combined with falling employment opportunities. That hasn’t happened yet in Australia. Combine that with the recent tax cuts and we seem to be doing just fine.

Posted by .(JavaScript must be enabled to view this email address)  on  06/15  at  01:22 PM

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