Right Pulse

Ever since Barnaby Joyce became opposition spokesman for Finance he has been hounded by the ALP, unions and their sympathetic media for comments he made about the risks to US sovereign debt. In this context he also has warned about the risk to Australia of continually racking up more Federal debt.

I’ve outlined on a number of occasions why Barnaby is right on the mark. Virtually every month more evidence comes out supporting Barnaby’s position. Here are two such examples I highlighted in January and February. Here is another example supporting Barnaby this month.

Investors should avoid government securities, including U.S. Treasuries and the debt of other nations, because of the risks associated with excessive borrowing, a leading U.S. fund manager said on Tuesday.

“The most dangerous market there is national government debt because the borrowing doesn’t seem to be ending soon — and it’s not just a U.S. phenomenon,” Dan Fuss, vice chairman of investment manager Loomis Sayles, told Reuters.

The important point here is perception and confidence.

Would make the basis of a great election advertisment.

UPDATE

We are in the middle of a boom, but the Rudd debt just keeps on growing:

Reserve Bank of Australia deputy governor Ric Battellino said the nation was better placed to deal with the economic challenges than in previous resources booms, when a fixed exchange rate hampered trade flows and threatened inflation.

In a speech to the Sydney Institute on Tuesday, Mr Battellino said the current boom began in 2005 and was interrupted somewhat by the global financial crisis before resuming its course and was now attracting strong investment.

So prior to 2005 the Howard government had no trouble balancing the budget. It goes to show that the GFC has been used as a scapegoat to push through Rudd’s socialist agenda.

Where’s Rudd’s anti-market, pro-government, pro-debt neo-liberal conspiracy theories now?

Flow data shows an abrupt withdrawal of German and Asian capital from Club Med debt markets. The EU’s refusal to offer Greece anything beyond stern words and a one-month deadline for harsher austerity – while admirable in one sense – is to misjudge how fast confidence is ebbing. Greece’s drama has already metastasised into a wider systemic crisis. The world risks a replay of the Lehman collapse if this runs unchecked, this time involving sovereign dominoes.

Barclays Capital says the net external liabilities of Greece are 87pc of GDP, or €208bn (£182bn). Spain is worse at 91pc (€950bn), and Portugal worse yet at 108pc (€177bn); Ireland is 68pc (€123bn), Italy is 23pc, (€347bn). Add East Europe’s bubble and foreign debts top €2 trillion.

And its immediate relevance:

Britain, France, Japan, and the US are all vulnerable. All must retrench. The great “reflation trade” of 2009 is over.

Bail-outs, socialist and debt fueled ’stimulus’ spending are coming back to bite much sooner than I thought possible. Good luck trying to re-finance all that government debt,  especially with tighter banking rules covering lending and investment. That means higher taxes to punish the independent and make them government dependent.

I’ve being covering the risk to the US’s sovereign credit rating for a while now, at least since November 2008. Well a little while ago Barnaby Joyce was hounded down by Wayne Swan and his financial commentariat in the press for suggesting that a US downgrade was a growing distinct possibility. Well guess what?

Moody’s Investors Service fired off a warning on Wednesday that the triple A sovereign credit rating of the US would come under pressure unless economic growth was more robust than expected or tougher actions were taken to tackle the country’s budget deficit.

This is not the first time such a warning has been fired off. Moody’s previously issued a veiled warning last year. It seems now they are manning up to the reality of the US’s dire fiscal position.

“Unless further measures are taken to reduce the budget deficit further or the economy rebounds more vigorously than expected, the federal financial picture as presented in the projections for the next decade will at some point put pressure on the triple A government bond rating,” the rating agency added in an issuer note.

And why wouldn’t it? The US is lucky to have the rating it does now. Printing money to devalue your country and monetise your debt is not exactly likely to impute investors with confidence. Given the way the US Federal Budget is put together by both President, Congress and Congressional Committees – all responsibility but no accountability – there seems no prospect of bringing spending under control.

The cavalier way in which the government dismissedJoyce’s previous warnings makes it clear that Rudd is more concerned with attacking his opponents and savings his own skin than preparing the nation’s budget for the economic mess that would be created from a US downgrade. Certainly it would make the cost of borrowing in Australia more expensive, but I don’t see that stopping Rudd’s spend-a-thon.

More from Bjorn Lomborg on the futility of Kevin Rudd’s emissions trading scheme. A scheme Rudd is going to re-introduce to the Senate for a third time:

All the major climate economic models show that using carbon cuts to achieve the widely discussed goal of keeping temperature rises under 2C would require a global tax on carbon emissions starting at $110 a ton (or about 26ca litre of petrol) and increasing to $4300 a ton (or $10 a litre of petrol) by the end of the century. In all, this would cost a phenomenal $43 trillion a year. And this is an optimistic estimate based on the unlikely assumption that politicians everywhere across the globe would make the most effective choices possible (such as choosing more efficient carbon taxes over emissions-trading schemes). The ultimate price tag could actually be 10 or 100 times higher. What we know for certain is that, according to most mainstream calculations, the cost of this solution would be many, many times greater than the climate damage it seeks to prevent.

So that pretty much torpedoes the pre-cautionary principle used to justify the ETS. It really is just a new tax by another name.

….Treasury Sec Ken Henry wants to increase taxes on the middle class :

“The tax system needs to be prepared for the probability that in order to finance the government-provided goods and services demanded by the community, revenue needs will grow strongly in the longer term,”

….mmmm, demanded by the community or by certain cliques that have captured the public good? As evidence…

Dr Henry said there was a strong case for new taxes to tackle environmental challenges.

And let’s not forget those living on the hog charity workers:

SOME of Australia’s lowest-paid workers could be stripped of salary perks worth up to $30,000 as part of a massive tax overhaul.

In a big challenge to the charity sector, the Henry tax review will recommend the clawback of fringe benefits tax concessions used by 60,000 organisations.

These allow church-based hospitals and nursing homes, the Salvation Army and other welfare agencies to provide top-up payments to their workers….

Catholic Health Australia has received advice from accountants KPMG that the tax clawback will cost its 75 hospitals an alarming $72 million.

It’s called socialist compassion.

Australia has once again come in third on the Heritage Foundation’s Index of Economic Freedom, as one of only seven countries that are now considered economically free in the world. That group of seven does not include either the USA or UK, the latter of which has fallen out of the top ten.

Now given that Hong Kong and Singapore – who both ranked above Australia – are city-states, Australia can rightly claim to be the most economically free country in the world.

Australia’s ‘freedom score’ is unchanged from 2009. I am not certain that the index has fully taken into account the latest Rudd changes to workplace laws and the advent of the budget deficit; next year they will likely have a negative impact on Australia’s score. From the WSJ about the US’s demise and its warnings for Australia and Rudd’s campaign of environmental facism and big debt and big taxes:

….study after study shows a strong correlation between economic freedom and prosperity….

The public sector can’t match the vitality of the private sector in promoting growth. Governments, even those that promise change, are primarily agents of the status quo. They tend to reflect the views and needs of those already holding political or economic power. Even democratic nations have their vested interests. Real change, however, can happen when those outside the mainstream have the freedom to try new things: new production processes, new technologies and new methods of organizing workers and capital.

Remember late last year when Barnaby Joyce as shadow finance spokesman warned of the risk of a US debt implosion:

Senior government figures have taken aim at Barnaby Joyce’s dire warning about a global financial meltdown if the United States government defaults on its debt…

”That’s shooting from the lip, making it up on the run,” Prime Minister Kevin Rudd said…

Assistant Treasurer Chris Bowen went further saying…”His comments on the United States need to be taken with a grain of salt,” he said, adding the vast majority of economists believed US debt levels were manageable….”Senator Joyce adopts very extreme positions, he is an extremist.”

So the reaction ot Joyce’s warning was predictably over the top and ill-informed. Would Chris Bowen and the PM make the same criticism of rating agency Fitch, which said this week about US government indebtedness:

“Difficult decisions will have to be made regarding spending and tax to underpin market confidence in the long-run sustainability of public finances. In the absence of measures to reduce the budget deficit over the next three to five years, government indebtedness will approach levels by the latter half of the decade that will bring pressure to bear on the US’s ‘AAA’ status“

Oh, so is Fitch adopting an ‘extreme’ position, or ’shooting from the lip’ ? And what about the ‘vast majority of economists’ claim made by Bowen. Has a survey been taken, has it? More from the Telegraph:

Fitch expects the combined state and federal debt to reach 94pc of GDP next year, up from 57pc at the end of 2007. Federal interest costs will reach 13pc of revenues, meaning that an eighth of all taxes will go to service debt. Most fiscal experts view this level as dangerously close to the point of no return for debt dynamics.

Oh, more extremism then?

Stephen Lewis, of Monument Securities, said a US downgrade would rip the anchor from the global system and pose a grave risk to the stability. “This would set off tremors, making all dollar assets less secure….”he said.

While US debt was higher after World War Two, circumstances were very different. The age structure was healthier. Most bonds were held by Americans. Demobilisation of the troops allowed for drastic budget cuts. America had emerged as the world’s strategic and economic Colossus. This time the US cannot rely on exuberant growth to whittle down the debt.

The reason Rudd and his comrades reacted so hysterically to Joyce is because they are set on taking Australia’s finances down the same path as the USA. It won’t be a happy ending.

…by bad mouthing Australia. It has been a while since I have read such an ill-informed piece of diatribe as the ABC’s Stephen Long’s piece about Australia’s ‘dumb luck’.

…the Treasurer, the Treasury and the Reserve Bank were set up for success by a wave of pure, dumb luck: a litany of lucky breaks and historical accidents that allowed Australia to – by and large – avoid the financial crisis.

This is the Donald Horne thesis about Australia as the ‘lucky country’. All our economic successes are down to luck. This thesis has been widely discredited in economic history circles, yet the left keep rolling it out as a way of undermining national pride – which they hate.

The main problems with this thesis are that it completely ignores the high level of scientific, engineering and managerial skill and innovation required to run massive mining and agricultural operations and the political skill required to forge trading links with other countries to sell those products.

Secondly, there are many other countries in the world that have similar factor endowments as Australia yet remain complete basket cases - South and Central America ring a bell (Chile and Costa Rica possible exceptions)? So much for it all being about luck. Success requires laws and institutions that ensure property rights, etc… Readers should note that unlike in Argentina, no Australian Federal, State or Colonial government has ever defaulted on its debt and no Australian in the last 100 years has lost their bank deposit, despite the absence of a US style FDIC deposit insurance scheme. So that says something positive about our financial dealings that the ABC would like to ignore.

Thirdly, it is hypocritical and cynical of the political left to keep harping on about Australia’s economic luck. It implies that politicians and government are mostly inept. Yet the political left want more government control and regulation. So where does that leave them on the role of government? Stuck, that’s where.

The substance of Stephen Long’s article seems to be based on what-if scenarios not on historical and current economic realities. Living in this type of fantasy land is unsurprising given that Santa is just round the corner. If the facts don’t fit the thesis, just make the facts up.

So much for the grand and holy climate consensus. China and India have walked out of the Copenhagen climate discussions, so the conference has failed badly.

Now remember that Rudd was meant to be a ‘friend’ of the conference, or some ridiculous such role, to give Rudd a special place at the conference. Rudd was also saying that it was critical and essential that Australia take to the conference a carbon tax and bribe scheme, otherwise we would be left out in the cold.

Well, we all knew that was a lie, Rudd just wanted to big himself in front of his socialist mates on his way to Sec. Gen. of the UN.

So given that the conference has failed so badly, what does that say about Rudd’s judgement to have our own carbon tax and bribe scheme before the conference? Rudd put his own will and agenda ahead of the national interest, and if the Senate had caved into Rudd we would have looked silly and damaged our own economy for no good and/or measurable reason.

As a result, Abbott’s position to oppose carbon taxation looks even stronger after Rudd’s failure at Copenhagen. Who has judgement problems now?