Mainstream economists grasping reality (just barely)

[Lefteee]

Okay, so we have seen that the claims that government borrowing always drives up interest rates appear rather shaky at best.

We have seen that since the election of the Howard government, large budget surpluses were accrued, govt net debt fell to practically zero - yet interest rates went up, up, up. This occurred in the period that some claim the RBA has had full autonomy in. So while it is claimed that govt borrowing drives them up, it is clear that paying off govt debt had no effect whatsoever at bringing them down. This calls the entire govt debt/interest rate argument into question as the argument must now be that the causality runs only in one direction ie: "yes it is true that interest rates instead of falling, can rise when the government pays off debt (to around 7.5% this time around) - but we still say that increasing the size of govt debt drives them up". That would be an interesting theory, begging for a good explanation. If rising govt debt necessarily pushes them up but falling govt debt doens't necessarily bring them down, what would the compound effect of all the years that government debt had risen in be by now?

Further, Deepy argues that all years pre-1996 need to be discounted from the whole argument since the RBA's decisions were prone to politcal interference back then. Which begs the question of why the 90 bank bill rate rose to over 21% in 1982 while John Howard was treasurer in the Fraser government. I guess we have to assume that treasurer Howard deliberately put them there? Or maybe they weren't always subject to political interference. Maybe the RBA under it's own guidance put them that high? But if that is the case, then we have the same situation as post 1996 - govt debt history shows that despite having increased their debt early in the piece, by the time rates hit 21% the Fraser govt's debt had been falling for the third year in a row.

So, key points:

* post 1996, government net debt fell to zero yet interest rates rose to 7.5%

* pre 1996, government debt had been falling for 3 years running when rates hit their record high of 21.39% under the treasuryship of John Howard.

* the overall history of government debt and interest rate movements shows the two running all over the shop, sometimes in tandem but more often in opposite directions, including instances where government debt rose yet interest rates fell.

http://www.swivel.com/data_sets/spreadsheet/1018793

http://www.rba.gov.au/Statistics/Bulletin/F01hist.xls

In the next exciting installment, we examine why the claim that govt borrowing pushes up interest rates persists.

[Jovial Monk]

No fair, Leftee, posting actual figures and stuff

[Lefteee]

I have more but some of the treasury documents and stuff are loooooooooooooong.

Bloody connection keeps going down. Alas, my poor old PC - she has served me well. Might bury her in the back yard and hold a service

[JWFrogen]

Okay, so we have seen that the claims that government borrowing always drives up interest rates appear rather shaky at best..

Checks reality, interest rates rising.

It does not always immediately but it does, the more demand one puts on money supply the more dear the cost. Or, if interest rates do not rise then one gets inflation, if one prints more money and does not increase it's real value in relation to goods and services by rising interest rates then the money becomes worth less and less.

[Jovial Monk]

Sure, that would and probably did happen when govt's could only tap its own capital markets. That is no longer true and so the nexus between govt debt and borrowings and local interest rates has been broken.

Govt's can of course create inflation leading to interest rates rising. The grossly incompetent Howard/Costello duo did that by, in a raging boom, sending more money into the economy via big tax cuts and outrageous pork barreling. Yet govt debt dropped top zero over that time.

[JWFrogen]

Even global capital markets make an assessment of economic productivity, debt and currency value, they exact cost on credit or capital investment.

I am not arguing rapid economic growth can not also raise interest rates in an attempt to contain inflation nor because there is more demand on that capital but this would have been exacerbated in the Howard years had he wracked up huge government debt. The fact he left a surplus gave Labor the room to spend without spooking an immediate reaction concerning interest rates and or inflation.

Just the opposite is true in the US, where they are having problems retaining the value of their currency and can not bolster it with interest rate rises as they think that will make their recession worse, and there recession is much worse despite larger stimulus than in Australia because they did not have a Howard surplus to start with, so the capital markets see little evidence they can spend their way out of it without causing other serious economic damage long term.

[Jovial Monk]

They do. But the govt is not competing with companies and individuals looking for loans.

There is perhaps enough demand (if Europe and the Chinese were also looking for long term debt) to raise the interest rates in the wholesale markets but that is not due to the minnow that is the Aust govt.

[Lefteee]

Okay, so we have seen that the claims that government borrowing always drives up interest rates appear rather shaky at best..

Checks reality, interest rates rising.

It does not always immediately but it does, the more demand one puts on money supply the more dear the cost. Or, if interest rates do not rise then one gets inflation, if one prints more money and does not increase it's real value in relation to goods and services by rising interest rates then the money becomes worth less and less.

Whether it's a suicide bomber or economic dogma, blind faith is unshakable

[Lefteee]

I suppose I can't argue with that argument. I mean, how could anyone? Government borrowing pushes up interest rates - who knows when, maybe after five minutes, maybe after five years but when rates do move upward we know for a fact that it must have been government borrowing sometime in the past.

A truth seemingly so self-evident that proof of a direct causal link is not required and the fact the actual figures are wildly out of accord with the claim can be safely ignored.

When I checked reality, in addition to the forementioned I concluded that rates are currently so far below the so-called neutral level that if a quater of a percentage point rise equals a "tightening" of monetary policy in the commonly used sense of the word, then the midday temperature rising from 8C to 9C must equal a heatwave.

Still no comment on the "reverse causality" issue - the periods lasting years at a stretch where government debt consistently fell but interest rates consistently rose. I guess we should ignore that as well.

Important lesson here people - next time you find that the facts do no accord with the commonly accepted theory, you should conclude that the facts must be wrong. Now what was the name of that river in Egypt?

[Jovial Monk]

De Nile is a river in Egypt. Baldrick swims in it all da time: there can be no structural budget deficit so there IS no structural budget deficit, hehehehehe