What happened to the spring of hope we hoped would follow the Covid winter of despair?
The
shortcomings of the existing system have become glaringly obvious. There was
much talk about life on the other side of the pandemic, a place where we could
build a better and fairer future on more secure foundations.
However,
two weeks of electioneering has confirmed that a move to a better place is too bigger
task for our bickering political class. We are back to the same old ways of
policy free mudslinging scaremongering and pork barrelling. We have learnt
nothing.
There
is a conspiracy of bipartisanship not to delve too deeply into important
issues.
For
instance, consider government debt and deficits and the all-important question
of where money comes from. There has been so much to learn from how we managed
the Covid crisis that should be front and centre of any election campaign. But
discussion is conspicuously absent.
Most
Federal government debt is not repaid. It is rolled over at maturity, replaced
by new debt. As any Accounting 101 student knows debt may appear on the
liability side of a balance sheet but so does owner’s equity. Debt that doesn’t
have to be paid represents additional equity in the nation. Government debt is mostly
owned by banks and large funds and are analogous to redeemable preference
shares in Australia Inc. Interest gives the holder a regular return. The
holdings can be sold at any time or redeemable at the end of the term, usually
replaced with new borrowings. Debt may be owned by foreigners. But the interest
on those borrowings is still paid into Australian bank accounts. If the owner
wishes to repatriate the funds the Australian dollars are swapped for whatever currency
is needed, so the interest always remains in Australia. Government borrowings should
not be used an excuse for austerity by constantly raising the spectre of burdening
our heirs and successors.
The
Covid response required massive new borrowings. However, most of the new debt is
owned by the Reserve Bank (RBA), our bank. We owe the debt to ourselves. The
RBA now owns $288 billion of government debt. One third of government debt
which is approaching $900 billion is now owned by ourselves. How is this a
burden? Interest is paid to us. If bonds are ever redeemed the proceeds are
returned to the government as dividends by the RBA. This is the new reality. Central banks around
the world are doing the same.
