Giddyup and thank you Mr Prime Minister and Mr Premier!
Back in April 2013 when discussing government resistance to borrowing we wrote the following:
“Our political and economic leaders, and many of their advisers, were educated in this [socialist education] system. And the problem is that it has not equipped them to make the right entrepreneurial investing decisions – that cost money now but produce long term benefits. Unwittingly, they are relegating Australia’s geopolitical stature to a ‘quarry at the end of the cul-de-sac’.
What I am talking about is our need to borrow money now to make serious infrastructure investments today. Inflation ensures that deferring projects makes them more expensive in the future – so while the government dithers, decades pass and the opportunity to fix, for example, the Spit Bridge, becomes unaffordable and is missed.”
NSW won’t invest in serious infrastructure for fear of losing its coveted AAA credit rating. The Treasury proudly declares the rating on its website:
“New South Wales is rated Triple-A by the world’s three major credit rating agencies. Fitch confirmed NSW’s Triple-A credit rating with stable outlook on 21 March 2013 while withdrawing future coverage for commercial reasons. Standard & Poor’s (S&P) confirmed NSW’s Triple-A credit rating, with the outlook revised to Negative on 25 October 2012. Moody’s reaffirmed NSW’s credit rating on 1 March 2012.”
So what if they borrowed money for 30 years? Their rating might drop to AA. What’s the point of having an AAA rating if you never use it?
It’s never been cheaper to borrow.
Sure, government debt has grown over the years and we haven’t got a lot to show for it, but it is still a fraction of our GDP. According to some estimates, total net government debt (federal and state) in Australia is $330 billion – or 22 per cent of GDP. That’s a bit like having a personal loan totalling $220,000 when you are earning $1 million a year. It doesn’t seem all that bad when you put it in those terms. And do you think that in four or five decade’s time $330 billion will seem like a lot of money? Business magazines will probably be lauding the world’s first personal trillion-dollar fortune by then.
One argument is that the private sector should make the investment. But they borrow at much higher rates, and while conventional wisdom suggests that they are more efficient operators, the reality is that if the government were to contract the construction it would be the very same companies doing the job. In any case, PPP don’t always deliver the best outcome either. Witness the current expansion of the M2 Freeway in Sydney. Is the owner disrupting traffic for years to build an additional two or three lanes in each direction in anticipation of much greater traffic in 30 years’ time? Of course not. The economic return comes from adding just one extra lane, ensuring that further disruption is guaranteed in a decade’s time when another lane is required.
Forget about the PPP model; simply pay the companies to do the construction work.
Another alternative is that the government does the borrowing and swaps it with the private sector – i.e. lends the funds to the private sector at a better rate than they could get themselves, and makes a better profit on the job than they would otherwise.
The point is that it needs to be done now while interest rates are low and the generational avalanche of baby boomers is fuelling demand for long-term stable income securities.
Pensioners and retirees, [as well as the pension funds they invest in], are sick to death of the low returns available on bank deposits. They would throw money at a long-term infrastructure funding model. With rates historically low, now is the time for the government to borrow for 20 or 30 years. And by self-funding, it would have the further benefit of filling NSW coffers in the future with inflated dollar revenues that would more than offset the fixed rates on long term government bonds.
The socialist philosophy has been alive and well in our education system for decades, and our leaders are unwittingly perpetuating its impact because they are unable to break free from its framework.”
That was then.
And so it is with great delight that today we read that the Coalition Government under Malcolm Turnbull is preparing to seize on historically-low global interest rates to accelerate borrowing for a wave of city-building infrastructure projects. According to the AFR today, “while gross debt will rise, the Coalition’s plan means that net debt will remain unchanged of may even be reduced, depending on how quickly assets are recycled.”
Readers should note that the asset side of the balance sheet will, helpfully, also increase as the infrastructure is created.
Most encouraging is that Treasury is expected to lengthen the tenure of Commonwealth bonds – to potentially 30 years, allowing the government to tap huge global demand for highly rated investments.
It goes without saying this is a much smarter plan than helicopter money.
You can read the original recommendation that the government to borrow for 30 years and start building infrastructure HERE.
Roger Montgomery is the founder and Chief Investment Officer of Montgomery Investment Management. To invest with Montgomery domestically and globally, find out more.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
xiao fang xu
:
pork barrelling
noun
used in reference to the utilization of government funds for projects designed to please voters or legislators and win votes.
How wisely they going to choose investment:
The fact that those with the most power over spending get the most pork and by far the greatest contributions from those whose self-interest would be advanced by such pork
Americans seem to have an overwhelming desire to believe that government is the answer, regardless of the question. But given that this belief is untenable to anyone paying even cursory attention to reality, they evade rather than face that reality by constantly looking for the “if only” that might square the circle-if only we could find the candidate who would not be corrupted by the inherent incentives toward abuse in government or some gimmick that would magically generate good government despite those incentives.
All Keynesians conceive of the State as a great potential reservoir of benefits, ready to be tapped. The prime concern for the Keynesian is to decide on economic policy – what should be the economic ends of the State and what means should the State adopt to achieve them? The State is, of course, always synonymous with “we”: What should “we” do to insure full employment? is a favorite query. (Whether the “we” refers to the “people” or to the Keynesians themselves is never quite made clear.)
In medieval and early modern times, the ancestors of the Keynesians who advocated similar policies also proclaimed that the State could do no wrong. At that time, the king and his nobles were the rulers of the State. Now we have the dubious privilege of periodically choosing our rulers from two sets of power-thirsty aspirants. That makes it a “democracy.”[1] So, the rulers of the State, being “democratically elected” and therefore representing the “people,” are allegedly entitled to control the economic system and coerce, cajole, “influence,” and redistribute the wealth of their reluctant subjects.
https://www.lewrockwell.com/1970/01/murray-n-rothbard/rothbard-on-keynes/
Myth 2: Deficits do not have a crowding-out effect on private investment.
Thus, deficits, whichever way you look at them, cause grave economic problems. If they are financed by the banking system, they are inflationary. But even if they are financed by the public, they will still cause severe crowding-out effects, diverting much-needed savings from productive private investment to wasteful government projects. And, furthermore, the greater the deficits the greater the permanent income tax burden on the American people to pay for the mounting interest payments, a problem aggravated by the high interest rates brought about by inflationary deficits.
https://www.lewrockwell.com/2009/09/gary-north/deficits-dont-matter/
The defenders of supply-side economics have regaled conservatives with this slogan, “deficits don’t matter,” from the late 1970’s until today. As far as I can determine, this was the only idea to come out of the supply-side movement that was ever agreed to by the mainstream Keynesians and Chicago School economists. They all agree: Federal deficits don’t matter. Someday, yes, but not yet. Not now. Don’t worry. Be happy.
Austrian School economists have long argued that the principle, “you can’t get something for nothing,” applies to capital markets. If the government absorbs a trillion dollars of investors’ money, that money cannot go to the private sector.
The Establishment economists look at past interest rates and conclude that government does not crowd out private investing. Interest rates do not always rise when government borrowing increases.
They substitute statistics for logic. They refuse to accept the principle that money lent to the government cannot simultaneously be lent to the private sector.
Keynesians dismiss the Austrian view. Why? Because they believe that money borrowed by the government will be spent by the government, then by the recipients. This will expand the economy. Theirs is demand-side economics.
Supply-siders dismiss the Austrian view because they believe that government intervention in a time of economic crisis is warranted. They are all Keynesians when a recession hits. They think the government will cut back on spending when the recession ends. Then, once again, deficits won’t matter. But they matter in recessions. They are seen as good. They don’t matter in boom times.
Chicago School economists dismiss deficits if the stock market does not collapse. They believe that the market forecasts accurately. If the market goes up when deficits go up, then, by definition, deficits are good. Things will work out. No problem.
Austrian School economists argue from the logic of scarcity. There are no free lunches. There is no free capital. When an investor buys a government debt certificate, he is deciding against investing in a private firm. He also decides not to lend to a private consumer. The government allocates this money so as to further the government’s agenda. That agenda is clear: to expand the power of the government over the private sector.
https://www.lewrockwell.com/2009/09/gary-north/deficits-dont-matter/
The people in government are quite smart about several things. They know how to spread our own tax money around so as to make themselves look like they are doing us good. They know how to tell us fairy tales about all the good they are doing. They know how to ring the bells that psychologically elicit our emotional support, words like “the future of your children and grandchildren.” They know how to simulate business structure to make government enterprise look like business enterprise without being business enterprise.
“Pensioners and retirees, [as well as the pension funds they invest in], are sick to death of the low returns available on bank deposits.”
yes cheats old geezers with inflated currency.
Graeme
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Doesn’t matter whether it was 2013, 2003, 1993 or 1983. Our political and particularly our economic leaders have, with the occasional exception, been sprouting a right wing small government line for decades. As you say, Joe was all about reducing debt. To blame this on a socialist education system is simply not correct and tarnishes an otherwise excellent article.
Roger Montgomery
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OK. Thanks Graeme.
Hugh Thompson
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Great idea for Australia
Roger Farquhar
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This represents a much welcomed and seismic shift in govt opinion and it has to be applauded – enough of this debt deficit disaster trash talk!
Angelo
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Thanks for the interesting article, Roger.
“It goes without saying this is a much smarter plan than helicopter money.”
We don’t need so-called “helicopter money” in this country (for now) but would it not be a very effective way of fighting deflation in a zero interest rate environment, such as we currently see in places like Japan and Europe? It seems to me it would be more effective and less distorting to markets than NIRP or even QE.
Angelo
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Thanks for the interesting article, Roger.
bob bellhouse
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Really Roger, stigmatising our world class education system as ‘socialist’ is incredibly subjective and reactionary. I had come to expect more of you. Regards, Bob Bellhouse, Queenscliff.
Roger Montgomery
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Keep in mind we wrote that in 2013, but sadly, it is a subject in the Masters of Teaching program a close friend attended. Roger Montgomery Ultimo.
Luke
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I applaud government decisions to make long-term strategic infrastructure investments now, while money can be borrowed at historic lows. Eminently sensible policy.
But I’m really confused by the suggestion that it’s a left-wing socialst mindset that’s been holding back that approach.
Is it the Coalition who has been saying all along:
* Don’t obsess on defecit this month/year, balance the budget over the cycle.
* Where the private sector demand shrinks, that’s the best time for the government to boost expenditure through long term investment, don’t just wait for private capital to work it out.
* Targeted long-term investment in infrastructure and education is the way to both boost demand short term, while laying the foundations for long term growth.
* The CEFC and NBN are perfect examples of that kind of future-targeted infrastructure investment (as the PM said today).
Whereas the socialists are all about:
* The government shouldn’t allocate capital for the long term. Infrastructure needs will be met by the market and private capital.
* When aggregate demand is low, it’s better for government to also shrink spending and live within its means. Starve the government beast.
Did I wake up on Opposite Day?
Roger Montgomery
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Keep in mind the timing of the article – 2013. The thinking and commentary at the time was that Government should not borrow more. Joe was all about reducing debt!
Max Zan
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Hi Roger
Your comments and suggestions about borrowing at low rates and long periods for new Infrastructure projects make sense provided the projects are worthwhile and can turn a profit once completed. Governments have a poor track record on that front and I agree with you that it’s best left to the private sector.
Where governments can help is to provide the means and funds to make it attractive for the private sector to become involved. In Australia we have a huge pool of funds that is growing and is tied up in Superannuation that could be used for such projects. You would think that Governments would capitalize on that and make it attractive for Superannuation Funds to invest in those new projects – maybe a lower tax rate on such investments could be an inducement. Imagine the number of new jobs that would be created and the Government would reap extra tax revenue from workers and companies thus offsetting any tax lost on concessions granted.
It’s really a no-brainer, but you have to remember that politics and commonsense are not one and the same thing. Let’s wait and see what happens next Tuesday – it appears that the penny may have dropped.
Regards
Max