The Leviathan Will Consume Us All: The Government and Aussie Debt

Before kicking off today’s Rum Rebellion, a short announcement. It’s not a particularly important one. Rather, it’s just a heads up if you’re interested in this sort of thing.

I’m on Twitter…again.

If you want to follow me, again, I’m @gcanavan2.

Right then, let’s get into it…

The S&P 500 and the NASDAQ both rallied to new all-time highs overnight. But the Dow Jones Industrials couldn’t quite join the party.

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I’m not sure if that’s significant or not.

But I do know it really puts this week’s interest rate decision and associated comments by the Fed into focus.

The Fed will announce its decision on Wednesday afternoon, US time. The market believes a rate cut is a certainty. The odds are at 91%. That will make it 75 basis points of cuts this year.

If the Fed signals that it is open to further cuts, perhaps as soon as the December meeting, expect stocks to shoot higher. But if it hints that the easing is over for now, expect profit taking to kick in.

It’s not only loose monetary policy pushing US stocks higher. Fiscal policy is more than doing its bit. From the Financial Times:

The US government’s annual budget deficit swelled to $984bn in fiscal 2019, the most in seven years, despite Donald Trump’s pledge to tame government spending as president. Lower tax revenues and higher military spending contributed to the growing figure, which is $205bn higher than the prior fiscal year, the US Treasury said on Friday. That brought the deficit up 0.8 percentage points to 4.6 per cent of economic output.

Loose monetary policy and loose government spending make for a heady mix. Stock markets love it.

The Explosion of Debt in Australia…

We could be in a similar situation in Australia in a few years. Right now, fiscal discipline is a political imperative. The government is determined to deliver a surplus this financial year.

It’s their way of proving that they’re a financially responsible government. And it’s our way of believing that we’re financially responsible citizens.

But we’re delusional. We’re soaked to our bone in debt. Total government debt is now just over $1 trillion. (Let’s not talk about it, but household sector debt is nearly $2.6 trillion.) The chart below shows how much things have gotten out of hand since the financial crisis.

Government Debt (AUD Millions) - 29-10-19

Source: Australiandebtlcock.com.au

[Click to open in a new window]

The period covers both Labor and Coalition governments. Both are spendthrifts. Keep in mind this explosion of debt occurred during unprecedented demand for our iron ore and coal, which in turn generates strong tax receipts for the government.

Not to mention an unprecedented property boom which generated billions in stamp duty for state governments too. This explains why the state and local government debt hasn’t exploded.

What have we got in return for all this debt?

Our taxes certainly aren’t lower. As a percentage of GDP, the Federal Government’s tax take is just under 25%. In 2011 it was around 20%.

Are the services provided by the government better? I have no idea, but I doubt it.

Is the government bigger?

Absolutely.

Writing in The Spectator Australia this week, former deputy leader of the Liberal Party, Neil Brown, reflected on his 50th anniversary of his election to the House of Representatives. He listed 12 significant changes since 1969. Here are a few of them:

  • Far and away, the most significant change has been that government is much bigger and more intrusive than it was in 1969. There are more departments and ministers, the cost has increased astronomically, more laws have been passed to empower the giant machine and government has wormed itself into every nook and cranny of life like virulent lantana. Has this produced a better society? I doubt it.
  • Government used to be smaller, cheaper and more efficient because it did what it was supposed to do — deliver services. The services were those that people could not provide for themselves. Nowadays, the whole government leviathan is bloated because government has expanded into giving away things that people have not asked for, do not need and which they should be able to do for themselves. Government is now like Santa Claus working up an endless list of giveaways. The civic motto today must surely be ‘Ask and you shall receive’.
  • The parliament is vital in a democracy. But ours is too big. There are too many elected members; the available work could be done by half the number. Two factors have contributed to this. First, the gigantic and entirely unnecessary new Parliament House with its luxury offices and committee rooms and also the numbers and over—generous entitlements given to MPs’ staff, some with grandiose titles like Chief of Staff. Work has to be found to fill those committee rooms and occupy MPs’ staff and what better than to invent new things for the government to do! The overall perks are too many and too generous. I left parliament when they decided to give motor cars to members and senators, scandalously unjustified.
  • Most parliaments consist of members who are failures in life who have never had a real job. In 1969, virtually every trade and profession was represented; now, very few are. In 1969, there were MPs with defence force experience; now, they are more interested in inventing new war crimes and alleging Australian troops have committed them. The gene pool in state and federal parliaments is now about as varied as one of those deposed European royal families. The result of their labours is the same — moribund.

If you want to stimulate the economy via fiscal policy and not increase debt, the solution is simple. Cut taxes and cut the size of government to pay for it.

Leaving money in the hands of the people who earned it is a far better way to generate productive economic growth. Taxing it for the government to spend is just stupidity.

But that’s how it works. The government knows best. The Leviathan will continue to grow. Until it consumes us all…

Regards,

Signature

Greg Canavan,
Editor, The Rum Rebellion

PS: Greg Canavan recently caught up with US gold expert Jim Rickards to talk about the truth behind the recent rise of the gold price in Australia. Click here to watch.


Greg Canavan approaches the investment world with an ‘ignorance is bliss’ philosophy. In a world where all the information is just a click away at all times, Greg believes we ingest too much of it. As a result, we forget how to think for ourselves, and let other people’s thoughts cloud our own. Or worse, we only seek out the voices who are confirming our biases and narrowminded views of the truth. Either situation is not ideal. With regards to investing, this makes us follow the masses rather than our own gut instincts. At The Rum Rebellion, fake news and unethical political persuasion are not in the least bit tolerated. It denounces the heavy amount of government influence which the public accommodates. Greg will help The Rum Rebellion readers block out all the nonsense and encourage personal responsibility…both in the financial and political world.


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