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Alan Kohler: When government ‘debt’ isn’t really debt at all

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In the 12 months to the end of March, the government ran a deficit of $196.2 billion.

Over the same period, the Reserve Bank bought $200 billion worth of government debt, with money it materialised from thin air.

In other words, the government’s successful fiscal response to the pandemic has been more than paid for with new money, printed for the occasion.

It’s not just been happening here: Total global fiscal stimulus during the pandemic so far has been about US$10 trillion ($12.9 trillion); total money printing by the major central banks, US$10 trillion ($12.9 trillion).

Serious questions: Is that even debt, and can they even be called deficits?

If a government sells bonds to cover the shortfall between taxes and spending, and another arm of the same government creates money and buys the same amount of bonds, is that a liability anymore?

When Treasurer Josh Frydenberg reveals the full financial year budget deficit next week, and predicts the deficit for next financial year, is it really a deficit if it’s a ledger entry matched by new money brought into existence at the same time?

The RBA now owns about $352 billion worth of government bonds (that’s actually the total value of its Australian dollar assets – they’re not individually identified, but they’re mostly government bonds).

The government now has $745 billion worth of bonds on issue, $224.5 billion more than a year ago (that total is the face value – their market value is $833.5 billion because lower market interest rates have pushed up their prices).

So, the RBA owns about 40 per cent of the government’s total debt, or to put it another way: The government owns 40 per cent of its own debt.

While the government-owned central bank owns it, that debt is not repayable and the interest on it just goes round in circles. Therefore, it seems to me, it is no longer debt, just numbers on a screen.

It’s true the RBA is independent of the government, but that state of affairs is really just a convenient political fiction – the independence is not absolute, and is not guaranteed by law.

Section 11 of the Reserve Bank Act provides that if there’s a disagreement between the government and the RBA board, then the Treasurer submits a recommendation to the Governor General, and then the Governor General, acting on the advice of the Federal Executive Council (which consists of all Commonwealth ministers and assistant ministers, so that basically means the Prime Minister), “may, by order, determine the policy to be adopted by the Bank.”

In other words, if there’s a stoush, the PM wins.

In 1996, then Treasurer Peter Costello and then RBA Governor Ian Macfarlane wrote a joint statement on the “conduct of monetary policy”, affirming the Bank’s independence, and that’s been reaffirmed in six more statements since then.

But none of them change anything, not really: The only concrete promise the government made is that it “will no longer make parallel announcements of monetary policy adjustments, when the Reserve Bank changes the overnight cash rate”.

Section 11 of the Act still stands.

Could the Prime Minister tell the RBA to buy all of the government debt and make it go away … poof? Definitely. Will it? Definitely not.

And the RBA won’t do that of its own accord because it wants to keep a viable bond market; if it owns all the bonds, there is no market.

And the government wouldn’t stop the RBA from selling the bonds it owns now and turning them into real debt again. It could, but it wouldn’t because it would be politically disastrous – portrayed as a fiddle and a fraud.

So Modern Monetary Practice – as opposed to Modern Monetary Theory – represents a happy coincidence followed by a stand-off.

The government spends more than it collects in taxes to save the economy from the effects of lockdowns, issuing IOUs to cover the difference; central bank materialises similar amount of money and buys IOUs from the private owners of them, ostensibly to manipulate interest rates and financial markets. Happiness ensues.

But it’s like the family with a dark secret: Everything is happy over dinner as long as no one mentions the elephant.

So far it works, although the Coalition has had to uncomfortably embrace part of the dreaded MMT – the bit where it says deficits don’t matter. Mr Frydenberg says there’ll be no austerity to bring the deficit down, so for the moment at least, deficits don’t matter.

But in the next crisis the elephant might have to be discussed, and MMT put openly into practice.

And there will be another crisis, that’s for sure.

Alan Kohler writes twice a week for The New Daily. He is also editor in chief of Eureka Report and finance presenter on ABC news

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‘Mountain of equity’: Millions of home owners could save thousands

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If you’ve become a home owner in the past five years it might be worth getting an appraisal – you’re probably sitting on a “mountain of equity”.

As we’re all aware, house prices have soared lately. And while that’s bad news for rapidly worsening inequality, it also means those that do own a home could save money on their mortgages, upgrade their properties or even borrow to finance that renovation they’ve been wanting to get done.

Refinancing could save you thousands in interest repayments a year.

You’ll be in a particularly strong position if you’ve also been able to keep up with your mortgage repayments during COVID, because you now own a larger proportion of a house that has rapidly increased in value lately.

It’s a virtuous cycle that’s making the gap between the haves and have-nots much larger in Australia by pushing up property prices even faster.

Owner occupiers have been the keystone of the latest property boom, with most being existing owners upgrading their homes.

Who could blame them? RateCity research published this week finds an owner occupier in Sydney who bought at the median price in 2019 with a 20 per cent deposit has now seen their wealth increase by $402,000.

Apply the same conditions to Melbourne and wealth has risen $192,000.

This assumes property owners kept up with their mortgage repayments, which the majority of home owners have done while working from home and taking part in a $300 billion government cash splash during COVID.

“Millions of homeowners are sitting on a growing mountain of equity, some without even realising it,” RateCity research director Sally Tindall said.

How to benefit

If you’re in this situation, getting the value of your home appraised could be the first step to a better home loan or moving up the property ladder.

“If you’ve owned your own home for at least a couple of years, and have been diligent about paying down your debt, you could refinance to a lower rate,” Ms Tindall said.

“Lots of lenders offer interest rate discounts to new customers with loan-to-value ratios below 70 per cent, including ‘big four’ banks CBA and Westpac.”

What’s a loan-to-value ratio? Put simply, it’s the difference between the size of your home loan and the value of your property.

So, as an example, if your home is worth $1 million and your mortgage is $100,000 you have a loan-to-value ratio (LVR) of 10 per cent.

The lower your LVR the easier it will be to refinance your loan at a lower interest rate or borrow more to purchase a higher-value property.

First home buyers might also be able to remove the guarantor on their loan sooner than they thought because of rapidly increasing prices.

About 58 per cent of the lowest variable interest rates available are open only to those with deposits of 30 per cent or more, RateCity said.

In other words, rising property prices may have moved you into the club of home owners that can achieve lower interest rates on their mortgages.

A median Sydney property purchased on an 80 per cent LVR in 2019 could now be refinanced on an LVR as low as 55 per cent.

If those conditions are applied in Melbourne, LVR falls to 63 per cent.

 

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Here’s why Australians won’t be hit by the soaring gas prices we’re seeing overseas

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Australians have dodged the bullet of skyrocketing gas prices currently hitting consumers in Europe and Asia.

While prices in the major gas hubs of those regions have spiralled up by a factor of five, in Australia a brief spike eased in September.

That means local consumers won’t be facing big jumps in household bills into next year.

Australian gas prices jumped in June and July after outages at coal-fired power plants in Victoria and Queensland boosted demand for gas generation.

That spike was short lived due to warm weather in some states and lockdowns in Victoria and NSW eroding demand, according to research by EnergyQuest.

“You’ve had warmer weather though the major capitals, the effects of the lockdowns and increased renewables, which reduced the demand for gas generation,” EnergyQuest CEO Graeme Bethune said.

Power prices fell

Those factors have also fed into power prices, with electricity costs falling in September in comparison with a year earlier.

What is interesting about the table above is that not only did average power prices drop, but the peak price charged by generators when power is in short supply also dropped.

That was despite the ongoing problems at the Victorian and Queensland power generators.

Part of the explanation is that there is increased output from renewables as rooftop solar grew, and new wind and solar generation came online.

That meant that gas power was called on less often to meet peak demand, which in turn held down power prices.

The inverse was true in Europe, where a 20 per cent fall in wind output over recent months helped run down gas supplies, contributing to the price spike, Mr Bethune said.

The future of power prices in part will depend on renewable output.

“If the wind blows strongly and there is plenty of sunshine across eastern Australia then it will keep pressure off gas prices,” Mr Bethune said.

The influence of renewables across the system in the last year is evident in this chart on power supplies.

Although wind has been stable in terms of its contribution to the power equation, outputs from hydro, solar farms and rooftop solar have risen.

The result is that coal has been pushed down from 65 per cent of power production to a record low of 60 per cent and that should help hold down both gas and electricity costs.

Even if offshore gas prices continue to spike Australian gas producers would not be in a position to push up local prices to match it.

“A lot of the export contracts for LNG [liquified natural gas] out of Queensland are set against the oil price and that has not risen by anywhere near the amount gas had,” Mr Bethune said.

“Then you have the federal government which has made clear to LNG exporters that they need to make enough gas available to the local market.

“They’re doing that regardless of the fact that they could make more money in the export market.”

Domestic users are supplied from long term contracts that cannot be easily changed when gas prices rise, so that would be another brake on prices.

However, while it is comforting to know local gas prices won’t spike to offshore levels, Australian consumers are still not getting as good a deal on prices as they should be, according to Bruce Mountain, Director of Victoria Energy Policy Centre at Victoria University.

“For small customers the gas price is not the big deal. The biggest things are the operation of the retail market and the costs levied by the owners of the gas-distribution pipes,” Professor Mountain said.

“Gas supply has been very profitable for the big gas companies.”

That was in part because consumers don’t bargain-hunt for retailers, and the charges levied to use the pipes and wires of the energy distributors are too high.

Regulators set these charges and could crack down on them but don’t, Professor Mountain said.

Since privatisation margins earned in energy distribution have increased dramatically.

Power distributor AusNet Services, under takeover offers from two groups, “is currently making a margin of 19 per cent – they’re far too profitable,” Professor Mountain said.

When power was distributed by [the state-owned] SECV there was a margin of 3 per cent on sales, Professor Mountain said.

Household power bills could be 15 per cent cheaper if the distribution businesses were less profitable, he said, with the situation similar for the gas sector.

But the move away from gas as a household fuel, necessary to reduce greenhouse emissions, will help deliver cheaper energy.

“Devices that use gas [for household tasks] are much less efficient that those using electricity,” Professor Mountain said.

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Scott Morrison talked Glasgow, China with News Corp boss over ‘after-dinner drinks’

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Prime Minister Scott Morrison discussed the Glasgow climate summit, China and the Biden administration with News Corp executives in New York last month, the company’s global boss has told a Senate inquiry.

Appearing before a Senate probe into media diversity via video link on Friday, News Corp’s global chief executive Robert Thomson revealed he spoke with the PM about international affairs over “after-dinner drinks”.

Mr Morrison was in New York to represent Australia at United Nations’ talks.

Mr Thomson told the inquiry on Friday he presumed the PM wanted to meet because he knew “many” world leaders attending the UN summit.

“I had presumed he wanted some insight about some foreign policy matters,” Mr Thomson said.

Mr Thomson confirmed Mr Morrison didn’t meet News chairman Rupert Murdoch while in New York. He also claimed there was no discussion of the looming federal election.

Mr Thomson said the Glasgow summit came up “in passing” between the pair, but they didn’t talk about News Corp’s planned 16-page net-zero spread across its Australian publications, which has ignited a firestorm of criticism Down Under.

The main topics of discussion were Japan, China, Afghanistan and the “contours” of the Biden administration, Mr Thomson told the inquiry.

“The Prime Minister and I don’t necessarily agree on China,” he said.

Mr Thomson (on TV) said he presumed the PM wanted foreign policy insights. Photo: AAP

Mr Thomson was also asked by Labor senator Kim Carr about whether News Corp directed local editors to take positions on political issues.

Mr Thomson said News Corp’s New York executives had no involvement in recent features on net-zero carbon emissions and that its Australian editors weren’t told from the US what to write.

But he said the company did expect editors to operate within a certain philosophical framework.

“As a company, we have a philosophy about certain issues,” he said.

“We have a philosophy about individual freedom, about the role of the market, about the size of government.”

Mr Thomson said that – as a former editor – he had “discussions” with News Corp’s editors, but that they had a “large amount of local autonomy”.

Senator Carr and the inquiry’s chair, Greens senator Sarah Hanson-Young, grilled the News Corp executive on the publisher’s track record on climate, accusing its Australian papers of platforming climate deniers for more than a decade.

But Mr Thomson said News Corp has been consistent on climate dating as far back as 2004, citing Mr Murdoch’s 2006 statement that the “planet deserves the benefit of the doubt”.

News Corp Australia has just finished a two-week campaign of climate coverage that included its major Australian mastheads running 16-page spreads about net-zero emissions.

The series had many critics, who argued News Corp had a long-held editorial hostility on climate action, including attacks on past Labor government policies targeting emission reduction efforts.

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