Thursday, July 26, 2007

More Economic Lies from Howard

So John Howard is blaming the increase in inflation last quarter with State government deficits- expected to run two 70 million over the next five years.

This is a deceptive argument because there could only be a crowding out problem if government and private borrowers were only borrowing in the domestic market.

Because private and public entities can borrow from worldwide markets thanks to the deregulation of the financial sector in the 1980´s, governments can borrow funds from anywhere in the world, and avoid placing undue pressure on domestic money markets.

Furthermore, the states that are running deficits are doing so for counter cyclical reasons (SA, NSW), or to improve essential infrastructure and remove capacity constraints (Qld), which should have no short term negative effect, and a long term positive effect on inflation figures.


Blogger larson_b said...

as usual troppo has something decent to say on this...

forgive the lack of link. i'm on my new computer and can't work it out. i feel like a baby boomer!! argh! foreigners, argh!!! i've finanical overextended one libs

4:14 PM  
Blogger zelko said...

You're supposed to be on holiday timboy.....

Here's an RBA testimony to parliment re the afformentioned link..

Mr SOMLYAY "How much impact on monetary policy does it have when the state governments produce deficits and the Commonwealth government is still trying to produce a surplus?"

Mr Macfarlane "But with the present set of institutions in does not have any immediate impact at all on our monetary policy...It is even more so for state governments, because state government deficits never did have any direct effect on monetary policy, other than if they were very large...It could have an effect if it were done on a large enough scale in the sense that it might push up long-term bond rates, but we would have to be talking about very big orders of magnitude— five per cent, six per cent or seven per cent of GDP—before you started to see any sign there. It would not affect what we were doing with our monetary policy; it would affect interest rates at the long end of the yield curve. So it might at the margin push up long-term bond rates, but not of the orders of magnitude we are talking about now."

10:34 PM  
Blogger timboy said...

Zelko- did I just catch you talking shop!


4:18 AM  

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