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Monday, September 06, 2004

Economic Myth - Part 4

I was inspired to write this following a comment on BP by Homer Paxton.  Homer points out quite rightly:

"I am waiting for a journo to point out that 17% interest rates were when Keating had a rather large surplus, bigger than any of howards, and that rates fell quite dramatically when the deficit shot up.

bush has a deficit of 6 1/2 % of GDP which converts roughly to about $30 Billion here which surely means double digit rates yet US rates are lower than ours."

What exactly is the argument for deficits pushing up interest rates?  Here is a graph over the last 30 years (John Howard's favourite timescale) comparing interest rates (the cash rate as determined by the market) against budget balance.  The interest rate line shown differs slightly to the one shown below as they have been averaged for each annual period.

I have flipped the budget balance figures around so that in theory, if it is true that deficits = high interest rates then the pink and blue lines should enjoy some sort of entwined waltz of harmony.  But they don't do they?  There is nothing at all, when you look at the raw data, to suggest any relationship at all.  Somehow, this government has managed to peddle the following myth:

"Budget surpluses are good, amongst other things, they keep interest rates down".

What they mean is:

"We don't want to spend money on services as we believe in small government, market forces and user pays.  The only way you will swallow this is if we make you believe that is bad economically for the government to spend money.  We will link it to an idea that high interest rates are always bad, and low interest rates are always good"

And the media, and the Australian public have swallowed it.

What about graphing the actual debt, rather than deficit/surplus, against the interest rate?

Just curious.
I can't get enough data for that (it only goes back to 1997).
Actually I'm not sure that would be useful. After all, the governments policies have just shifted public debt to the private sector (see me scary graph on saving). And since debt is principle plus INTEREST there probably is a link, but the wrong way round for Howard.

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