MONEY MATTERS is the debt ceiling a problem?
Few people in Australia know that we have a “debt ceiling”. This is when the government has a self imposed limit to borrowing. Many of you would be familiar with the controversy in the USA. Their debt ceiling was reached during the Obama administration and was looking over the fiscal cliff (Government shut down and default) when pushed by the Republicans and the Tea Party in 2011. Our ceiling is a paltry 500 billion when compared with the United States ceiling of 16.7 trillion dollars. But since our national debt is closing in at around $475billion, and just about to bump it’s delicate little head on the plaster, it may be something we need to think about.
Like everything in the realm of economics, there is always a wide-ranging difference of opinion. With most coalition politicians, the idea of busting the debt ceiling will be a catastrophe to be averted at all costs. It would mean that our triple A credit rating would be downgraded to double A plus. Cynics in the media could be excused for believing that politicians back then where just banging the “Debt and Deficit” to justify austerity measures. Could it be possible they will change direction now that the debt ceiling could be pierced during their watch? How cynical of you?
Some economists argue that exceeding, or raising, the debt ceiling is not a big deal at all. The key issue is whether a lower ranking will force our banks to borrow overseas credit at a higher rate. It is claimed this will cause a trickle down and individual mortgage rates will increase. Since we have one of the highest rates of personal home borrowings in the world this may create some voter backlash. Many argue that the downgrade to a lower credit ranking will make no difference to our borrowing capacity and the difference between triple A and double A plus is negligible.
There are just nine countries in the prestigious AAA club. Besides Australia there is Canada, Denmark, Germany, Luxembourg, Norway, Singapore, Sweden and Switzerland. The USA was downgraded by S&P in 2011. They still enjoy a historically low interest rate. Australia is currently borrowing $6.35 billion every month and will be politely asked to leave this exclusive club by the back door soon if we don’t tighten our collective belts.
Two things that are only slightly aligned with this topic but worth mentioning here:
1. Who should care what these rating agencies believe anyway? Please see the stand out movie “The Big Short” (produced and starring Brad Pitt) to get an insight into how badly these rating agencies behaved during the GFC. Credit rating watch dogs Moody’s, Standard and Poor’s, and Fitch were the handmaidens of Wall Street and did their bidding by turning a blind eye to outrageous malfeasance. How these companies have resurrected themselves with even an ounce of credibility is hilarious.
2. The present government, besides being rudderless in general, have missed a golden opportunity by not seizing the window of low interest rates and an AAA rating. They could be borrowing at a record low of 1.5% and fixing many of our dire infrastructure problems. By painting themselves in a corner that all debt is bad and to be avoided at all cost they have missed a generational opportunity to fix a lot of problems.
More Money Matters:
The RBA has left interest rates on hold at 1.5% for another month. It has not changed from this rate since August last year. Most pundits expect it stay this low for the short term at least.
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