From: smart@manta.mel.dit.CSIRO.AU (Robert Smart)
Subject: Re: The Decline of Britain (was Re: Great Britain as a malfunctioning democracy)
Organization: CSIRO, Division of Information Technology, Melbourne
Date: Fri, 17 Apr 92 11:30:39 GMT

In article <jks34q4@zola.esd.sgi.com> livesey@solntze.esd.sgi.com (Jon Livesey) writes:
>
>Every economy is a trade-off.   Here in the US we are paying for
>excess consumption by running a trade deficit, 

And in Australia also. This statement is however exceedingly misleading.

In a world of floating exchange rates it is interesting to consider: how
do you run a trade deficit? Surely you need Yen (for example) to buy the
goods. The Yen get exchanged for dollars and the dollars go to people who
want to buy Australian goods. If there is an excess of goods coming in then
there is an excess of dollars going out. Now nobody wants to put Australian
dollars under the bed, so what do they spend them on? Not goods which they
export from Australia because we are only talking about the net dollars
after all that has been taken care of. What happens to the net outflow of
dollars is that people lend the money back to Australia or they come to
Australia and buy things which they leave in Australia: i.e. the trade
deficit is exactly equal to an investment surplus. 

Now it is worth considering which is cause and which is effect. This is
somewhat semantic, but to me it is clear: the net investment in Australia
keeps the demand for the Aussie dollar high which is what makes exporting
difficult and imports competitive which causes the trade deficit. The
American situation is slightly different because there is some stockpiling
of American dollars, but I'll bet the main reason for the trade deficit is
the same: Australia and America are attractive places to invest.

There are 2 ways to look at this. You can say that we are being rewarded
with wealth now for having stable politics and and intelligent workforce
and raw materials, and hence being an attractive place to invest. Or you 
can say that we are selling off our assets to increase our income. I think
the latter view is correct, and we need to reduce low tech investment (like
property), by appropriate taxes and charges which make foreign ownership
of land unattractive.

However you look at it the approach of the Australian government to the trade
deficit is mad. They increase interest rates [attracting more investment] to 
squeeze _all_ expenditure in the hope of squeezing imports more than exports. 
Insanity rules. I can't believe that the governments economic models predict a 
good result from this approach. If they do then their model of the behaviour of
external investors must be completely wrong.

>and paying for
>extra government services by running a fiscal deficit.   

If the government's taxes don't cover its bills it can:

1. Print money. This causes inflation (or prevents deflation that would 
   otherwise occur). This is a tax on people holding money (since its value
   is reduced). It is a very easy tax to collect, hence popular during wars.
   Nasty side-affects mean that it should be kept as an emergency tax.

2. Borrow money. This increases the interest rate and hence it is a tax on
   other borrowers. However in an international context the increased
   interest rate attracts investors to the country. So it also tends to 
   mean that the country is borrowing money from overseas to pay for
   government services. Since this is undesirable the Australian government's
   policy of running a budget surplus seems right, though this doesn't
   prove that they know what they are doing.

   If it weren't for the foreign investors then the government's borrowing
   causes an immediate transfer of wealth from other borrowers to itself.
   It does _not_ cause a transfer of wealth from the future into the present.
   The traditional American fear of government borrowing, that we were
   borrowing from our children and making them poorer, was always misguided
   until the vast upsurge in international investment started. Nowadays
   there is some truth in the concern.

Bob Smart
Xref: sparky soc.culture.british:6138 alt.politics.british:4