foreign liabilities (1 Viewer)

[NICK__]

this might be a random question, but i read today that Australia's net foreign liabilities are now $555bn, being 66.4% of GDP. What i just dont get, is that for a country like Australia, which has a perpetual CAD, doesnt this mean that foreign liabilities will rise indefinately? And what about interest that is paying for this? Does this mean that we will have a bigger and bigger deficit in the current in order to service this debt? Is there an end to this, or do the interest payments just get more and more until they swallow the country?

And what about the whole "free trade" debate? say all global trade barriers were eliminated, would that mean that some countries would just keep on having a CAD forever?

sorry if is incoherant, or im just heaps stupid or something

 

[NICK__]

thanks 4 that...sorry, about the CAD forever thing...ok, so say there is this small, uncompetitive country somewhere which currently keeps levels of protection high, meaning that they they don't need to import too much stuff, can export cheaply (as they are subsidised) and have low levels of foreign investment etc. this would mean that they would have CAS? however, if they were to reduce all protection, then their domestic manufacturers would all go out of business because they are uncompetitive, and consumers would have to import everything, giving them a high CAD...would this country ever be able to get rid of this CAD in the future?

 

[nick1048]

Yes, our foreign liabilities are huge, and yes, interest will accumulate on it. However, Australia has a triple A credit rating - meaning, we pay our shit back. Our export sector is doing well too, with China needing our resources to run their energy requirements because their economic growth is sky high (9%-i think) (we export all our mining/primary sector resources to them).

I don't get what you mean by if all trade barriers are removed, then some countries would have a CAD forever..

I don't think that is enough to support such a large CAD. The current net liabilities worry me at such phenominal figures, we have a CAD of 7% of GDP which is red zone i.e. Asian Financial Crisis in the making. I don't see how improving efficiency will cater for our every expanding consumption. I agree with contemporary economists however who identify the lack of public savings as a problem largely attributed towards the increasing CAD. Look at our terms of trade for instance, how much better can they get sustainably (keep in mind China's demand is not indefinite). The Australian economy, I feel, has already entered the "debt trap" scenario which is going to be difficult to emerge from. Another final thing to consider is the upswing in the international business cycle which the world has recently emerged from. If Australia is able to scrape in on o.k. grounds with such positive global conditions, how do we, as an economy, battle through a recesion? I believe the Federal Government will need to put a sharp halt on over consumption and provide large enough incentives for people to start saving. This will solve quite a few CAD problems, the social implications however are a lot less desirable to think of. Not every consumer considers themself an economic unit...

 

[nick1048]

lol we're producing quite a bit... technically we can't produce anymore than we are (NAIRU) now of course in the future our productive capacity will increase, however Australia is suffering from "capacity constraints." This means we can not meet foreign demand at current with such a relatively small labour force. The future fund I think you are refering to should stimulate domestic savings in combination with the abolition of the superannuation surcharge (superannuation is a form of savings). I suppose we have to now sit back and ask is this enough to cover the cost of our increasing consumption, or is more savings required? According to Pitchford's thesis, things will work out due to the private sector constituting 98% of net foreign demand i.e. this is not a problem for the Australian government. If the private sector goes bust, no returns will leak out of the economy to overseas investors. From a national economists perspective however this is not so simple as a conclusion...

The problem with economics is the policy conflicts that occur between two economic objectives. This is why no one can come up with a fail safe solution, merely attempt to provide some pre-emptive policy and observe the results.

On a more personal note, you are quite good at economics (observing some of your posts) have faith in your own abilities and if you are wrong, your wrong, no biggie! I'm not trying to come across as intimidating or arrogant, I just wish to maintain a sense of sophistication that the subject demands. Sorry if any of my posts seem personal or targetting. I assure you they are not.