JP Morgan, Moody's and NAB Advocate Moving Towards Recession

by Damian Penston

What do Peter Jolly from NAB, Sally Auld from JP Morgan and Marie Diron from Moody’s have in common? Not one of them understands the fact that a government surplus is the same as a non-government deficit, and vice versa. Not only that, but they mistakenly believe that AAA credit ratings should have any meaning or significance to a government with sovereignty over its own floating currency. If this isn’t a cardinal sin for economists, it ought to be.

Last week, each has claimed that Australia must either decrease public spending or increase taxation because failing to do so could cost the Government its AAA credit rating (see here and here). While such ratings may be important indicators for investors who speculate on capital gains in the financial markets, the rating given to the Government of Australia is absolutely meaningless and should be ignored.

The reason is incredibly simple - the Government has the authority to create money and, therefore, can never miss a debt payment in its own currency. The same is not true for every government around the World (for example, Timor-Leste uses US dollars and has no authority to issue them), but it’s true for countries like the UK, USA, Canada, Japan, New Zealand and Australia. There aren't enough A's in the World to give them an adequate rating.

 

This lack of understanding has led NAB, JP Morgan and Moody’s to offer dangerous advice which jeopardises the private sector - they have openly called on the Government to reduce the amount of money which is circulating in the economy. Spending is needed to inject money into the economy and taxation sucks money out. Following their recommendations would leave businesses and individuals with fewer funds with which they may carry out commercial transactions, thus accelerating an economic downturn.

Given that NAB, JP Morgan and Moody’s are all part of the private sector, they are clearly operating against their own interests and the interests of their investors. Should the affected parties call for the resignations of Jolly, Auld and Diron before or after they have cost them their capital gains?