Australia "open for business", but buried in debt!

Vanguard July 2014
Max O.

Abbott in June prostrated himself before the belly of the beast on Wall Street and declared 'Australia is open for business'. This homage to the citadel of US capitalism and imperialism would be expected from a comprador like Abbott.

For he is only a prime minister of one of their client states and is all too well aware that the United States is the largest investor in Australia. So what is so bad in having a powerful foreign investor such as the United States involved in Australia's economy?

Debt! The Abbott Coalition government may well scream about how bad big government debt is and the need for an austerity budget, but you won't hear them make a squeak (nor the Labor opposition) about the massive Current Account Deficit that is suffocating the Australian economy.

Why not? As prime minister of Australia, it is Abbott's job to oversee the country being milked by foreign investors, with the United States being the biggest beneficiary.

Balance of debt

For foreign investors the advantage of having client states such as Australia is that they pay out enormous amounts of profits, dividends and interests to multinational corporations. This foreign dominance of the Australian economy can be viewed through the frequent running up of a deficit in its current account.

Unfortunately our politicians rarely speak about the exponential pile of foreign debt that is the result of 40 years of uninterrupted deficits on the current account. The current account records a country’s trade in goods and services and its income flows with the rest of the world.

A current account deficit is a country’s monetary loss that is funded by foreigners through the capital account, the other side of the balance of payments. The aim of the game is for the current and capital accounts to add up to zero.

The balance of payments is a balance sheet of a country’s position which can be compared to the rest of the world. The balance of payments is divided into two main sections: the capital account and the current account.

The capital account provides all the data on capital flow in and out of Australia. It is the capital inflows from foreign investment and foreign borrowings that fund any current account deficit.

The current account consists of (1) the trade in goods balance (imports and exports of goods); (2) the services balance (imports and exports of services, such as freight, tourism and foreign students); (3) the net income and (4) the net transfer balance, all added to give an overall current account balance.

The net income figure consists of interest, dividends and royalties paid overseas and those received from overseas. The biggest debits here are the interest payments on foreign borrowings, but dividends paid to foreign owners of Australian shares have swollen strikingly in recent years; consequently the net income deficit is the overwhelming portion of our current account deficit.

Foreign investment ends up as foreign debt

Bourgeois economic commentators reassure us that current account deficits are not bad per se if they finance investment opportunities that will earn the foreign exchange that helps repay foreign capital. However until these borrowed foreign savings are paid off, they are a country’s liabilities as foreign debt.

Major financial investments in Australia are essentially controlled and owned by overseas capital. The danger of foreign money controlling a country is widely detested throughout the world: just look at Greece, Spain, Portugal and Argentina!

In the 2013 December quarter Australia's foreign debt stood at $858.9 billion, a record high 55.5% of GDP, a high ratio by international standards. Compare this with our net foreign equity (foreign loans owed to Australians) of $20.4 billion, which brought our net international investment liability position to $838.5 billion and one quickly realises Australia's fortune is at the whim of foreign investors.

The 2014 March quarter saw Australia's foreign debt fall slightly to $855. 6 billion with our net foreign equity shrinking to $5.2 billion, leaving us with a net investment liability or net income deficit position of $850.4 billion.

The risk of relying on a high current account deficit is that at some point overseas investors could well refuse to keep funding Australia’s foreign debt, especially during an economic crisis. The current economic debate is myopically limited to tackling Australia’s federal government deficit, even though a crisis over the economy's foreign debt would swiftly burden taxpayers with exorbitant liability.

About 81% of our gross foreign debt is held by private investors and financial corporations, and the Federal government would need to guarantee much of these borrowings in a crisis.

What is happening to the most troubled of indebted countries and their currencies could easily be Australia’s destiny. A number of these nations have lesser foreign-debt ratios than Australia and a declining currency only adds to a country’s foreign debt in local-currency terms.

Financialisation

As a previous article (Who controls Australia) in Vanguard explained, countries like Australia are caught up in the process of 'financialisation', where the 'flight of capital' goes from one nation-market to another in 'a race to the bottom'.

"But capital has to be free to move between corporations inside a nation-market-state. Money-capital can thereby chase better average rates of profits. The current patterns of finance capital speeds that switching. The crisis intensified the need to do so."

This explains the need for Australia to offer higher interest rates to attract foreign capital to keep underwriting our foreign debt. A problem that just keeps getting bigger and bigger.

International finance capital is a predator of economies like Australia, a good reason to break out of their clutches and win economic independence.