On a trip to Australia, I discover that a day is a very long time in politics Down Under

Douglas Alexander's Notebook.

I arrive Down Under as a guest of the Australian government, but my breakfast appointment on the first morning happens to be with none other than Alastair Campbell. He’s in Sydney simultaneously to support the British and Irish Lions and to talk about his diaries.

At a table overlooking the Sydney Opera House, we discuss the picture on the front page of every newspaper – showing Prime Minister Julia Gillard knitting a woollen kangaroo for the royal baby. John McTernan, also previously of Downing Street, now her communications director, is quoted in the coverage as saying the idea “was a no-brainer”.

Cool prime time

The previous day Alastair had been ushered in to see the prime minister in Canberra by John and he echoes the judgement of others, saying she seemed very calm under fire. Given the papers’ comments about her royal roo pose, it’s a quality she’ll need today. My next meeting is with a former Labor prime minister, Paul Keating. Now retired, he remains fascinating and stimulating company.

The sound of power

No sooner have we discussed the role of Kondratieff waves in advanced capitalist economies than Keating is explaining – as a lover of antique clocks – that he used to read the Christie’s catalogue during cabinet meetings. When I ask him what he believes the prime political virtues are, he replies without hesitation: “Imagination and courage.” He then explains that he drew his inspiration and got his best ideas in government by listening to music – “the highest form of art” – and to Shostakovich in particular.

Next it’s down to Canberra, amid growing speculation of a challenge that afternoon by Kevin Rudd to Julia Gillard’s leadership. Parliament is in its last week before a long break, so it’s his last chance to challenge her ahead of the election scheduled for September. The Gillard/Rudd rivalry over recent years makes the periodic outbreak of the TB/GBs during our 13 years in office look like a picnic.

Events, dear boys, events

Until a few weeks ago the idea of a comeback for Rudd, the former prime minister deposed by Gillard three years ago, seemed remote. Yet with poor polls suggesting a wipeout in the election just months away, the speculation is at fever pitch as I arrive at Parliament House.

In the course of the morning I meet Foreign Minister Bob Carr, Defence Minister Stephen Smith, Climate Minister Greg Combet and Education and Employment Minister Bill Shorten. Within 24 hours two of these ministers will have announced not only that they’re quitting government but that they’re leaving parliament, too.

Rudd’s supporters make their move that afternoon as word spreads that a petition is being circulated among Labor MPs demanding a leadership vote, or “spill”, as I soon discover it’s called. Making a fateful decision, Gillard responds by announcing a vote that very afternoon, on condition that whoever loses gives up politics altogether.

With half an hour to go, Shorten appears before the cameras to announce that he’s switching his support from Gillard to Rudd. At the subsequent caucus meeting Rudd defeats Gillard by 57 votes to 45.

Labor’s difficulties seem more electoral than economic, and are more to do with personnel than policy: the Australian economy is growing for the 22nd consecutive year, and despite a legislative record that includes major educational reform and the introduction of a landmark disability insurance scheme.

Sheila, take a bow

Gillard’s concession speech was a model of graciousness. After congratulating her rival on his victory she spoke of the “honour” of serving as the country’s first female PM. In part because of her “misogyny speech” that became a huge YouTube hit even in the UK, there was much discussion of how being a woman had affected the way she was treated in the media. Here, too, Gillard had the last – and best – word when she said this about her gender: “It doesn’t explain everything, it doesn’t explain nothing, it explains some things . . . What I am absolutely confident of is it will be easier for the next woman and the woman after that and the woman after that. And I’m proud of that.”

Oz reorientation

One woman who doesn’t seem too bothered by Labor’s leadership change is Julie Bishop, the Liberal opposition’s foreign affairs spokesperson. The next day when I meet her it’s very clear that this suburban Perth MP is still preparing for government. She is well briefed on the issues, and our conversation reinforces how deep and enduring are the ties between the UK and Australia. Yet it is also clear that Australians are already embracing the opportunities of what their government’s recent white paper called “the Asian Century”. Perhaps that explains why in none of my meetings did anyone suggest the UK leaving the EU would be a good thing for Australia. Indeed, in discussion after discussion, the possibility was greeted with a mixture of incredulity and anxiety.

Rugger relief

With 30,000 travelling Lions fans in the country it should be a busy time for Britain’s man in Canberra, High Commissioner Paul Madden, but he tells me with relief and pride that, so far, there has not been a single arrest.

Alas for me, the only meeting that didn’t happen was the one scheduled with a backbench Labor MP at 3.30pm on Thursday afternoon. At least he had a good excuse. That day, the now erstwhile backbencher (Kevin Rudd) instead met Governor General Quentin Bryce to be sworn in as the 28th prime minister of Australia.

As I left Australia the polls were already tightening. Yet Rudd still faces a huge task to defeat the Liberal opposition leader, Tony Abbott. Then again, as I learned from my time in Canberra, a day – never mind a week or a few months – is a very long time indeed in Australian politics.

Douglas Alexander is the shadow foreign secretary

Sydney Opera House. Photograph: Getty Images

This article first appeared in the 08 July 2013 issue of the New Statesman, The world takes sides

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We're racing towards another private debt crisis - so why did no one see it coming?

The Office for Budget Responsibility failed to foresee the rise in household debt. 

This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous. 

The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.

If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017. 

This is what the OBR was projecting what would happen around now back in 2015:

This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:

First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”

As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram. 

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).

So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.

We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)

There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.

Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.

But of course debt has to be owed to someone. These charts show who owes what to whom.

The crisis in private debt

Bearing all this in mind, let's look at those diagrams again - keeping our eye particularly on the dark blue that represents household debt. In the first, 2015 version, the OBR duly noted that there was a substantial build-up of household debt in the years leading up to the crash of 2008. This is significant because it was the first time in British history that total household debts were higher than total household savings, and therefore the household sector itself was in deficit territory. (Corporations, at the same time, were raking in enormous profits.) But it also predicted this wouldn't happen again.

True, the OBR observed, austerity and the reduction of government deficits meant private debt levels would have to go up. However, the OBR economists insisted this wouldn't be a problem because the burden would fall not on households but on corporations. Business-friendly Tory policies would, they insisted, inspire a boom in corporate expansion, which would mean frenzied corporate borrowing (that huge red bulge below the line in the first diagram, which was supposed to eventually replace government deficits entirely). Ordinary households would have little or nothing to worry about.

This was total fantasy. No such frenzied boom took place.

In the second diagram, two years later, the OBR is forced to acknowledge this. Corporations are just raking in the profits and sitting on them. The household sector, on the other hand, is a rolling catastrophe. Austerity has meant falling wages, less government spending on social services (or anything else), and higher de facto taxes. This puts the squeeze on household budgets and people are forced to borrow. As a result, not only are households in overall deficit for the second time in British history, the situation is actually worse than it was in the years leading up to 2008.

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

An inquiry

In 2015, around the time the original OBR predictions came out, I wrote an essay in the Guardian predicting that austerity and budget-balancing would create a disastrous crisis in private debt. Now it's so clearly, unmistakably, happening that even the OBR cannot deny it.

I believe the time has come for there be a public investigation - a formal public inquiry, in fact - into how this could be allowed to happen. After the 2008 crash, at least the economists in Treasury and the Bank of England could plausibly claim they hadn't completely understood the relation between private debt and financial instability. Now they simply have no excuse.

What on earth is an institution called the “Office for Budget Responsibility” credulously imagining corporate borrowing binges in order to suggest the government will balance the budget to no ill effects? How responsible is that? Even the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up.

The OBR told the New Statesman ​that it was not aware of any errors in its 2015 forecast for corporate sector net lending, and that the forecast was based on the available data. It said the forecast for business investment has been revised down because of the uncertainty created by Brexit. 

Still, if the “Office of Budget Responsibility” was true to its name, it should be sounding off the alarm bells right about now. So far all we've got is one mention of private debt and a mild warning about the rise of personal debt from the Bank of England, which did not however connect the problem to austerity, and one fairly strong statement from a maverick columnist in the Daily Mail. Otherwise, silence. 

The only plausible explanation is that institutions like the Treasury, OBR, and to a degree as well the Bank of England can't, by definition, warn against the dangers of austerity, however alarming the situation, because they have been set up the way they have in order to justify austerity. It's important to emphasise that most professional economists have never supported Conservative policies in this regard. The policy was adopted because it was convenient to politicians; institutions were set up in order to support it; economists were hired in order to come up with arguments for austerity, rather than to judge whether it would be a good idea. At present, this situation has led us to the brink of disaster.

The last time there was a financial crash, the Queen famously asked: why was no one able to foresee this? We now have the tools. Perhaps the most important task for a public inquiry will be to finally ask: what is the real purpose of the institutions that are supposed to foresee such matters, to what degree have they been politicised, and what would it take to turn them back into institutions that can at least inform us if we're staring into the lights of an oncoming train?