Saturday, December 13, 2008

Government Borrowing - How exactly will it be repaid?

In amongst all of the headlines, and all of the chatter about the economic crisis, there is a question that does not seem to appear. It is the most fundamental question when considering the question of what is, and what is not, the right thing to do in the current crisis.

I have spoken about this before, but I think the subject needs a post that directly addresses the question, and that question is as follows:

Exactly what will be the source of economic growth that will pay back the huge borrowing that is being undertaken by governments?

I have just posted on the Guardian newspaper's 'Comment is Free' forum, asking this question (you can find it here - I post under the name MarkinChina). It is the second time that I have asked the question. The first time, nobody responded to the question. So far, at this early stage, I have had the following response, which inadvertently points out the problem:

MarkinChina - I fear your question - while well-meaning - is a crass one. We are now painfully aware of the problem you succinctly outline - what we want is some sorta answer to get us out of the mess the idiots got us into. Just to rephase the problem as you have done is too easy.

For the record I believe the debt will almost certainly be repaid off by massive inflation a few years down the line.

Meantime - while our money is still worth something - borrowing more to give us a better future is probably the least bad solution.
I will not criticise this person for this response, as what they are actually doing is recognising that the price of the profligacy of today will be paid tomorrow. At least in this case, the poster recognises that borrowing without any way of paying it back will have unpleasant prospects down the line.

For my consideration of this question, I will focus on the UK. For the (many) US readers, I think that you will find that many of my points will apply to the US as much as the UK. The starting point for this question is to return to 'A Funny View of Wealth' and consider what actually might produce wealth. In a Funny View of Wealth, I listed the following:

  • Commodities extraction and processing
  • Manufacturing
  • Agriculture
  • Export of services
  • Inbound Tourism
  • Services (provided that they are not paid for through borrowing)
It is a fairly crude characterisation of the discussion in the original discussion, but will suffice for the moment. When we look at this list, the problems become apparent. Our main source of commodity wealth is North Sea Oil, and this is now in steep decline. Manufacturing has been declining for many years, and there are no new industries or technologies that show any promise of ameliorating that decline, let alone reversing it.

Agriculture is mature, but may see some improvements of output, but only if GM technology is widely adopted. This is controversial and, even were this course to be followed, the improved output would probably not make a significant difference to UK output pverall. With regards to tourism I pointed out that we spent more on outbound tourism than we received on inbound tourism. The relative impoverishment of the UK may serve to reduce that imbalance, but is unlikely to see the sector generate a surplus. Our greatest export of services was in the financial sector, and I think very few people would suggest any growth, even to pre-crisis levels, for a very long time. Finally, for services, this growth is built upon the growth of the others.

None of this is to discount the discovery of a new technology or process. In recent years, Vodaphone emerged on the back of a new technology, and is now a global giant. These kinds of developments are always possible. However, it would require the emergence of many such companies to start to provide the wealth required to pay back the borrowing that is now being undertaken. Perhaps a better example than Vodaphone, in the context of this discussion, is Dyson. The founder of the company famously committed to manufacturing in the UK, only to later move operations to Malaysia. He could simply not remain profitable whilst manufacturing in the UK. As such, there is always the possibility of the emergence of new companies, but how much wealth they will generate in the UK is questionable. The Vodaphone and Dyson stories do not make a case, but do serve to illustrate that whilst growth is possible, it will not be easy. The ongoing decline in manufacturing serves to illustrate the point more clearly.

Whichever way that you look at the UK there is no certain area of growth that can currently offer a way of repaying the borrowing. Whilst we can not discount an amazing Renaissance in business, and the growth of whole new sectors, there is nothing to indicate that these are about to happen. Instead, what we are seeing is the massive contraction in the inflated (bubble) service economy, with no commensurate growth in other sectors. More to the point, we are starting to see a severe contraction in sectors such as manufacturing.

When I first wrote a 'Funny View of Wealth', I was painfully aware that the UK was not providing the new businesses to ensure the long term future for the UK's wealth. Since I wrote the essay, the situation has become worse, rather than better. At the time of writing, the UK already had a major debt problem, but that problem is now becoming huge. None of that increase in debt has gone into the development of wealth creation activity, and the problem is that the borrowing will now be a further constraint on the prospects of economic growth, as the productive sectors of the economy will be required to service the debt. Under such circumstances, the emergence of another Vodaphone becomes less likely, and the probability of another case like Dyson more likely. The weight of servicing the debt, will just be a further weight on the economy as a whole.

It is at this point we return to the commentator on 'Comment is Free'. He is quite right that the only solution to the debt problem would be 'massive inflation', but that is not the future that I believe that he really wishes for. I have posted at some length on this and related subjects in other posts, so will not repeat myself.

I have just returned to the 'Comment is Free' forum, and I find none of those praising the use of borrowing for scheme x, y or z are answering the question of how it will all be paid for. The only other reply that acknowledges the problem of repayment of the debt is as follows:

Markinchina - the reason no-one has answered you is that the answer is rather unpalatable, both for the UK economy and because of our size, the world economy; these debts will never be repaid. Ecomonies with enfeebled manufacturing bases and significant imports of foods and manufactured goods will see their currencies collapse, their standard of living relative to the rest of the world eroded, and the debt inflated away. I think you have to look at Argentina from about 1930 to 2000 to see the way the UK is heading. And they could feed themselves!

Me and my partner will probably leave this country (nothing too adventurous - Oz/NZ or US for us) in the next 2 years and I would advise anyone who can to do the same.

The only person who has thought about the reality of the situation is fleeing the country. There you have it. The rest are the 'buy now, pay later' generation in action. Whilst the forum is in a left leaning paper, I suspect that the wish not to confront the reality is a widespread phenomenon. With such views, how can change ever take place?

Note 1: I published the tax reform post, as promised, but a strange quirk of blogger means that it was not published on the home page. The post can be found here. Apologies for that.

Note 2: The next project on the subject of reform will I guess be a subject of particular interest to many regular readers. I will be taking a look at the central bank system, banking regulation, fractional reserve banking and how the system might be reformed. It may take me a while as I have many commitments at the moments, and it is also a very complex subject. In the meantime I will comment on any particularly developments, provided that they are of broad significance.

Note 3: There have been many interesting comments on the last post I made. I will try to address some of these as soon as I have time.


  1. They can only print money until the value of the wood-pulp outstrips the value of cash.

    What then!?

  2. Cynicus, you mentioned before about how a poster found you scary. I was not that poster, but I myself tend to get anxious when I read your blog. The future is not bright if your conclusions are correct, which is what I feel is likely when seeing the reactions of the UK government etc.

    You should not feel guilty about the effect you may have though; you are only the messenger of bad news, you cannot bear responsibility if your analysis causes consternation - In fact the more peoples eyes are opened to the dangers, the more people will think about what they can do to prepare for such eventualities and thus have a positive effect.

    I think the only real danger is a sudden collapse that catches the general population unawares because of the Governments current denial of the problems. The UK has been relatively stable (on the surface) for so long, and we have not had to deal with hyper inflation or economic collapse and not having experienced it first hand will not immediately know how to deal with it.

    I mean I read history about how hyper inflation has effected other countries, but until I research some more I haven't a clue how it could pan out, or how someone on benefits will be able to buy bread at hundreds or thousands of pounds each. The basic knowledge of where the extra money will come from, how,and how soon the inflation will be added to bank accounts or benefits etc is a mystery to me, as it will to most people, and I worry that if it came a reality there would be a panic.

    I am going to educate myself on these matters now, so I don't panic myself if your predictions come to pass. My feeling is that as well as informing us of your economic predictions, you could offset some of the gloominess your predictions could cause by offering a guide to what people could do to protect themselves. OK this is what I think is going to happen, but don't worry too much, think about doing this, this or this.

    Of course I can understand if you don't want to offer the wrong advice, but a basic outline of some of the options and a quick primer on some of the things to watch out for may help some of your readers of a more nervous disposition.

  3. cynicus

    I also have been following the blogg in the guardian. It is abundantly clear that very few people seem to realise that debt is finite. Whilst all the twitter is concerned with how to spend this non existant money, few grasp how it needs to be payed back and fewer still, the implications of massive and unsustainable debt.

    This is all the more depressing as the broad sheets and those commenting presumably represent the more analytical portion of the population.

    The basic truth of your argument is conveniently ignored, and will continue to be until the obvious happens.

    In any case, it is too late now to stop.

    I continue to be amazed by the complacency displayed against the now overwhelming evidence being reported daily of the true depth and nature of the problem.

  4. If I may, I'd like to shed what I think is a 'ray of light' into all this. I don't disagree with anything you say, specifically, as you know from my previous comments.

    But, all the doom and gloom you are predicting for the UK is based on the idea that we are all acting insanely now and that we will *continue to do so*.

    I don't think that's the case.

    Yes, we are heading for very dark times. Yes' we've crippled our ability to make money. And yes, our current government are idiots borrowing their way into oblivion.

    But (without wanting to sound overly patriotic) this has always been a pretty versatile little Island. People don't see the clouds now, but they *will*. Probably after some fairly horrible events force them to, but they *will*.

    And then, things will change. Difficult decisions will be made. A period of stripping the fat will begin. I don't even think it will take too long. Once a 'realisation' sets in of the true gravity of the matter, the majority of people will buckle down and put their affairs in order.

    Britain can be profitable. We still have plenty of manufacturing knowledge. We still invent things. We still have a culture which encourages creativity and innovation. We still have a good hard work ethic in most areas.

    The only thing which could prevent us reacting correctly and becoming profitable again would be if government "spin" managed to point the blame somewhere it doesn't belong. So I submit that the most important thing all of us can do is to prevent that happening by exposing such falsehoods wherever they occur.

  5. How James Kunstler sees it.

    'Change You Won't Believe'

  6. Okay, I take it all back. Maybe my 'Ray Of Light' post was too hasty.

    The government are already beginning their "quantitive easing". Plus more borrowing.

    And what is the result?

    Labour draw parallel with the Tories in the latest poll.

    The British Public are not showering themselves in glory. They seem to find merit in this insanity.

  7. I think the British public are probably quite confused about who to vote for.

    They probably look left and right and see the same dreadful faces staring back at them (not that there is a left or right any more). Neither party stands for sound money, liberty or fiscal conservatism. George Osbourne is a joke with ill-thought gimick-policies just like Darling.

    I can't remember who said "Democracy is the worst form of government - except for all the rest" but I think he may be proved wrong before much longer.

    It doesn't matter who you vote for because The Government always gets into power. No matter which party persona it's wearing it is still the same people pulling the strings.

  8. As I understand it, booms or busts, progressions or recessions are simply a matter or wealth transfer. In capitalism to date, the pattern always appears to be the few gain big at the expense of many small losers, a little like casino economics, if you will.

    So we know who lost and is still losing daily from the reports coming in. But who are the few that won? Where did all that great borrowed wealth go from the boom? Surely not all could be lost in property overvaluation, or consumer goods? Surely some of the debt based GDP must have been used to pay the wages and bonuses of many boom beneficiaries...

    ...Because it doesn’t appear to have been spent on infrastructure; or re-investment into a new wealth producing sector to replace what the Conservatives eroded. Even comparable countries like France and Germany kept a better balanced portfolio of manufacturing sectors along with their growth in the service based economy.

    But Labour decided the UK could make good with all our eggs in one basket and continued the Tory tradition of selling the remaining family silver, and then began borrowing to feed the tertiary sector to pay for simulated “growth”.

    Labour has had the UK living of a glorified “equity release” strategy where we have basically re-mortgaged the UK on an over-valuation and will now suffer negative equity on our country. Wise globalist empires will be waiting for our market value to bottom out before they come in to buy up what is left of the country cheap – that’s if we don’t default and go to them first for a hand out.

    I’m sure no party, Labour or other would want to see that happen so now that the creditors have wised up and the service sector income looks to be crippled, the question of how our future economy will pay down the government debt without an alternative sector to depend upon remains?

    The only option I can see is for Labour to lease a region of the UK, say Cornwall or Wales, to the Chinese for, let’s say, one hundred years? After all, to the Government, London is the United Kingdom, everywhere else is just overhead, right? We might even get lucky and find they turn Wales into a hub of industrial production for Europe by the time they have to give it back to us. Or is even the land value of Britain overstated without the debt economy?


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