As Europe sinks further into the sovereign debt crisis, I thought I would write about something of the foundations of the crisis. I have insultingly titled this post one billion idiots, and you are probably one of them. So was I, before I wrote this, and presumably so were many of my regular readers at one time. It is not pleasant to be called an idiot, which is why I have stressed that I too was an idiot.
This post is really for those who have still not asked the most simple question in the world; a question that every person in every developed country should be asking. My regular readers have now (I hope) asked the question of themselves, but there are many people who have yet to ask this simple, but powerful question. So what is this amazing question? I hope that you will not be disappointed, but suspect that you will be when you first see it.
Why is, and why has, the government of my country been borrowing money?
So, there it is. disappointed?
I suspect that you are indeed disappointed. It is a question that we have stopped asking, as it now so 'normal' that governments borrow money, we have forgotten that there should be a reason for their doing so. But what is that reason?
In the democracies of the rich world, as elections approach, there is discussion of economics. We listen to the to the back and forth of debate, we listen (if attentive) to the detail of the economic policy of party x and party y, and balance in our minds which has a better policy. Those of us who are most attentive might, just might, take into consideration whether party x and y will increase or decrease government borrowing. After all, governments borrow money, but they should not borrow too much money, should they?
Do you not think that this is odd, that we never really ask the one question that matters; why is it that both party x and party y both build borrowing into their plans for the economy? It is simply assumed that government borrowing is a normal state of affairs and that the question becomes one where we take into consideration how much they are borrowing, one against the other.
I am referring here to the 'rich developed countries', embodied in the OECD. These countries have something in common. They have complex and developed infrastructure in place. They have (had?) a large and wealthy tax base. They have the potential to raise enough money to pay for all of the functions of government from the wealthy tax base that sits as the foundation of the revenue of government.
So why is, and why has, the government of my country been borrowing money?
It is only when we ask this simple question that it becomes apparent that we have been idiots. There is no good reason, outside of (arguably) war (and less arguably) natural disaster that might justify government borrowing. However, there are bad reasons, and we are partly to blame for these.
What a government is doing when it borrows money is giving us something which we will have to pay for later. Governments will tell us that they, the government, are borrowing money. But they are not borrowing the money; 'we' the taxpayer are borrowing the money. We are borrowing the money because, collectively, we will pay back the borrowing. So why are governments borrowing money on our behalf?
We, those who have to repay the borrowing, collude in the illusion that the borrowing is not our own. When we see party x or party y, we balance questions of how much taxation we will be paying under government x, and what services and benefits government x will provide for us. It may be that we vote for party y, because they will hold down taxes. Or it may be that we will vote for party y, because they will increase spending on benefit a, b or c. If we take the former, they are holding taxes down, in part, by borrowing money. In the case of the latter, the benefits are, in part, provided by the borrowed money. Whichever the permutation of taxes, services and benefits, these are provided, in part, through borrowed money.
But remember, they are not borrowing money, we are borrowing the money; we the taxpayers.
What we see is that the politicians appear to be generous to us; they are holding taxes down, or they are now providing a better service a, b or c. However, regardless of whether it is party x or y, they are bribing us with our own money, hidden in the form of debt. The real difference between party x and party y is how they use that additional money from our borrowing to please their own constituency of voters.The key election questions in the end resolve around how our tax money is distributed, and how our newly created debt is going to be distributed as it come due. If the debt allows for tax cuts, or holding back tax increases, person a votes for it, even though they MUST pay for it later. Or, even better, because party y will make person b pay most of it later. And the same situation with a promised improvement in service/benefit a, b, or c, all being subsidised now with debt that we must later pay.
This is why we are idiots. We are allowing governments to bribe us with our own money. Blinded by our own interest, as a constituency to be bribed, we allow the dishonest practice to continue. In all cases, in all developed and mature economies, governments should operate on current revenue. There is no reason to borrow, excepting to subsidise through debt, the interests of different constituencies; to bribe these constituencies through accumulation of taxpayer debt.
It really is that simple, and that is why we are idiots. We allow this situation, and we have colluded with this situation.
Note 1: I know that, for regular readers this is a little repetitive. However, I am struggling/attempting to make this point as clearly as possible, so that as many people as possible start to ask the question (comments/suggestions/alternative accounts welcomed). I returned to this subject as a result of a comment in which the commentator suggested that it was necessary to borrow money during economic downturns. It was the thought that we have become so used to government debt, people are just unable to see the possibility that a government might save money during the good times to ease the problems during the bad times. It is an answer that is obvious but somehow we became so used to governments signing debt on our behalf, we forgot that they might also save on our behalf.
Note 2: Lord Sidcup - thanks for the link to the Marxist economist. The author is heading in the right direction; he 'sort of' grasps the problem, but can't see that underneath the OBR figures (which he rightly identifies as dubious), there really is a structural problem. I also liked the link to the Hayman article. In particular that there is no playbook (I think that was their expression) for the current situation with global debt. There really is no precedent that we can look at, in particular if you throw into the mix a dysfunctional currency union. Of particular interest is the element that deals with psychology (one of my errors in the early days of this blog was to think that market participants would be logical in their approach to investing), as this has a large part to play.
Note 3: Death to Bubble Addicts - also, thanks of the link. I have looked at Chris's work on and off. The title of the presentation of 'unfixable' sets it on the right course. I liked the point early on about the impossibility of investing when we do not know what the ECB or Federal Reserve will do next week. The perfect exponential is interesting, and the 'red squiggle'. I think he underestimates shale gas (a subject I keep meaning to post on), but he is right that (at some point) we face some big questions, but the last question at the end of his talk is perhaps very pertinent.
Note 4: Sorry to not respond to other comments, links, but out of time....just a final note on the massive support being given to Europe from the US. If ever there were an indication of how serious the situation is, this is surely about as clear as it can be. I am going to be pushed for time for a while, but may come back to this later if possible.