Thursday, December 1, 2011

One Billion Idiots

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.


  1. I do completely agree. However why could the gov not just have created the money instead of borrowing it? The same amount of currency would have entered the economy, just without the liability. So surely that just makes us greater fools??

  2. Why is, and why has, the government of my country been borrowing money?

    Nice one cynicus. I've been asking that myself for a long time and thought I must an idiot for not understanding why.
    Here's another one.

    Why is "growth" so important?

    I mean, if I invented a machine that churned out cars, fridges, tellies, ipods, food, clothes and everything else we consume at the touch of a button for a mere penny an item, then the world economy would be knackered. But wouldn't it be a good thing? I mean we would have the means give everyone everything yet there would be a massive contraction in the economy.

    The usefullness of money lending banks in society is to allow growth to happen when there is genuine innovation or technological progress that benefits people in some way (as opposed to creating bubbles in housing etc.) but of course economies that are ex growth, temporarily or otherwise, must put the fear of god into bankers. I believe the unquestioned idea of government borrowing has been a product of a banking agenda for their own self interest. Another question then, as banking can be useful to us as a society if it is used as a mechanism to generate innovation, why does the priviledge of creating money for nothing lie in private hands? Seems to me that there are many other ways to allow genuine growth to happen.

    The unquestioned policies that the major political parties follow makes a mockery of democracy.
    And makes me quite cross too.

    Cheers Dave.

  3. It looks as if even the mainstream are now starting to realise just how desperate things are -

    - "Banks borrowed irresponsibly to lend to us";
    - "Banks went on their own borrowing binge to lend to us"
    and maybe most tellingly: "Money was flowing not to those parts of the world where investment opportunities were was flowing uphill to finance consumption".

    I've long followed the blog although I very rarely post; it is clear even to me (and I am by no means economically literate) that there is simply no way out of our current situation without a total rebalancing of the "global" economy.

    I have no idea what form this will take but I imagine it will be hideously painful for those of us in the west.

  4. Here's a thought. If governments spent only their income and their savings, and never borrowed, where would the money go that is presently invested - if that's the word for it - in government bonds? Ideally into investment in new productive capacity I suppose, but past form suggests it could equally go into private over-consumption or asset bubbles. Or would the taxes governments needed to levy to live within their means soak up all the excess? (By the way, I'm not presenting these questions as arguments against governments living within their means, I'm just asking.)
    But that's comparative statics. What about the dynamics? Getting to the point where governments live within their means would entail them either paying off their debts or defaulting on them. The former course would flood the market with released capital, risking huge bubbles, while the latter course would crystallise enormous losses for financial institutions worldwide. Tempting to conclude that getting to your ideal position would be extremely risky, even if the position itself is right.
    On the plus side, if governments didn't borrow then they and the central banks couldn't insist that banks bolster their robustness by lending to ... er ... governments.

  5. The Most serious adjustments that can affect the markets seem to be taken at weekends.
    I wonder what we'll get for Christmas.


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