29 Nov 2010, 9:27pm
economy reflections:
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  • So Why do Governments get to Borrow and Never Repay

    Watching the Irish go through all their hair-shirt measures, it made me wonder.  The question will probably show me as an economic ingenue, but nevertheless it occurred to me. Why the hell do governments get to borrow so much without having to pay it back?

    Looking at other enterprises, getting away with that sort of thing is unusual. Take individuals for instance. It’s fair enough to borrow early in one’s working life, either for education, though this is becoming of doubtful value, or to buy a house. In the past you tended to aim to pay these back over time. Take a company. It raises debt, but ideally uses this to finance productive capacity, that creates more money than the debt destroys in interest, eventually repaying the debt or rolling it over to finance more productive expansion.

    The theory is meant to be that governments do this too – borrowing either to finance productive infrastructure expansion or to oppose the variations in the business cycle. The first gets paid for by increased tax receipts on the economic activity facilitated by the infrastructure, the second by the tax receipts during the upswing parts of the economic cycle, remember the golden rule of Gordon “no more boom and bust” Brown… He had the theory okay, just the practice was wrong.

    All that theory seems to have gone to pot in the last few decades. The Irish situation just highlights it. It seems nutty enough for the 5 million strong taxpayers to take on the amassed debts of banks that have behaved like drunken sailors over the last decade and a half. Now they get to borrow money to pay for those debts from the EU and the IMF. Since when was borrowing to pay for borrowing the way to financial Nirvana?

    It’s not like the taxpayer had the benefit of the binge drinking at the party, but they sure get to experience the hangover at best, or the morgue at worst. I can’t see how they can come back from here, they might as well throw in the towel and take the hit of defaulting now. They’ll struggle on, only to default later.

    Finally, what is so special about bondholders, anyway? One of the problems seems to be that governments have got into the habit of endlessly borrowing money they have no intention of paying back, merely of servicing the interest. Obviously if you plan to keep on doing that you have to suck up to the sources of lending.

    Something I learned in clearing all my debts including the mortgage is that I didn’t want to be beholden to anybody. Nobody is entitled to knock on my door and demand to be repaid, and I’d tell them to stick it if they tried. You gain a certain amount of power through not owing people money, and you lose a lot of power if you do.

    Redeeming my mortgage was an irrational thing to do in a low-interest rate environment, but at least now if I lose my job my main problems are how to get to eat, heat and drink, rather than if the repo men with thick necks and baseball bats want to visit. Or even their sharp-suited counterparts from a mortgage company.

    Governments could do with learning some of that attitude. We were told that we were within hours of the ATMs not working when Alistair Darling stepped in. At the time most of my capital assets were in £ demoninated investments apart from my house, so perhaps I would have rued him taking a default strategy as I would have been wiped out. I have corrected that since, getting about half my capital wealth into non-financial assets to forestall that sort of thing in future, since I expect the second dip sometime in the next five years. For what it’s worth, though I’ve been tempted to goldbuggery I consider gold as a financial investment, albeit independent of of the UK governments devaluationary policies 😉

    However, let’s face it, the majority of people in the UK don’t have capital assets – they have debts, in terms of mortgages and unsecured debt. A default strategy might have more attraction for them, rather than being clobbered for years with declining real terms wages and employment falling. Although Argentina showed in 2001 that the social unrest following default on loans wasn’t pretty, it was survivable, and Argentina’s economy has largely recovered. Issuing the haircut command to bondholders is something an economy can come back from.

    Either way we can’t carry on endlessly borrowing and never repaying. Otherwise, as the Irish are discovering, economic policy is not determined by the people you elect as a government – it’s decided by the people who own your debt. Hello IMF, hello EU, perhaps hello Angela Merkel, the only European country that seems to have a working economy at the moment. Living on the never-never catches you out in the end, whether you’re an individual or a country. Sometimes bankruptcy is the only way out.

     
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