Saturday 4 May 2013

Debt: The Options

Debt: The Options

Recently I was talking to a fellow Conservative about debt and he said that Austerity (in Europe) should end as it was killing the economy. I disagreed and to understand why we must look at the options available as well as the consequences.

There are three general options available to Governments when they get themselves into debt and they decide to do something about it.

1. They can honour the debt and pay

2. They can print money and try to devalue the debt using inflation

3. They can repudiate the debt and default

Each has it's own results

1. Paying the debt means financial sacrifice, expenditure must be cut, revenue (meaning tax) should be increased. Maybe worst of all future plans must be curtailed or even scrapped all together. Just to rub salt into the wound it continues for year after year.

2. Another method is to devalue the debt, the current term for it is "Quantitative Easing", it basically means printing more money than the economy needs in an effort to inflate the currency. To make it worth less tomorrow than it was yesterday even though the face value remains the same. If for example the Government owe's $100 million and they inflate the currency and it is now worth $90 million, the Government saved itself $10 million. Here is a trick exclusively available to Governments.

3. Finally they can default on the debt and start with a fresh slate. They can start spending money in a manner that both the Government and the voters find attractive.

Of course each of these in turn has consequences

1. Once a serious effort has been made to pay the debt, the debt will stabilise and then go down. The only time this does not apply is if further increased borrowing occurs. It is slow and painful but it works and allows the Governments credit rating to remain in tack, meaning that further credit will be available if needed at a reasonable price. Regular payments also increase the likely hood that the loan can be renegotiated after all few creditors want to kill the paying customer.

2. Inflation is a tax on the peoples standard of living. It is insidious as it is invisible for along time, but when it hits it hits hard. It hits the poor and those on tight budgets first, whether they be people or businesses. It destroys businesses and drives homebuyer's from their homes. If inflation is 10%, $100 now has the purchasing power of $90. Any money in the bank makes interest and loses it value, all at the same time.

3. Defaulting on the debt seems the best option and it is as long as the Government never wants or needs to borrow money again. The reality is that most Governments borrow money every day, for the simple reason that has bills it simply must pay, every day without fail, payroll, pensions, interest loans are just three of many items. But the bulk of it's revenue doesn't come in every day so to tide themselves over they borrow, just as many businesses do. But once a loan is defaulted you have announced to the world just how bad your financial position is. While they may have thought it was bad the Government has just informed them that it is so bad they have stopped paying their bills. The next question is what other bills will they stop paying?



And why should people continue to pay their debts to the Government (or anyone) when it has stopped paying it's own debt. The idea that the Government starts off with a clean new slate is a mirage, what it ends up with is little credibility and a bad credit rating. As well as a whole series of problems of it's own making.

The bad news is that there is no easy way out of debt. In short debt is bad and only by rejecting debt as an economic policy can this problem be solved.

Upon Hope Blog - A Conservative Future.

1 comment:

  1. M.A.D. Pioneer10 May 2013 at 23:30

    Re: Debt The Options + Debt Is King

    How did we miss this?
    How does the Government we entrust to Govern and regulate such matters simply sit there and allow such debilitating incidents to occur, let alone not learn and act on it?

    The fundamental fact of the matter is that we have become complicit with economist self-perpetuating propaganda and spin! What serious democratic government's have to 'wake up and smell the roses' with is that although we as citizens may hate them, and corporations detest them even more, taxes are a necessary evil in a modern and ethical society. For almost 20 years in Australia, both major sides of our Federal and State governments have conducted a 'pissing competition' as to who can reduce taxes more. This has and is unsustainable. Why do corporations need to be paying in some cases no taxes, when they have been making record profits?
    As I've recently heard in an interview ' there's nothing wrong with a responsible nation/government going into debt, so long as the principle reason for going into debt is temporary, and contributes meaningfully in stimulating/contributing to the nation in real terms - i.e. infrastructure.
    It's almost criminal and a deliberate abuse of our democratic system and trust for Australian political party's to play-down and demonise our economy for political gain - i.e. Tony Abbott attacking the Labor Government and its damage to the Australian economy in the Australian media and in speeches, and yet in Britain he openly positively boosted about the condition and strength of it!
    Or how the Federal Liberal/National Coalition down-played the condition and shape of the Labor Government effort to stimulate the Australian economy, by introducing stimulus programs (alas the way in which the Government conducted it could have been much better thought out and managed!), the IMF, by which every capitalist economy is measured and driven, in fact complemented and used the Australian Labor Government's initiative and actions as a good example of economic management (which the Labor Government stated was learnt from the post-Great Depression findings).
    Finally I see no issue with modern and ethical governments and societies being conscious and aware of the importance of ones national welfare and well being. For by not taking this consideration seriously for those truly in need can breakdown societies cohesion!
    History is to be learnt from. To ignorantly ignore it is bordering on the line of criminal negligence! After all isn't this why we put our trust and faith in democracy and do I dare say it - 'our elected politicians'.
    And what of the 'king-pins' within the financial industry and Wall Street? Have any of these people who deliberately dreamed up, schemed and implemented one of the worst economic crises / scams in modern history been held accountable? Have any of these powerful executives come forward and apologised for the economic and social destruction they have created?
    No they have not! For you do not need too when you are one of the elite 1% who has both unimaginable wealth and politicians in your pocket!!

    M.A.D Pioneer