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My apologies for the long time since I last posted. I have several three-quarter finished posts sitting waiting to be finished but, in each case, I struggled to find anything new to say, and want to avoid just commenting on 'events'.

I finally came around to writing this, due to a comment from one of the blog readers, who goes under the name of 'Death to Bubble Addicts' and who quoted another blogger (not named, sorry). It was actually a comment that was particularly interesting because it was such a succinct presentation of an argument that is at the heart of my blog. I will quote the relevant sections:

It’s astounding that people can’t grasp the simple concept that wealth (as opposed to money) does not grow on trees. We, individuals and governments, have consumed more than we produced, for a long time, or in simple terms we spent more than we earned. Now we, individuals and governments, must earn more than we spend, for a long time. Yes, that will cause a depression. It can’t be avoided because the consumption has already occurred and payment is due.


Our previous debt-bubble-fueled-overconsumption will be paid for, either by those who consumed, those who provided the goods, those who provided the credit, or the taxpayers. No matter which group pays, that group will consume less because they are paying for prior consumption. It doesn’t avoid anything if the government stimulates using more borrowed or printed money, [it] just shifts the burden from one group to another. Creating future tax burdens by running large government deficits just shifts the blame down the road a bit. Creating inflation is a tax on savers, which subsequently reduces their ability to consume. Defaulting on debt will be ruinous to creditors.

I read these two sections, and thought about the ongoing message of my blog, and found myself appalled at the amount of complexity - amongst commentators, economists, policy makers - that is used to hide these simple truths. I will repeat the points, just to make sure we can show how simple they are:

  • We have spent more than we have earned, and one day will have to pay back the borrowed money we spent.
  • Someone has to pay for the borrowing (unless we default), and those people will, at some point in the future, not have money to spend.

Much of the purpose of my blog has been about trying to take to pieces the complexity that is used to hide these simple and self-evident truths. In fact, everything we see in the actions of policy makers and the discussions of most economists is actually an attempt to hide these basic realities. We can see the complexity in the way that they bury simple ideas under jargon (e.g. quantitative easing = printing money), or dense formulae. There is only one formula that is really important, and that is the one that calculates income vs. expenditure.

One way that the borrowing has been justified by policymakers and commentators has been the use of the word 'investment' and this word was widely used in the UK in particular. It is worth pausing and thinking about the word 'investment'. It seems that many governments have been pouring money into investment for many years. Despite that, income has just fallen, and the income is not enough to cover expenses, such that government needs to borrow more to 'invest'. In fact, it seems that the more the government invests, the more it seems to need to borrow in the future for further 'investment'.

What kind of 'investment' is this? With this scale of borrowing for 'investment', at some point in the future our income should be going through the stratosphere. However, it seems that all this investment just means that at some point in time we will have to pay back ever larger amounts of money, and there is no prospect on the horizon of our income increasing.

Greece has led the way. Their government's position is the likely future position of the major debtor governments across the developed world. When the credit ran dry, they were faced with no choice but to implement austerity measures. They are now moving onto the road to paying back the gargantuan sums that they borrowed to bribe and delude their electorate. Likewise, in Ireland, and Lithuania, a similar story has unfolded.

Even with the stark reality of the consequences of excess government debt is placed in front of us, it still seems that the reality will not apply to us. Greece is different, as it can not become more competitive with a currency devaluation. Apparently, that solves the problems. We can all just devalue our currency, and all will be well with the world. I have read this so many times that I simply despair.

A currency devaluation is not a solution, it is simply an indirect form of impoverishment. It is a form of impoverishment that hurts savers, and creates a wage cut across an economy. If we think of an average person, who has a taste for imported Belgian beer, we can see why this is the case. He drinks ten bottles of the beer per week, at a price of £2 per bottle, thereby spending £20 of his income on Belgian beer. After the devaluation his cost for Belgian beer increases to £2.50 per bottle. This means that his expenditure for identical beer has increased by £5 per week, meaning that, in real terms, he is poorer. If we then think of his savings in Belgian beer terms, he might find that he is even poorer. If we imagine that he has £20,000 in savings, before the devaluation he held the equivalent of 10,000 bottles of Belgian beer. After the devaluation he only holds 8,000 bottles.

In the case of our Belgian beer drinker, he made the error of saving. He gets hurt on the real purchasing power of his wages, and gets hurt for being dumb enough to save money. In reality, a currency devaluation is just a wage cut over the economy, and a wage cut that hurts those who have been prudent enough to save (investors).

Devaluation also hurts the overseas investors who have been foolish enough to have put their money in the economy in which the devaluation takes place. In their case, we can think of their investment again in terms of Belgian beer. As with our domestic saver, they put in the equivalent of 10,000 bottles of Belgian beer, but when they take their money back out, they find it is only worth 8000. Sure, they can buy the same amount of English beer as before, but why should they endure being poorer in Belgian beer terms? They invested in good faith, and find that they are poorer.

Apparently, countries like the UK are 'lucky' that they have the freedom to devalue their currencies. I would suggest that the politicians are lucky that they have the freedom to devalue, as it is a method of cutting wages and paying for their past profligacy without actually having to admit that the fault is theirs. They do not have to face their people and tell them the truth, which is the (partly) case in the Euro countries.

I say 'partly', as even when confronted with reality, they instead blame 'speculators' and the evil money men in the markets. 'Yes', there are some who profit from the plight of countries like Greece, but that is not to say that the problem is their fault. It is only because the politicians spent like drunks that the speculators are in a position to profit. These 'evil' investors need the foolishness of governments, or their speculation will come to nothing. What happens is that cause and effect are rearranged. It is not the strength of the speculator's position that allows them to profit, but the weakness of the government's position. In other words, it is the government that is the cause, and the speculation that is the effect.

The trouble is that many analysts and commentators are apologists for this line from governments. In doing so, they distract from the real source of the problem, which is that governments have acted irresponsibly.

In practical terms it is very simple. As a contributing part of society, a worker pays taxes to pay for the activity of government, including benefits such as health care, social security, policing and so forth. All of these cost money, and the worker contributes a percentage of their taxation to pay for these. If the government provides a percentage of all of these activities through borrowing, then they are in effect subsidising the worker's purchasing power through borrowing. The individual worker has the same benefits, society has the same benefits, but the benefits are being paid in part by borrowing. The problem is that the government claims that it is the government that is borrowing the money, when in reality it is the worker who is borrowing the money.

The government will not have to pay back the money. The worker will. The government has no income except through the taxation system, and that means that the government is not really borrowing money, the worker is. What we are seeing in Greece is that the Greek people are trying to move to the position of paying back their own previous borrowing, which was undertaken in their name by their government.

This is what all of the complexity and dissembling is about. Governments borrowed the money in your name, and pretended that the debt was their own. They lied to you. They pretended that the debt was not yours, but it nevertheless belongs to you. It is not the government's debt, it is your debt. Whilst everyone talks in the abstract about government debt, as if it were something separate from the tax base, it is not something separate. Every penny of borrowing is, at some point in time, going to be paid back by people like you.

Sure, again we will see governments dissemble. They will try all kinds of methods to reallocate the debt, for example pouring high taxation onto corporations, or singling out group 'x' or group 'y'. All of this will be done to hide the fundamental problem, which is that they never should have been borrowing in the first place. If group 'x' or group 'y' are such good causes for higher taxation, why was it they were not taxed so highly before? They could have been taxed before, as there was no reason not to, and the debt would have been avoided. Instead, the government will now paint group 'x' or 'y' as deserving of higher taxation with populist rhetoric. At no point will the government ever explain why group 'x' is so deserving of taxation now, when they apparently were so undeserving of such taxation before.

And the commentators and the general public will eat it all up. The government will carry on as governments do, and the inevitable pain will nevertheless take place. In the end, the point of this post is simple. When the pain does come, do not be distracted. Put the blame where it lies. It lies with the government, and with the apologist commentators and economists who have sought to justify the great lie; that government owns the debt, not the taxpayers.

Source: Excess Government Debt: The Great Economic Lie