The inconvenient truth about sovereign debt

The efforts of our political leaders to socialize the fallout from the financial crisis by means of the balance sheets of the government and the central bank, and to thereby sustain an illusion of normalcy, have guaranteed that the financial crisis is now morphing into a sovereign debt crisis – a process that is unfolding at different speeds globally but that in many places is well advanced already. On a long enough time line, everywhere is Greece.

Crises clarify things. When the cash runs out and the chimera of harmony and “shared ideals” can no longer be sustained with borrowed or printed money, the hard questions get asked – and clear and blunt answers are finally given. No more time for fuzzy logic.

Who Owes Government Debt?

Who owes government debt? Who do the lenders to governments ultimately hold a claim against? The answer is not as obvious as it is in the case of loans to private entities, such as individuals or corporations.

In the case of Greece, for example, many will consider the answer to this question obvious: The Greek “people” have an obligation to repay the loans that banks and bond investors have extended to the government of the Greek “people”. After all, the government represent “the people” and have thus borrowed in the name of “the people”. So “the people” of Greece have a collective obligation to pay.

This is nonsense. It is unjust and economically absurd. Also, it is simply not going to happen. Forget about it. Not only in Greece – forget about it almost everywhere. Once the debt load has reached a certain level the “people” won’t pay – and rightly so.

The loan from a banker or bond investor to a government is a contract, and many people will assert that contracts have to be honoured for the market economy to work. But most Greeks never contracted for this debt, their government officials did. The loan is between a lender (bank or bond investor) and the government – a political entity. That entity has seriously overspent and is now going broke.

I maintain that the vast majority of people do not consider the debt of their government to be the equivalent of their own personal debt, nor do they feel obligated morally to assume responsibility for any action that government officials undertake or any contract that they sign. This position is sensible. To have any real sense of personal responsibility one needs to have control over affairs. In a democratic nation state, no single voter has sufficient control over the borrowing and spending activities of the government, and it would thus be absurd to assume the citizen will readily forfeit a considerable part of his or her future income or property to honour debts incurred by those who are running the government.

The whole notion of democratic “representation” has been obscured by constant propaganda trying to tell us that the government qua democratically elected government represents “the people”, that it looks after the “national interest” (which is a convenient political fiction) and “society as a whole”. This is evidently not the case. The government is not a true representative of anybody.

If the government officials were my representatives – like, for example, the lawyer and tax account who I hire to work for me, or the shop manager or other employees who work in my business, and for whose actions I do in fact take considerable responsibility – I could direct their activities, and most importantly, I could release them from their duties at any moment. In a democracy, I get a chance to kick out my “representatives” only every four or five years even if I tire of their “representation” much earlier, or more precisely, I get a chance every four or five years to cast an individual vote of infinitesimally small importance in a process that may replace one group of politicians with another group of politicians. Whatever my “representatives” do in these four or five years, I have to take the consequences – and live with these consequences for years and decades. If the presently ruling group of politicians decide to bail out the entire banking industry – all with my best interests at heart, of course – I have to foot the bill.

So, a secretly elected official, who I may or may not have voted for, whose supporters largely remain anonymous to me (elections are secret – which further weakens accountability!), whose actions I cannot direct, and who I cannot relieve of his duties for a number of years, can sign loan contracts which will place a considerable burden on my future income and my property.

Not likely.

It gets even more absurd. While my children do not have to pay for my debt – debt, for which their father signed personally – and can thus control their financial future without being burdened by my financial extravagance, they will be on the hook for servicing and repaying the debt of governments that accumulated that debt while they were not yet allowed to vote or were not even born yet – and that not even their father ever voted for.

If this represents the currently accepted notion of what a government is rightfully allowed to do, it is clear that then the notion of private property has no meaning in our society. In such a system there can be no private property. If the government can tax my income and property and engage in loan contracts that create an everlasting and potentially unlimited claim on my future income and future property – then the phrase “private property” is a vacuous term.

The German anarchist philosopher, Max Stirner, saw this very clearly already 166 years ago when he wrote in his “Der Einzige und sein Eigentum” (“The Ego and Its Own”) that if there was a state, all property was owned by it. The individual can just borrow it for a fee – taxes. Or, as Doug Casey put it: Try not paying your real estate taxes for a year or two, and you find out who really owns your house.

Such clear thinking is sadly the exception today when most people happily declare that we need a state to protect private property. I would argue that today in all advanced democracies the state is almost certainly the largest threat to your property and future market income.

Continue reading at Paper Money Collapse.

2 Comments

  • Blackadder2 says:

    What will eventually shock a lot of people is that they might have an interest in a pension or investment fund that has bought government bonds, and they end up:

    a) thinking that they have a sound investment for their fund;
    b) “investing: in bureaucrats who hamper his other investments;
    c) paying taxes on future income to pay the interest on their “investment”.

    Of course, whoever owns government debt really wants to own you.

  • Tim Lucas says:

    “I would argue that today in all advanced democracies the the state is almost certainly the largest threat to your property and future market income”.

    Agreed. I do not own a house and I save as I am congenitally stupid. I enjoy the illusion that I am the master of my fate and so prefer more than others not take on the debt which would allow me to live better. I do this despite all of the disincentives that the government puts infront of me to save. However, the number one consideration I have when considering how to save is how I can prevent the authorities from taking it from me.

    I wonder by how much growth in standards of living are retarted by my “tax efficient” investment decisions. I buy post-office inflation-linked bonds (tax free loan to the government), venture capital trusts (tax-free loans to a variety of unworthy business ventures), gold sovereigns (capital gains tax-free hiding my capital under the bed) etc etc.

    Would that I could simply invest in one of the world class companies that are still domicled in the UK without 28-50% of every inflationary gain being taken from me, this would surely be a better allocation of scarce resources, and it would feel a lot better for me too, knowing I’m not lending my capital to a bunch of no-hopers!

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