BY DOMINIC WIGHTMAN
I pull my hair out at the economic theorists attached to the current Loonie Labour leadership and those linked with the Scottish National Party (all of the former, not all of the latter). They should be done for radicalising idealistic types. These theorists keep on repeating the myth that debt is fine – a soaring national debt is no biggie because there is a magic money tree out there. None of us need worry about money. Why? Because governments can sell government bonds whenever they want to, to generate spending money for their economies.
Their theory is beautiful: That since Bretton-Woods currencies like the dollar are fiat currencies and so the Fed can generate IOU’s in an endless process just by pressing a button. That there’s an endless supply of government bond buyers. That yes, it’s a massive Ponzi Scheme but who cares? The dollar will never crash. The pound has been a fiat currency for almost four hundred years. There’s no way confidence in such currencies will ever cease.
One of these short-cut, lazy minded spiels appeared last week on a Scottish Nationalist website. When you read the comments “needs to be publicised” and “How about a pamphlet version for campaigning?” you realise that there are dimwit political activists out there who actually swallow this rubbish and try and convince the populace to vote because of it. Or maybe these activists are not dim – maybe their eyes just glaze over when economics is mentioned (understandable but still indolent) or maybe they are so desperate (the Scottish Nationalist ones in particular) for an economic narrative after the oil error predictions of the past.
So, once and for all, let’s kill the Magic Money Tree, shall we?
Let’s ask, why is there no Magic Money Tree? And let’s respond with some bullet points for these dummies:
- High levels of government debt mean substantial government resources must go towards servicing debt—to pay debt interest. Less money for public services.
- There’s a consistent relationship between high levels of government debt relative to the size of the economy and abnormally high interest rates consistent with lower levels of domestic investment (a situation currently suspended due to extraordinary efforts in monetary policy and unusual events in the global economy, but the normal connexion between debt and investment and interest rates will almost certainly recommence as these efforts and events diminish.) Escalating National Debt Leads Eventually to High Interest Rates.
- There’s a negative causal relationship between high government debt ratios and low rates of national economic growth. High Debt means Low Growth.
- High-debt policies will not only bestow huge financial loads on future generations of taxpayers in the form of high levels of interest expense. They will also significantly reduce personal incomes with which to pay these bills. Interest Eventually Gets Out of Control.
- Current and projected increases in national debt, eating into future economic growth rates, also mean sluggish future growth of government revenues. Even as future interest expense rises as taxpayers are asked to service all this debt, progress in government revenues will slow, leaving less funds available for other priorities, such as the NHS, education, the army and so on. High Debt leads to Low Government Revenues.
- Slower economic growth, higher interest expense and less resources for other priorities eventually lead to a crisis of public confidence. Worse, those buying the bonds stop buying them. The obtainability of foreign savings may initially dull the effects of government borrowing on interest rates, but the foreign taste for any nation’s debt is by no means unlimited. Government Bonds become worthless, like Ghana’s, Venezuela’s or Congo’s today.
- Hyperinflation eventually rears its ugly head and fiat currencies crash. History is littered with their corpses (to be fair, it’s also littered with the corpses of commodity based monetary systems, which have also failed). All fiat currencies eventually collapse. Hyperinflation kills currencies.
Apart from shouting the above from a rooftop, I am not sure how to get the message across: Sound national economic management is vital. Ignore the loons. Think of the interest, which eventually becomes unserviceable. Look at brutal economic history rather than trying to reinvent economics.