Running from a Paper Tiger
The current Eurozone austerity has been prompted by an effort to appease a bond market that lacks confidence in the will of sovereign nations to repay their debts, rather than their actual ability to do so
A US politician, James Carville, once said that: “If there was reincarnation… I want to come back as the bond market. You can intimidate everyone.” At this time of economic crisis, our government, plus those of Greece, Italy, Spain, Portugal, the USA, and just about every western economy you care to name, are thoroughly intimidated. But by what?
The reason stated by the UK government that tuition fees are going up, that the severely disabled are being forced to work (even, in one case, after the man in question was dead), that our soldiers, sailors and pilots are being fired after coming home from fighting for their country, is to cut the dreaded “deficit”. Basically, this is the difference between how much money the government receives in taxes, and how much it is spending- and the government claims we are spending too much. As a result, the total UK government debt is going up. But this is not a problem in an objective sense- it is a problem because of the opinions of a few thousand traders in the world’s financial centres- collectively known as the Bond Market.
Basically, the bond market works like this. You lend money to a government, and it’s a dead safe bet, as the government will keep paying you some interest, as governments rarely go broke. Where the problem comes, is when people start to think the government really is about to default on its debts. Obviously, when people think this, they aren’t going to invest in the government for no reason- so the government has to pay them more interest to encourage them to buy their bonds. And so the government has to spend more money- a lot more money- on paying off this interest. This is what our government, the Greek and Italian governments, and so on, are trying to avoid.
It all sounds pretty simple, right? More debt = scared bond traders = more money spent paying interest. But the problem is that you can’t just say ‘this=this=this’ in economics. All economics is based on- to put it bluntly- guesswork.
For example, the headline British debt-GDP ratio is currently about 63%. This sounds like a lot. However, historically, a big amount of debt hasn’t stopped the government from doing some big projects. The classic example is 1945, when the UK had a debt of 249% of GDP, created by the government spending vastly more than its income during WWII. And yet, afterwards, the government was able to set up the NHS and nationalise the railways. So a lot of debt- and spending when you’re in debt- aren’t necessarily problems.
So why is everyone so scared today, then? The answer is: they are because they are.
Eh? I hear you say. Well, that’s a fair answer. And this is where the bond market comes into it. Markets depend to a large extent on confidence- on the belief that you will make some money. What matters is not an objective reality, but what you think will happen. Currently, the few thousand opinion makers in bond markets are worried about their investments, so are demanding more interest, whether or not this is actually a fair reflection of what’s going on.
The problem comes with the conversion of these opinions into objective reality. No-one can accurately predict the future, but the government repeatedly tells us that “there is no alternative” to cutting our national debt. What would be more accurate to say is that, “we think that bond traders might not like what we’re doing, so we’re cutting our spending, even though that may actually be more harmful.” The irony is that government spending is nothing like personal finance, in that government spending is one of the biggest drivers of economic growth. So, by cutting it, although the government are saving a pound today, they may well be losing two tomorrow.
What the bond market and the government have achieved is the oldest political con in the book- telling someone your opinion, but saying it’s absolutely true. However, anyone who’s ever sold anything knows that the best way to fight a lack of confidence is by acting with confidence. In the midst of the Great Depression, Franklin Roosevelt famously stated, “the only thing we have to fear is fear itself.” Now we are back in the same position, but yet the government is reacting to fear with fear. This spiral is leading nowhere but down, and someone must stop it, soon.
Running from a Paper Tiger
The current Eurozone austerity has been prompted by an effort to appease a bond market that lacks confidence in the will of sovereign nations to repay their debts, rather than their actual ability to do so
A US politician, James Carville, once said that: “If there was reincarnation… I want to come back as the bond market. You can intimidate everyone.” At this time of economic crisis, our government, plus those of Greece, Italy, Spain, Portugal, the USA, and just about every western economy you care to name, are thoroughly intimidated. But by what?
The reason stated by the UK government that tuition fees are going up, that the severely disabled are being forced to work (even, in one case, after the man in question was dead), that our soldiers, sailors and pilots are being fired after coming home from fighting for their country, is to cut the dreaded “deficit”. Basically, this is the difference between how much money the government receives in taxes, and how much it is spending- and the government claims we are spending too much. As a result, the total UK government debt is going up. But this is not a problem in an objective sense- it is a problem because of the opinions of a few thousand traders in the world’s financial centres- collectively known as the Bond Market.
Basically, the bond market works like this. You lend money to a government, and it’s a dead safe bet, as the government will keep paying you some interest, as governments rarely go broke. Where the problem comes, is when people start to think the government really is about to default on its debts. Obviously, when people think this, they aren’t going to invest in the government for no reason- so the government has to pay them more interest to encourage them to buy their bonds. And so the government has to spend more money- a lot more money- on paying off this interest. This is what our government, the Greek and Italian governments, and so on, are trying to avoid.
It all sounds pretty simple, right? More debt = scared bond traders = more money spent paying interest. But the problem is that you can’t just say ‘this=this=this’ in economics. All economics is based on- to put it bluntly- guesswork.
For example, the headline British debt-GDP ratio is currently about 63%. This sounds like a lot. However, historically, a big amount of debt hasn’t stopped the government from doing some big projects. The classic example is 1945, when the UK had a debt of 249% of GDP, created by the government spending vastly more than its income during WWII. And yet, afterwards, the government was able to set up the NHS and nationalise the railways. So a lot of debt- and spending when you’re in debt- aren’t necessarily problems.
So why is everyone so scared today, then? The answer is: they are because they are.
Eh? I hear you say. Well, that’s a fair answer. And this is where the bond market comes into it. Markets depend to a large extent on confidence- on the belief that you will make some money. What matters is not an objective reality, but what you think will happen. Currently, the few thousand opinion makers in bond markets are worried about their investments, so are demanding more interest, whether or not this is actually a fair reflection of what’s going on.
The problem comes with the conversion of these opinions into objective reality. No-one can accurately predict the future, but the government repeatedly tells us that “there is no alternative” to cutting our national debt. What would be more accurate to say is that, “we think that bond traders might not like what we’re doing, so we’re cutting our spending, even though that may actually be more harmful.” The irony is that government spending is nothing like personal finance, in that government spending is one of the biggest drivers of economic growth. So, by cutting it, although the government are saving a pound today, they may well be losing two tomorrow.
What the bond market and the government have achieved is the oldest political con in the book- telling someone your opinion, but saying it’s absolutely true. However, anyone who’s ever sold anything knows that the best way to fight a lack of confidence is by acting with confidence. In the midst of the Great Depression, Franklin Roosevelt famously stated, “the only thing we have to fear is fear itself.” Now we are back in the same position, but yet the government is reacting to fear with fear. This spiral is leading nowhere but down, and someone must stop it, soon.
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