You may have seen the clip of Steve Baker
doing the rounds this weekend. You may have laughed or dismissed his comments, perhaps because you disagreed with him on Brexit. But if you did so, please listen again, because what he's saying is important:
"Your government rode an enormous credit boom within which the money supply tripled, leading to the global financial crisis…and a sense of injustice which has led to many of our subsequent troubles.”
Then read the article shared in the thread, on the $91 trillion debt burden that is currently facing nation states around the world.
There is an unpalatable truth here, which sooner or later we are going to have to acknowledge:
The only way to get rid of a $91 trillion dollar debt is to debase the currency to the point where a trillion dollars will only buy you a loaf of bread.
There’s no sensible way in which a debt of this magnitude can ever be repaid, either through growth or taxation. So what may be likely to happen in the coming years, as this vast web of obligations compounds and continues to grow at an accelerating rate? This is a problem currently confronting Rachel Reeves, our new Chancellor, and Labour, and with which they must engage.
Debt, and credit, are not necessarily bad things. Credit oils the wheels of commerce, and enables us to pull profits from the future to invest and to grow businesses today.
But the warnings of the Ancient Greeks and the Romans that we should do ‘nothing to excess’ were as true for them as they are for us (nihil nimius in Latin, meden agan in Greek – common sayings for each culture, but sadly forgotten by us). There is no sense in which government debts equal to the size of the entire global economy are not excessive and are not a gigantic problem almost beyond resolution.
There are ways out, but none of them palatable. Default, refinancing, or inflation – which will we choose? (Remember that inflation, the enemy du jour, is actually rather good for some people – especially those who owe large sums of money; like nation states).
In our credit-based system, money is nothing more than another person's liability (whether the liability of a central bank, or of a commercial bank). It is backed by absolutely nothing other than the belief that the liability will be repaid (to quote even more Latin, this is the origin of the word 'credit', which comes from the Latin credo credere, to believe).
If a person holding your liability money begins to believe that you're not good for the money, the entire edifice collapses.
Governments cannot allow this loss of faith to happen. Remember, modern money is backed by absolutely nothing other than faith and belief. So a voluntary default (a refusal to pay) is off the table.
Refinancing is possible - issuing new debt to pay the principal and coupon of the old. This is the route most governments that can still access the bond markets have taken to date. This works up to a point, much like taking out a new credit card to pay off a previous one.
This doesn't get rid of the debt – it merely moves it around and can make it easier to service, but ultimately adds to the debt burden in the long run and has the unfortunate effect of compounding it at the same time. If you’d like to see this in highly unpleasant action, just read up on how the IMF and the World Bank treat borrower nations in the global south. I would recommend the excellent book 'Hidden Repression' from Alex Gladstein (link in the thread).
Which leaves us with debasement through inflation.
Governments will almost never admit or articulate this, but the surest way to get rid of a trillion dollar government liability is to debase the currency to the point where the nominal value of their obligations is negligible when measured in a currency whose actual value they have destroyed.
The quote below is from ‘When Money Dies’, a seminal work on the Weimar inflation. Bondholders and mortgage holders might eventually have got repaid in nominal terms – but the amounts they received were meaningless in comparison to the actual value of the assets that the debtors held (such as houses).
This is a nation state problem, but the profligacy of nation states has also made it YOUR problem.
Governments are by their nature unproductive - their sources of income are typically either their citizens (through taxation) or accrued via issuing liabilities against their good name (which, in a circular fashion, is actually yours). In one sense, nation states levy taxes not because they need the money – they can usually print it, after all – but in order to reassure the potential purchasers of their government debt that they are good for the money (belief, once again).
The exceptions to this tend to be the states that are the net exporters of the fundamental currency that actually enables civilisation to exist, namely energy.
So how can you protect yourself, if the conclusion is that the only likely solution to this gigantic problem is strategic inflation and currency debasement?
One option is to save whatever you can in hard and finite assets that cannot be replicated or produced with zero cost. That is, don't think you can save in government liability money.
Unfortunately, this practice has already hugely contributed to housing inequality in the UK, where, whether they know it or not, the richest among us have figured this out and keep their money not in cash but in houses.
You too should have the right to protect yourself - but I'd also like to see an alternative to a 'flight to housing' that exacerbates other social issues. Perhaps find something else. Ideally something that the government cannot confiscate when the house of cards finally comes tumbling down.
You'll likely know what I would recommend. But this is something you'll need to decide for yourself, and on behalf of your children, who will unfortunately inherit the mess that our governments and central banks have made.
