There’s No Money Left

“I’m afraid to tell you there’s no money left” was what was written on a note left by the previous Chief Secretary to the Treasury for his successor when the UK government changed after the last election in May 2010.

Since then the new government has been attempting to rein in spending, although he hasn’t been doing a great job of it – over this parliament the national debt will still rise by over £500bn, or £19,000 for every household in the country. Interest on this debt – money the Government has to collect in taxes but can’t spend on services – will more than double to almost £67bn, surpassing spending on the defence, transport, home office and justice departments combined.

Even so, some people think the relatively mild spending cuts, which restore government spending to where it was as recently as 2007, are an unbearable travesty which will take us back to the dark ages.

That’s why I’m attending the Rally Against Debt in London this Saturday, and I urge my UK readers to do the same. Here’s my placard slogan: “The Borrower Is Slave To The Lender” — Proverbs 22:7.

36 thoughts on “There’s No Money Left

  1. I totally understand what you’re saying. The same thing is happening in America right now, except politicians are doing less to cut spending. Most are unwilling to make any real cuts at all.

  2. I completely agree. What people fail to realize is that, once you are in debt, any further deficit spending will be accruing (and compounding) interest until you pay off the rest of the debt. Since both our governments’ (US and UK) debts are so large that they will take decades to pay off (if ever!), the benefit gained by most spending programs is probably dwarfed by the financial cost.

  3. Unfortunately the USA and UK (and the rest of Europe) are seen both internally and externally as “too big to fail”. As long as that persists, you won’t get consensus for hard decisions. (We might see the euro break up under the pressure, though.)

    It’ll be interesting to see what happens.

  4. Hey Gerv,

    I think you would also find this ministry interesting trying to help the body of Christ get out of Debt. The website is http://www.debtfreearmy.org and is part of a very trustworthy group of christians. I have personally met one of the founders who came to my hometown.

    -Dale

  5. People will always complain, but the governments always have the power to rob them of their money, even if it’s to pay the debt that they are responsible for. Meanwhile, crooked politicians (aka politicians) go unarmed and are not seen as responsible for their incompetence in most countries. We will never go back to the dark ages, of course, but we may see some very big countries’ GOVERNMENTS crumble to dust and see the rise of new powers, which we probably won’t like very much…

  6. The tax exemptions handed to Vodafone alone is enough to cover every single council bill, yet we’re having huge cuts on council bills and the government are cracking down on ‘anti-tax dodging’ protests. Cuts aren’t necessarily the problem (though see below) but priorities is. The Tories protect their own. Services are being cut whilst the causes of the crisis (lending, bonuses, tax dodging) are continuing to grow unabated.

    In addition, the Tory economic policies are based on theoretical economics, exactly the opposite of historical recommendations for dealing with a recession. We are using the strategies adopted by Ireland and Greece, which just don’t work. Keynesian economics says we are being idiots and Keynesian economics is proven under fire.

  7. Of course if you plain wanted to handle the deficit, you’d increase taxes to increase the rate you can zap the interest. However the Tories are happy to cut bottom lines services instead since that doesn’t focus on their core demographic: Rich middle-class white people.

    This comment brought to you by a rich middle-class white person who serves to benefit from Tory policies but who is thinking about people less fortunate than himself who are being screwed by Tory policies.

  8. Danny: You seem to have confused me with someone who supports all the policies of the current government.

    You also seem to have confused the Labour government with one which governed in the interests of everyone, entirely even-handedly. You say “the Tories protect their own” – do you really claim Labour didn’t do the same?

    There’s a fundamental asymmetry here: it’s not as if there’s some magic pot of money which appears out of thin air, and Labour want to hand it to Group A and the Conservatives want to hand it to group B. Labour wants to take money from Group A (“rich, middle-class white people”) to give it to group B, and the Conservatives think that’s a bit unfair on Group A, who earned that money by their hard work, and want them to be able to choose for themselves what they do with a bit more of it.

    You say the causes of the crisis are lending, bonuses and tax-dodging. If lending is a cause, surely borrowing is one too, by both individuals and governments? (You can’t have lenders without borrowers.) The last government consistently spent more than it raised. That’s a dumb thing to do, however much “tax dodging” you think there is. And bonuses – that’s private companies paying money to private individuals. Whether one is for or against it, it has nothing to do with the enormous size of the national debt.

    I think taxes are far too high, and that reducing them and broadening the tax base so everyone contributes a bit (even if only a little bit or a token amount) is a matter of fairness. People who have a stake in something care a lot more about what happens to it. I believe that tax evasion is wrong, but tax avoidance and planning (which are by definition legal) are entirely reasonable. A business which voluntarily chooses to pay more tax than its competitors doesn’t stay in business long – and that’s not good for its employees. So my question about Vodafone is not: “should they have paid more money?” but “are they being treated the same as other similar companies?”. If the answer is no, then that’s wrong.

  9. Debt = Outgo – Income. Both the UK and USA reduced Income by giving tax breaks to the rich and corporations. Both the UK and USA increased subsidies to drug companies, oil companies, agri-business, prison builders and so on. Then these same people created a colossal financial crisis by using their new wealth to bid up the price of real estate in a huge bubble. That forced the governments to bail them out, increasing the Outgo.

    The debt “problem” is primarily an effort to transfer retirement money from the working class to the richest and most powerful people in these countries. All we have to do to solve this “problem” is fix the taxes and subsidies.

  10. Corporations don’t pay tax – people do. If you tax the companies in a given sector more, what do they do? Raise prices, and pass on the cost. Or try and reduce costs by laying people off, imposing wage freezes, asking for unpaid overtime and so on. Is that really what we want? Corporations are not some magic money source.

    As for the rich: I guess it’s a philosophical question whether you think fair is “everyone pays the same for the same services”, “everyone contributes the same proportion of their income”, or “the rich contribute a higher proportion (and a much higher absolute value) because they can afford it, they should be generous, and if they won’t be we’ll force them”. Thing is, most rich people are rich for a reason – they’ve built businesses, employed people, worked hard. If government wants to encourage something, it subsidises it, and if it wants to discourage something, it taxes it. So why do we tax success?

    Are you really saying that the consumer dwelling financial crisis was caused by drug and oil companies bidding up the price of 4-bedroom homes in Birmingham?

  11. Gerv, your first paragraph ignores the fact that corporations make profits and generally act to maximise profits. Most companies that could make more money by raising prices or reducing costs already have.

    For the rest: many rich people are rich because they inherited their money, or they were lucky in some way, or they were immoral and/or criminal, or they benefited from government subsidies or other support. Or perhaps like me they didn’t work particularly hard but were fortunate to have skills that were in great demand. On the other hand I’ve cknown poor people who work two crappy jobs, working far harder than I’ll ever work, to keep their families alive on a fifth of what I make. They may even be incredibly skilled at parenting or other work that happens to not be financially rewarding.

    So is it appropriate for my “success” to be taxed to provide subsidies for those people? Absolutely!

    Don’t get me wrong, I’m no communist or even socialist; I believe in economic incentives and free markets as an efficient mechanism for allocating resources. You can overtax people and then things start to fall apart. But markets are just a tool, we need other tools like taxes to get just outcomes.

    I believe in balanced budgets too, but the costs have to be borne across all segments of society, not just shoved onto the most vulnerable. I don’t know much about the UK to be honest, but in the USA spending cuts usually start with the assumption that “defense spending” is untouchable, which is totally absurd, unfair, and immoral.

  12. Gerv, your first paragraph ignores the fact that corporations make profits and generally act to maximise profits. Most companies that could make more money by raising prices or reducing costs already have.

    It doesn’t ignore that – that’s why I said “all companies in a sector”. If you raise costs for all of them by increasing taxes, they can increase prices knowing that this is what everyone else will be doing, so their competitiveness doesn’t suffer. (If you raise taxes on some of them but not all of them, you can avoid this – at the price of favouring one company over another, which most people would say is unfair.)

    Companies which don’t make profits go out of business. (Or do you think you can refine the tax system so that you tax exactly the right amount from each company that everyone ends up breaking even? And how would that incentivise hard work, growth and success?) Profit is going to be a consistent feature of companies which are long-term successful. But prices are variable, and related to costs. And taxes are a cost.

    I agree there are some other sources of wealth than hard work. Although note that Proverbs is in favour of passing on an inheritance, and that the Bible is clear there’s no such thing as luck. For me, as long as it was obtained legally (arguing for high taxes on all rich people because some of them are dishonest seems a strange argument!), this goes back to the 8th commandment – do not steal. Would you say it’s possible or impossible for democratically elected governments to steal? If possible, how do you detect it happening?

    So is it appropriate for my “success” to be taxed to provide subsidies for those people? Absolutely!

    If you had said “So is it appropriate for my wealth to be used to help these people? Absolutely!”, I’d be right behind you. But why the assumption that the right way, or even a good way, to do this is through taxation and government redistribution of wealth? In the New Testament, who is called to help the poor and needy? Individual Christians and the church are to “give cheerfully” and freely, not governments. And government is a particularly bad vehicle for them to do this through because it bears the power of the sword (for other good and excellent reasons) and so isn’t good at doing non-compulsory things. Government taxation and welfare is not the same thing as Christian charitable free giving.

  13. I think the problem with marching “against debt” is that it’s like marching “against rape” or “against poverty” or “against childhood disease” (all of which people do). Supposing you manage to convince the government to your opinion through the sheer strength of numbers that show up on your march. Then… what?

    It’s impossible to express any kind of nuanced policy ideas through marching, just that X bad thing is bad. That makes some kind of sense when there’s a clear Not X alternative; if the anti-war marches had managed to convince Blair’s government, they could have chosen not going to war. But if you convince the current coalition government that debt is bad, you haven’t really achieved anything, they already agree that debt is bad and are trying to do something about it. You want them to act more effectively, but what’s “more effectively”? That’s a matter of legitimate debate, and it’s legitimately complicated and difficult. What lay people think is effective is often going to depend on tribal loyalties, as you can see even in the comments to this post.

    You’re also likely to be throwing your lot in with some pretty unsavoury people, but that always happens with mass rallies, and is the big reason I don’t prefer demos, marches and rallies as a means of political expression. Still, I admire you for being willing to take political action based on your beliefs, even if I have serious questions about your methods.

  14. individ-ewe-al: not everyone agrees that debt is bad. There were placards on the “March for the Alternative” which said “No Cuts”. Do they really think they could raise taxes enough to make that possible, and that the “rich”, who are seen as a source of endless cash, would just hang around and take it?

    At the moment, all the pressure on the government seems to be to cut less and either tax more or get into debt more. I hope we will be able to put some pressure on from the other side.

    You’re also likely to be throwing your lot in with some pretty unsavoury people

    I’m glad you concede the possibility of this with any rally; but I also think a lot of people who are in favour of smaller government are perceived as “unsavoury” because of the giant logical fallacy, so prevalent in UK politics today, that if something should be done (such as assisting the poor), then it must be the government who does it, and if you are against the government doing it, you must be against doing it altogether, and are therefore evil.

  15. Yes, some of the anti-cuts people believe that the way to reduce debt is to increase tax. Some of them believe that greater efficiency of tax collection would be enough to cover the shortfall without any increases in rates of taxation. I’ve seen numbers showing that if all the tax owed to HMRC under the current system were actually collected, no cuts would be needed. I don’t have any way to evaluate that claim, but it’s certainly something that people believe. Again, it comes down to the fact that reducing debt is desirable, but people are divided along tribal lines about how to accomplish this.

    I’m generally in favour of charitable giving by individuals and institutions. There are two big problems with trying to replace government spending with private charity, though. One is that some very important aspects of welfare and services depend on infrastructure which is way beyond the budget of anyone smaller than the whole state, notably the NHS. The second is that, well. 6% of the UK population are churchgoing Christians. Let’s be generous and assume that half of those agree with your understanding of the Bible about free and cheerful giving, and not only believe that, but are willing to go through with it. That leaves, what, 2 million people to support the entire UK population, or 30 individuals depending on each Christian for education, healthcare, basic necessities for whatever proportion are too young, too old or too sick to work at any given time, and a huge list of other things. That’s just not going to happen!

  16. > If you raise costs for all of them by increasing taxes, they can increase prices
    > knowing that this is what everyone else will be doing, so their competitiveness
    > doesn’t suffer.

    It doesn’t work like that because demand is usually elastic. For most products and services, if all competitors increase prices then demand will decrease.

    > Or do you think you can refine the tax system so that you tax exactly the right
    > amount from each company that everyone ends up breaking even?

    That’s definitely not my goal! I already explicitly agreed with you that some margin of profitability is needed to maintain adequate incentives.

    > the Bible is clear there’s no such thing as luck

    OK, for “luck” read “reasons beyond human understanding, or at least the understanding of the person who struck rich”.

    > Would you say it’s possible or impossible for democratically elected
    > governments to steal? If possible, how do you detect it happening?

    It’s possible. Governments steal by violating the law, that’s relatively easy to detect. I think they can also steal by passing unjust laws, or applying laws unjustly, but that’s much harder to be definitive about.

    Of course, the Bible is super-clear that some taxation is legitimate, so determining the bounds of legitimate taxation is as hard for you as it is for me, I suspect.

    Your points about charitable giving are good and I actually agree I’d like to see more charitable giving and less government welfare. But as individ-ewe-al pointed out, there are some things governments can do better at. For one thing we simply do not have charity-based infrastructure for wholesale income redistribution. And there are public goods like libraries and roads where you want to reap the maximum possible economies of scale.

    Also I think there are also strong psychological reasons why some amount of compulsory giving works better. For example, if I suspect other people aren’t giving “what they should”, I feel less likely to give “what I should”, even if I’d be happy to give that much as long as I’m confident everyone else is giving their share.

  17. It doesn’t work like that because demand is usually elastic. For most products and services, if all competitors increase prices then demand will decrease.

    And that reduced demand leads to reduced output, which leads to wage freezes and/or hiring freezes and/or layoffs. Not to mention the disappointed people who used to be able to afford this good, but now can’t.

    If companies whose taxes increase don’t increase prices, then profits are reduced. Some companies may be able to cope with that, but those on the margin of profitability will fall into a loss, will go out of business, and lay off their workers. Less efficient businesses going bust isn’t a bad thing all the time, but it does tend to be smaller businesses (less resilient, fewer reserves, no economies of scale, no ability to cross-subsidize) and that’s not good for competition or growth.

    Re: determining the bounds of legitimate taxation, I find this article to be very helpful. See point 6: there are examples in the Bible where a 10% tax is considered oppressive. However, our political discourse has moved to the point where if someone suggests governments should tax as little as 10%, they get looked at as if they have two heads, and then it’s assumed that they hate the poor.

    Compulsory giving works ‘better’ (as in, it raises more money), because it’s, er, compulsory :-) But the question for us as Christians should not be “what works best, in our judgement?” but “what does God command?”. The state has the power to compel citizens to do things; it has that power for legitimate Biblical reasons, and can compel them with legitimate Bibilical authorization – but “take money from A and give it to B” is not to be found in the instructions.

  18. individ-ewe-al: I agree that there should be one rule for everyone when it comes to taxes being collected, although I also think that tax law is now complicated enough that in the cases of enormous companies, it’s less a case of an assessment and more a case of a negotiated settlement. That needs fixing, too.

    I don’t think that providing healthcare requires resources such that it can only be provided by governments – there are lots of counter-examples of businesses and even charities doing it, or a portion of it.

    Your point about the small number of Christians is a good one – my comment was outlining where I’d like to be eventually, not what we should implement tomorrow! If the Lord is gracious and sends revival, we might get there in less than 100 years.

  19. So you believe that healthcare should only be available to healthy working people or those who beg?

    US government tax subsidy motivates corporate healthcare. Corporations lobby for these tax subsidies. This fundamentally corrupt arrangement enslaves the modern serf: unless you work for a corporation you endanger your family.

    Charity based healthcare encourages this corruption by channeling moral outrage into personal guilt. We know some people are born without the ability to be healthy slaves to corporations. But rather than organizing to help all in need, we succumb to guilt and donate to charity to hide the worst cases. Everyone in between either lives in poverty to maintain health or suffers in pain and early death.

    Government healthcare need not be the only or perfect answer, but the current US system is much more like a problem than a solution.

  20. Gerv, I think you and Douglas Wilson are claiming that any government activity not mentioned in the Bible is illegitimate. Correct me if I’m wrong about that.

    I don’t see any Biblical justification for that claim, nor any other kind of justification. Wilson points to Romans 13:4 as naming “the assigned task for civil rules” (punishing that the intent of Jubilee was to discourage permanent purchase and requireevildoers). But that doesn’t mention other activities that you probably think are legitimate, such as maintenance of roads, and more importantly nothing in the text says that’s the ONLY task.

    Further, you and Wilson agree that the Bible does not identify wealth redistribution as a legitimate function of government. What then do you make of the Year of Jubilee, Leviticus 25:8-54? It appears to me that Jubilee’s return of property and releasing of slaves was a form of compulsory, large-scale wealth redistribution. (I realize rental instead, but commands such as verses 28 and 54 don’t seem to be conditional on that.) It also appears to me that government enforcement of this law would have been legitimate. What do you think?

  21. Er sorry, the last parenthetical should read “I realize Jubilee was intended to discourage purchases and require rental instead…”

    Regarding “That needs fixing, too” … indeed! if advocates of spending cuts gave majority or even equal attention to cutting benefits to the wealthy, I’d be completely supporting them. In the USA I have a lot of respect for Dick Lugar, who’s been trying to get farm subsidies cut for years and failed.

  22. Hmm, if everyone in the world is free of debt, then how do people save? Has it ever occurred to you that, axiomatically, one man’s debt is another man’s savings?

    Consider, if you will, a farmer who is saving for the day when he is too old to farm and must retire. So he saves a portion of the money that he earns, and when he retires, he uses those savings to feed himself. But what if, instead of stockpiling money, he stockpiled extra crops? That wouldn’t work, because food rots rather quickly. Wood decays. Metal rusts. Brick weathers. Everything decays over time. But yet, by stockpiling money, he sudden found a way to beat entropy (disregard inflation, and keep in mind that for much of history, money was deflationary).

    Stockpiling money works because money is a measure of debt or credit. A note is essentially an I.O.U. (and if you knew much about the history of paper money, this would be obvious). Essentially, by trading away more crops than other things that he trades in, the farmer has built up a stockpile of I.O.U.’s. And when he retires and starts living off of those savings, he is essentially calling in those debts.

    A debt is caused by a deficit: trading in more than you trade out. Savings are the result of surpluses: trading out more than you trade in. Savings and debts are two sides of the same coin. You CANNOT have one without the other.

    Furthermore, money is NOT a store of value. It SIMULATES a store of value by way of debt: the farmer’s savings is not an actual stockpile of crops (since that would decay far too quickly), but rather an accumulation of other people’s debts that he then calls in when he can no longer farm. For the most part, this simulation works well enough, but it can break down at times…

    For example: If, as the result of a panic, everyone starts wanting to save, which is of course impossible because savings are, by definition, someone else’s debt, and that pulling out from economic activity in order to save is what economists call a “recession”. But wait, this is self-reinforcing! As people rush to save and pull back and save, they will find it increasingly difficult to do because that is what everyone is trying to do! You can’t run a surplus (and thus save) unless someone is willing to run a deficit. And as fewer people spend, it becomes harder to save, the recession deepens, and the panic (the impetus for the rush to save) grows. This is what computer scientists would describe as a “deadlock”, no? Gee, if there was only a way to break this deadlock. Maybe if there was someone who was willing to step in and be the debtor that must exist in order for people to save, rebuild confidence, and rebuild the economy. Oh yes, there is someone: the government!

    Case in point, by the end of the Great Depression, US public debt (government debt) had soared significantly. But as that rose, US private debt (individuals) eased back down to healthy levels: it was essentially a roundabout transfer of debt. But once private debt levels were low, the economy could recover, and the public debt taken care of. And that’s how you break a deadlock.

    None of these concepts are that difficult to grasp. It’s all common sense and very straightforward. But it seems that very, very few people in the public can make these very elementary associations and connections (e.g., savings=debt), so we get people carrying placards denouncing the immorality of debt and touting the morality of saving. Poor planning, shortsightedness are indeed vices. And these things may very well lead to imprudent debt, and that may be worthy of condemnation. But not debt itself. The issues are far more complicated than a quote from a holy book, and, really, is it too much to ask for people to just sit down, think things through logically, and maybe read up a little about economics before acting politically?

  23. roc: Your point about the year of Jubilee is an interesting one. I guess I would say that the difference is that it was intended to restore the allocation of land to the original allocation decided by God, and everyone was aware it would happen – even 50 years in advance. Current welfare systems are designed to redistribute wealth in new ways according to the social goals of the redistributors – which are often ungodly. And no-one knows from year to year what the next redistribution might involve – whose wealth will be taken, and who it will be given to.

    But I will need to think harder about this.

    Adam Smith: I am not arguing here against all debt, I am saying that our government is far too deeply indebted. But I also reject the idea that all savings are someone else’s debt. If I dig some gold out of the ground, and hide it under my mattress, I have savings – and no-one is in debt.

    Your analysis suggests that buying and selling is a zero-sum game – one person gains X, the other person must lose X. But that’s clearly not the case. Two people make an exchange only when they both think they gain more than they lose – otherwise they wouldn’t exchange. There is much more value in the world now than there was 100 years ago – because people grow things, make things, dig things out of the ground, apply their time and labour to creating wealth.

    If a recession is caused by people saving rather than being economically active, why are UK household savings the lowest they have been in 40 years?

    I would recommend Keynes vs. Hayek, Part 1 and Part 2.

  24. johnjbarton: I am not a US citizen, and I’m not arguing for the US system. I think having your health insurance linked to your employment is just a dumb system. In the UK, your employer will pay for your health insurance but you can take it with you – either to another company, or just paying the premiums yourself if you are unemployed for a time or go self-employed (as I did).

  25. In the UK, your employer will pay for your health insurance

    A significant number, perhaps even the majority, of employers in the UK do not provide private health insurance (or provide cover so sparse that it excludes many common conditions).

    but you can take it with you – either to another company

    I don’t think so. If your current employer has cover with, say, Bupa and you move jobs to an employer with, say, PruHealth, you’re going to have to switch (and accept the resultant changes in cover).

    or just paying the premiums yourself if you are unemployed for a time or go self-employed

    I imagine the number of unemployed people who choose to purchase private health insurance is infinitesimal. If you’re self-employed, you probably can’t get the exact same scheme as you could with a larger employer.

  26. Alex: I didn’t mean to imply that all UK employers provide health insurance. And, given that it seems disassociating it from employment is a desirable thing, perhaps that’s good. People are given their pay, and they can decide how to spend it – on health or otherwise.

    I do speak from experience – when I left the last company I worked for, I took my BUPA cover with me when I went self-employed. I have the same terms and conditions now, as a self-employed person, as I did on the company scheme. And another person, who joined that company, arranged for their policy to be merged in to the company policy in a way which made it possible to de-merge later. A quick web search shows at least one company (AXA PPP) offering to allow you to switch including coverage of pre-existing conditions in some cases.

  27. I’m talking about real savings, not fantasy savings from finding gold.

    How is digging up gold and burying it under your mattress any different than printing money and burying it under your mattress?

    Gold is really no different than paper money: it has very little actual value (gold, as a substance, can’t clothe you, feed you, shelter you, warm you, or do much of anything; if the world has been devastated by a nuclear holocaust, do you think that gold would have any value, or would you expect scraps of food to be far more coveted?). The only value that gold has is that, by long-established tradition, gold is accepted as a medium of exchange. Paper money likewise, has little actual value (well, if you burn it, it can keep you warm :P), and the only value that it has is that, by government decree (and necessarily, popular consent), paper money is accepted as a medium of exchange.

    Digging up gold does not produce wealth (and the real Adam Smith of 1776 would by quick tell you that!) just as printing money does not produce wealth.

    PS: At least with printing money, the money supply could be controlled, whereas there have been major swings of inflation and deflation (c.f., the long-term economic devastation of the Spanish Empire caused by gold, and the effects of gold and silver on inflation/deflation and the whole silver coinage debate in the US in the 1800’s) that have resulted from unsteady influx of gold supplies.

  28. The argument can be applied to anything I create which is not perishable. If I make some cloth, or a chair, or paint a piece of art, and put it under my bed, I have created value (in that someone is willing to pay me for what I have created) and saved it – without anyone going into debt. If I swap the painting or the cloth for money and store/save that, I have also saved without anyone else going into debt. New wealth is being created in the world all the time – as the crops grow, as the miners mine, as the factories work. None of this _requires_ debt to function. Money is an IOU for wealth. If money were working properly, every bit of paper handed round would reflect actual stored value in a vault somewhere – whether it is nice paintings, cloth, chairs or something else which is less convenient to put in your pocket than paper. Once we left the gold standard, that no longer became true – and that’s bad.

    Anyway, I digress. Claiming that one person’s savings must be another one’s debt is just demonstrably not true.

  29. You can certainly create value by making a painting, but when you can swap the painting for money, but where did that money come from? How does an IOU differ from debt?

  30. You can swap the painting for the chair someone else made, in an exact analogy to making the painting. You are then both better off (you must be, otherwise you wouldn’t have swapped) and yet more value is created.

    Wealth is not a zero sum game, and therefore it cannot be true that one person’s ‘savings’ (retained wealth) is another person’s debt. If it were a zero sum game, there would be just the same amount of value in the world as there was 2000 or 5000 years ago. And that’s obviously not true.

  31. The wealth is in the real objects, not in the money. I create value when I make the painting, and I create more value when I swap it for the chair.

    If I make a painting, and sell it to you for an IOU saying “Gerv owes Ganesh one chair”, and then later you redeem that IOU by providing the chair, the same value is created overall (and one could debate at what points in the process it is created.) At some point in the process I have that IOU, and those savings are just your debt.

  32. Fair enough; perhaps, then, the key difference is between secured and unsecured debt. If I’ve already made the chair, and yet you have the IOU, the debt is backed by something – the chair already in my possession. If I buy your painting with an IOU against a future, not-yet-existent chair, then that’s a different story.

    To return to the original point, then, I guess the problem with the government’s debt is that it’s unsecured – there are no assets backing it. (Well, perhaps we could sell off all the library buildings, schools, hospitals and town halls – but people tend to object to that.) We are faced with the choice of either repaying the debt or continuing it. Continuing it is borrowing from our children; they will have to repay it eventually, or continue to pay billions in interest for ever more. If we repay it, we can do that either by raising taxes or cutting spending. Taxes are already very high, and there is a law of diminishing returns – raise them too high, and the mobile wealthy move, and receipts go down. It also perpetuates a system where half the country is working to pay for the other half – hardly a good way to reward effort.

    We have to cut spending, if we don’t want to pass on the debt to the next generation – which would be spectacularly unfair. That’s what the Rally Against Debt was about.

  33. Right, but now we get to the crucial point of why there are no simple solutions to the money supply problem.

    If we restrict ourselves to secured debt, we are worse off as a result. In the painting and chair example, if I make the painting today but you’ll only be able to finish the chair next week, then either I can hang on to the painting and give it to you next week when I can get the chair at the same time, or I can give it to you now and get the chair next week. Having the painting is worth more to you than to me, so if I hang onto it, potential value is lost.

    The problem is much more stark when we consider perishable goods; if I want to exchange a cake I made today with a cake you will make in two weeks time, there is no choice but to use unsecured debt. The alternative is for the goods to be wasted.

    You’re right that debt is borrowing from our children, but equally we as a society bequeath them something of value – both physical infrastructure and the more nebulous concepts of a functioning economy and society. If people or governments never took on unsecured debt, it’s likely that we would be much worse off overall – though that’s certainly open to debate.

    None of this means that I think that the current _level_ of debt is appropriate – just that I think we shouldn’t be against it on principle.

  34. “if I want to exchange a cake I made today with a cake you will make in two weeks time, there is no choice but to use unsecured debt.”

    I don’t think that’s true; I could put up anything as security. My house, my clothes, my car, whatever. Of course, some of those would be overkill for a cake :-) So yes, I guess there’s also an issue of whether one’s liabilities outstrip one’s assets – or rather, the value of the assets one is willing, if necessary, to dispose of without causing oneself significant pain.

    The current average household UK debt, including unsecured loans, appears to be about £18,000. For many people, that’s 12-18 months wages. And the personal (not household) share of the national debt is aboutr £14,000. This rather outstrips our assets that we’d be willing to sell.

    There is also the issue of whether interest is charged on the debt; i.e. is having the debt the means to an end (cake exchange) or is it also a way for someone, either one of you or a third party, to make money in itself? If it becomes so, the temptation to greater debt, and for people to encourage you to take on greater debt, becomes much larger.

    In the case of a company or a government, though, no-one is personally liable for the debt – directors and politicians can just walk away. Which means there is no “what is the risk to me?” brake on the amount of debt accumulated, where the risk accrues to the person authorizing the indebtedness. And that’s highly dangerous.

    You’re right that debt is borrowing from our children, but equally we as a society bequeath them something of value – both physical infrastructure and the more nebulous concepts of a functioning economy and society.

    I don’t believe it’s necessary for the government to take on this much debt in order to bequeath a functioning economy and society to our children. Many societies have managed to do this fine in the past. As for the infrastructure – shouldn’t they get to decide how to spend their money, rather then have us do it and expect them to be grateful? “What do you mean, you don’t want a road from P to Q? Well, we’ve built it now…”