Debt seems to be the media topic of the moment. How much money a government owes, or is allowed to owe is the focus of the greatest political debate of our time. The world appeared to hold its breath whilst the US Congress decided whether it would pay its bills or not and in the end when they did it was essentially not by coming up with the money but by raising the amount that they were allowed to borrow. In simpler terms this is the equivalent of extending the limit on the credit card in order to make the next credit card payment- sheer madness! But the questions still remain- why does a first world country like the USA or Australia need to borrow money? What are our elected officials doing with all of our cash? Why the hell are we in debt in the first place?
Part of the problem comes from the way that western governments produce currency. Essentially money only comes into existence when it is borrowed by the government to make the circulating currency. The treasuries of the civilized world do not keep vaults filled with gold or something in order to back the currency notes that they issue. Instead they borrow enough assets via the reserve or central banks, usually by issuing bonds, to make the currency that they need in order to run the economy. This debt based currency, or fiat money as it is more properly called, means that even the wealthiest nations begin their operations in debt. The central banks are not owned by the government so the nation is in debt to private interests who have control over the rates of interest charged and who are in the business of producing profits from the moneys that they lend. This seems to be a very poor way for any country to produce its currency and only the bankers really get any benefit from a system like this.
In fact, if we examine who we are in debt to for all of this money (Australia is currently $68 billion in debt or $7,800 per capita- see http://www.debtclock.com.au/ ) it turns out that it is to the banks. Whilst almost every other business suffered through the recent “global financial crisis” (in reality it was just another fiscal depression) the banks made record profits. In a report on the impact of the GFC on the efficiency of the banks Ha Vu and Sean Turnell of the Department of Economics, Macquarie University, Australia said:
Across the GFC the net interest margins (NIMs) of Australian banks increased, to an extent that not only covered their higher funding costs noted above, but to levels that also partly compensated for increased provisioning against rising bad debts. Overall, the NIMs of Australia’s major banks were, at an average of 2.4% overall, about 20 – 25 basis points higher at the end of 2009 than they had been immediately before the crisis (Brown et.al. 2010). Such increasing NIMs were the product of the higher interest rates the banks charged on outstanding loans. At the end of 2009 the average rate charged by banks on their overall loan portfolio was around 160 basis points higher relative to the cash rate than it had been in mid-2007. The increase in NIMs reversed the trend of falling margins that had been underway since the mid-1990s, and which up to this point had been driven by the competition from both new banks, as well as new non-bank lenders supported by (the) then vibrant securitisation markets (Brown et. al. 2010).
On the other side of this coin (that we owe to the banks) is the politicians. They have become addicted to debt. But there is good debt and there is bad debt. In a very interesting article in the New York Times Robert J Shiller sets out a plan for using government debt to fund infrastructure projects as a way of building a debt free economy (http://www.nytimes.com/2011/07/24/business/economy/tax-and-spend-but-keep-your-balance-economic-view.html?scp=8&sq=good+debt+infrastructure+spending&st=nyt). So long as the nation has something to show for the debt spending like highways, dams, schools and other publicly owned assets the money isn’t really lost- it is invested in a better future. The trouble is that too many projects that waste a lot of money show nothing in the end. Here in Melbourne a striking. The Victorian government spent $1.3 billion of taxpayers’ money to introduce a new, more technically advanced ticketing system on public transport called myki. The project was a failure from the start and has proved to be unpopular (mostly because it doesn’t work on all transport) and now the government is saying that it will cost a further $2 billion to scrap it (http://www.heraldsun.com.au/news/victoria/state-government-to-make-decision-on-myki-next-week-ted-baillieu-says/story-e6frf7kx-1226004676343 )and return to the old system. Multiply this kind of waste over a few dozen pet projects (like expensive wars) of the cabinets of the state and federal governments and there’s $68 billion that they don’t have to pay their debts. In the end we the people can’t have much to say about it- we elected them.