“For decades we have piled deficit
upon deficit, mortgaging our future and our children’s future for the temporary convenience of the present. To continue this long trend is to guarantee tremendous social, cultural, political, and economic upheavals. You and I, as individuals, can, by borrowing, live beyond our means, but only for a limited period of time. Why, then, should we think that collectively, as a nation, we’re not bound by that same limitation? We must act today in order to preserve tomorrow.” — President Ronald Reagan, inaugural address, 1981
Notwithstanding that shortly thereafter the Reagan government went on to contract debt at a record pace, reversing the 30-year trend of debt contraction as a percentage of GDP, what is amazing is that 30 years later, lessons have still not been learnt. In fact, President Barack Obama might have used this very rhetoric in his recent inauguration speech and all those present would have marvelled at his wisdom. For the record, President Reagan later commented, “I am not worried about the deficit. It is big enough to take care of itself.”
Unfortunately, Pakistan’s political elite has also latched on to this particularly frightening scheme, under which running the government is simply about borrowing money. This strategy allows governments to live beyond a nation’s means and fulfil tall electoral promises with relative ease. The layman, especially those who have ever attempted to genuinely borrow from a financial institution, must be wondering who actually lends to governments at the verge of bankruptcy. Well, the simple answer is, that is why fiat currency was invented. And no, fiat is not a reference to the Italian automobile manufacturer.
Does the reader realise that the notes in his wallet or her purse being gender neutral are backed by nothing! They are actually backed by nothing except the writ of the government. Which writ if everyone may recall, is regularly challenged pseudo-brilliantly in media talk shows. Mathematically, if money is backed by government, and there is no governance, money equals nothing!
So while the intelligentsia debates non-issues, government simply prints more money and continues to contract more debt and life goes on. And since not many understand money, especially not the politicians and definitely not the journalistic profession, there is no one guarding the printing presses. Frankly even if they were, the net sum of the vigilance, considering absence of knowledge, will amount to nothing!
Reverting to how exactly is debt contracted by the government, the answer is simple: through money creation. The money pumped into the system, through a perverse mechanism, eventually ends up as government borrowing. The beauty of the system is that the government can only pay its debt by creating more money; unfortunately, however, this strategy begets more debt. While the consequent inflation considerably reduces the value of debt, it continues to grow in absolute terms.
The inability of the general populace to in essence grasp the time value concept of money ensured that things continued without a fatal hitch over the last few decades, until some sane or stupid — depending on the perspective — persons questioned the status quo, ushering in the sub-prime and euro debt crises!
All of the above was surely Greek for most readers. But, for the moment, simply reflect how a government can ever pay debts which run into trillions? While misery surely loves company, in this particular instance, the fact that most governments are currently plagued by humongous debts hardly provides any solace, in fact, quite the opposite. Till quite recently there appeared to be no solution to the above question. However, the recent Cyprian saga sends shudders down the spine. Presciently, the solution dreamt up by politicians and their pundits for paying Cyprus’s debt is quite simple: destroy money by shutting down banks and forcibly appropriating money from personal accounts against government debt. The worst news is that once a precedent is created what would stop other governments from following in the footsteps of Cyprus?
Government, unwittingly, have stumbled upon an end strategy for the money illusion. Print and borrow money, hoodwink the populace into believing that prosperous times are forever through the creation of an asset bubble, and once the bubble bursts leaving only debt, simply empty private coffers and pay the debt. As far as governments are concerned, all gain and no pain. The strategy even makes taxation and revenue authorities redundant. Admittedly, the government holding the bill when the music stops, gets lambasted, but the upside is that the populace has short memories and all will be forgotten by the next election!
And now for the drop scene. Pakistan’s national debt is at unmanageable levels and things continue to get worse. The Federal Board of Revenue in their recent presentation to the caretaker prime minister has advised a downward revision on the budgeted collection. This perhaps is the singular most distressing development during this election season, manifold more critical than dual nationality, fake degrees, tax or phone bill defaulters and all the rest.
While the nation debated and gambled upon ‘Kaun baney ga caretaker’ (who will be the caretaker), and now engrosses itself in contemplating the efficacy of the decisions to transfer or not to transfer, external factors continued to weigh heavily against economic stability. Digressing a bit, any decision to curtail electioneering expenses works contrary to the strategy of addressing income inequalities and denies the populace the opportunity to gain what little they can from democracy. This is the only time when politicians pay to the people, even if only a fraction, what they expropriate from them the rest of the time.
Sure honesty is important, and maybe there is an argument for change, and yes, the corrupt should be made accountable, and maybe the judiciary should be involved in everything, and; the list can go on. But when will the beauty contest move to substantive elements, the economy? Broad statements about taxing the rich, curtailing corruption, self-sustainability and the like are a dime a dozen. What are the credible commitments that move towards economic viability, power generation, enhancing employment opportunities and curtailing debt? The how is more important than the what. The nation has a choice. It can choose to be proactive on these critical issues, or passively sit and get entertained by the election action… till debts do us apart!
The upside of no golf is catching up on book reading!
Cheers!
The writer is a chartered accountant based in Islamabad. He can be reached at [email protected] and on twitter @leaccountant