I read a fascinating post today by the excellent Australian blogger billy blog. In it he notes that even when the Australian government was running surpluses between 1996-2007, the international financial institutions pressured it to continue issuing debt - and it gave in to them. During that period the Australian government issued more debt than it needed but didn't actually use the proceeds in any way that benefited the people of Australia. This intrigued me. Surely when a government is running a fiscal surplus it will pay off debt, won't it? Well, apparently not. Why not?
Billy answers his own question at length in the blog, but to summarise here - the government continued to issue debt because the international financial markets needed it for liquidity. It had nothing to do with the people of Australia and everything to do with providing risk-free funds to speculators. And the taxpayers of Australia paid interest on that unnecessary debt.
At the same time as the international markets were calling for more Australian risk-free government debt, they were also shouting about the need for welfare reform and spending cuts. And the Australian government gave in to them on that one too. At the same time as it was issuing unnecessary debt and running a fiscal surplus, it cut welfare spending programmes to the poorest in society.
Now why on earth would a democratically-elected government ignore the wants and needs of its electorate and dance to the tune of the international financial markets?
Well, it's all about the power of the big international financial institutions, and in particular the credit rating agencies, the IMF and the World Bank. Governments are terrified of them, and with good reason. Recently we have seen downgrading of credit ratings for various countries in the European Union. The consequence of this is that these countries are now paying far higher interest rates on their debt, at ruinous cost to their citizens. However, Portugal - feistier than the others - is fighting back. It has commenced an international criminal inquiry against the three main international credit rating agencies (Moody's, Standard & Poor and Fitch) on the grounds that when these agencies downgraded Portugal's debt they CAUSED the sovereign debt crisis that forced Portugal to seek assistance from other EU members. Portugal suggests that these agencies may have benefited financially from the country's ensuing difficulties and claims that these agencies wield excessive power due to lack of competition. Portugal was unable to service its debt and was bailed out by the ECB on condition that they imposed austerity measures on their citizens - which so far the citizens have refused to accept. They should be thankful. In Greece the IMF is involved and the imposed austerity measures are far more severe. And in Africa, where the principal agent has been the World Bank, the austerity measures imposed on countries that have suffered from capital drain have caused famine and wars. No wonder governments are scared.
I'm not going to discuss here whether the behaviour of the credit rating agencies actually causes debt problems or is simply a response to the prospect of debt difficulties. The point is that the effect of debt downgrade is high interest rates and loss of international reputation - and above all, unhealthy interest from some international agencies (the IMF and World Bank, in particular) that have a terrifying reputation. No government wants the IMF hovering around, and to avoid this governments will adopt all manner of measures that hurt their citizens. The IMF and its lackeys, the credit rating agencies, are particularly attracted to countries whose expenditure persistently exceeds their income - even if these countries are meeting their debt obligations without difficulty. Running a deficit for any length of time is a dangerous strategy, and the UK has run one for quite some time. No wonder the Coalition government is so hysterical about "getting the deficit under control". They are fobbing off the international sharks.
I commented in a previous post that there is a fair degree of confusion over whether the Coalition's aim is to reduce the deficit or the debt. In my view it is neither. They are placating the international credit rating agencies and by extension the IMF.
As far as the deficit is concerned, the aim is not to reduce the deficit but to hide it. The easiest way of hiding a deficit is to shift the difference between expenditure and income to private individuals. They can go deeper into debt, go bankrupt, lose their homes or starve to death without affecting a country's credit rating or attracting IMF attention - as is evident in India's economy, for example. A programme of spending cuts aimed at low to middle income earners reduces the deficit quite nicely and has the additional effect of creating public unrest, which helps to convince the rating agencies that the Government is really doing something. It's all spin and doesn't fix anything. But it hurts lots of people.
Now the effect of hiding the deficit should be, of course, that government debt stops growing. But this is a bit more tricky. Because, you see, the same institutions that want spending cuts to reduce deficits also want governments to issue debt. You might think this is an extraordinary example of doublethink on the part of the international institutions, but it isn't really. Government debt is only useful to financial institutions if it is low-risk. Countries that run deficits are riskier than those that don't, so the safest debt is of course that issued by countries that don't run deficits - and they want lots of that debt, whether or not the country itself needs it. To these institutions, the issuance of public debt has nothing whatsoever to do with deficit financing or public investment: its sole purpose is to ensure a plentiful supply of highly liquid, virtually risk-free funds for international speculation. So the international institutions apply immense coercive pressure to governments to reduce or eliminate deficits, thus reducing risk, while maintaining debt issues, thus ensuring liquidity in the international financial markets. Hence the Australian government's bizarre behaviour.
There is nothing logical or rational about spending cuts to reduce a deficit when a country is comfortably meeting its debt obligations and is experiencing an economic downturn - which is the situation in the UK at the moment. There is also nothing logical or rational about governments continuing to issue debt and cut spending while running a fiscal surplus, as the Australian government did. It's all about placating the gods.
In days gone by, people believed that there were powerful, moody and unpredictable gods. If an individual angered the gods, he (or his descendents) would suffer a terrible fate. The essence of classical tragedy is retribution for hubris, which is the "sin" of challenging a god's supremacy. When the individual challenging the god was a king or ruler, retribution could be enacted against the people he ruled. And humans didn't have to do much to anger the gods. Orpheus angered Apollo simply because he could play the lyre beautifully and Apollo was jealous of his skill. But above all, humans who disobeyed gods came in for terrible punishment. The Old Testament is full of stories about disobedience followed by punishment.
We like to think that we have moved on from all this superstitious nonsense. But we are the same people, really, and have the same mindset. Only now the deities we worship are not weather gods - they are unelected and undemocratic international institutions that wield excessive power, have their own agenda and care not a jot about ordinary human beings. Anger the credit rating agencies, they downgrade your debt. Anger the IMF, it withdraws "essential" funding (although I question whether that funding is either necessary or theirs to give). And these "deities" are greedy and rapacious. To placate them, governments drain their countries' resources and sacrifice the people who elected them, or more often, those that didn't.
But these "deities" don't have to have this power. They only have this power because we give it to them. We don't have to do what they say. Governments don't have to issue debt they don't need. They don't have to inflict unnecessary spending cuts on their people. All that is needed is for governments to take back their power from these self-appointed demigods.
Democratically-elected governments are sovereign in their own countries. They have the right and the power to issue their own money, obtain funds through taxation from their better-off citizens and businesses, borrow from these as well if they wish, and spend this money as they see fit to benefit the people of the country. If a democratically-elected government wishes to run a deficit, it can fund that by creating its own money or borrowing from its citizens. It doesn't need to borrow from international financial institutions, and it is time that these institutions recognised that they have no right to insist that governments provide them with risk-free funds. No international institution should coerce a democratically-elected government into taking actions that hurt its citizens, and no democratically-elected government should allow international institutions to dicate how it should run its economy. And above all, democratic governments should support each other in standing up to the demands of the international institutions. Let governments work for people, not for the international financial system.