Debt is a curious concept. While it remains a taboo word in some countries like Germany, who suffered in the 20s and 30s of hyperinflation caused by the First World War debt repayments, and still remain subconsciously traumatised by it, it is a way of life in other countries like the US, where from your time in college onwards being in debt is the norm. So whist the first strive to never be in debt or at least the less time possible, the latter strive to achieve it, not as an end result, but as a mean to achieve the lifestyle they seek. But in this post I will not discuss personal/individual debt, since it is somehow culturally entrenched, even though banks help with that, but to national debt, the debt by states.
As economic actors, states have always had the obligation to get into debt to either pay for their bills, like all of us, or to avoid the consequences of an unfavourable trade balance, which would devalue their currency. However, recent events have shown that this getting into debt has also helped to bail-out or to purchase debt from failing companies and banks, to ultimately save the economy. Now I foresee several problems with this:
1) The child simile. If a child goes and brakes his wooden horse, and you as a parent go and buy him another wooden horse, what does the child learn? He/she learns that it is not important or catastrophic to break a toy, because if it happens the parents will buy a new one. And the same happens here with CEOs and the state, although I would think that a CEO would have a more developed brain than a child, it sends the same message: no problem, mommy the state will always be there.
2) Who says otherwise the economy will collapse into recession? Well it is the same companies and banks that say so, as well as governments behind them. So apart from being an interested party, how truthful is it?
Let’s take the example of a bank. Let’s say we let a bank collapse because of it’s risky investments. The savings are guaranteed by already existing mechanisms outside the bank, so the only to other things remaining are the bank debt and the bank employees. I am sure that the latter can be assumed as a precondition for the bank selected to incorporate the savings. So then we only have the debt, this can be divided between good and bad debt, the good in the form of sound investments can follow the savings and employees into the selected bank. And the bad debt? Well, to me this shouldn’t be assumed by all of us but more specifically by the bank owners and the top managers. Surely their hefty pensions and compensation packages can help them in paying this debt. And perhaps next time, this child can think twice before breaking the wooden horse.
And now lets take the example of a company. Basically a company, a large multinational company, a car manufacturer, finds itself in trouble when it has made the wrong investment (car model) and is not making the profit they planned. So in order to keep things “as they should be” they announce the failure, the threat of closing factories (but not reducing the top staff’s bonuses), and government who doesn’t want massive job losses gives them some money. But who is accountable at the end? Is it a single model gone wrong or a whole strategy? What happens in cutting-edge businesses? They fire those that drove the failed strategy and hire new leadership? Why didn’t the US government help Apple during its bad period? Basically because Apple couldn’t threat massive job loss nor turning the economy into recession (when Apple currently is worth more than any car manufacturer). So the solution should be the same company reducing the top management bonuses, firing those to blame and making them pay for any debt, and certainly not having us pay the bill
3) Who’s money is it? Wait a second, the state is using my money I’ve paid through taxes and the future money I’ll pay (in form of state debt), to do this. Do I think this is a fair use of my money? I don’t. Governments are not concerned by this debt since its long-term debt that will need to be dealt with by future governments, so current governments don’t have much of an issue of incurring such a debt. This debt most often than not comes from abroad, in the same way that Spanish debt comes from German bank loans, and you have Ms. Merkel knocking on the door in Madrid, you have Mr. Hu Jintao knocking on the door in Washington, because US debt comes from China.
Illegitimate or odious debt
And here we enter the world of illegitimate or odious debt. What I have exposed previously is simply the most obvious examples of this sort of debt. But what about the debt contracted by some nations to finance war? Should the same people that have suffered the war not only pay it with their lives but also with their taxes? And what about the person that was fooled into buying a house and getting a mortgage, when it was obvious that any little bump in the economy, would make them unable to pay?
Debt should only be paid when it has been legitimately agreed upon, and should not be the mechanism for those with money to keep on gaining more money at the expense of the rest of us. Iceland is a great example of people realising this, and so is Argentina.