Debt is a bad thing – HIRC

I may have coined a FLA (four letter acronym) in my white paper.  “HIRC” is short for “Highly indebted Rich Country.”

Greece  –     is the answer to the obvious question (what country is a HIRC?).

How did it get that way?

If I have understood the situation properly – the government spent money it did not have in the expectation that this would generate an economic upturn which would increase government revenues to pay for the spending.  This is the recommended response advocated by economists such as Keynes and followed by Gordon Brown and others following the global financial crisis of 2008.

Another way of describing this policy is “spend now and pay later” and is the opposite of the austerity measures being used by the current UK government in dealing with UK debt.

A particular problem that Greece faces is that it is within the Eurozone which means that it cannot realign its national currency to reflect its poor status – it does not have a national currency but is tied to stronger economies such as Germany and France.  As a result, the only way it is allowed to deal with the problem is the sort of austerity budgetting we are seeing in the UK.  And austerity bugdetting is not popular because it means fewer state-funded jobs, which means higher unemployment and therefore lower living standards.

Could this situation have been avoided?

Under my proposal that commercial debt is outlawed, governments would not be able to issue debt so, yes, this particular problem could not have arisen.

The big question is can governments operate without the flexibility that borrowing gives them.  Should Keynesian solutions be allowed to governments?

And if governments cannot borrow, how are cash flows managed?  The UK cycle involves payments going out throughout the year but a large proportion of tax revenues (income and corporation tax) coming in in January.  Would we need to change tax payment dates?  Or change the fiscal year so that the largest inflow of money came in at the start of the and set an automatic limit on what could be spent?

 

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