Friday, August 05, 2011

Sovereign Debt: Who Loves Ya, Baby?

…Neither a borrower nor a lender be…

This excerpt from the much derided advice of Polonius is looking better for the case of sovereign debt. Nations borrow money for the same sorts of reasons as individuals do – to get them through a rough spot, to buy crap they can’t afford, because they believe the future never comes, and, somewhat rarely, to make sensible investments for the future. The big debts run up by Reagan and the Bushes fall squarely in the middle two categories.

The normal source of income for a nation is taxes, and economists, but practically nobody else, recognize that to borrow is to tax. When a nation borrows money today, it’s deferring taxation today for the future.

So who loves sovereign debt? Those with cash in their pockets do. In the world today, that means governments like China, a bunch of big corporations, and the rich. Suppose that instead of running up 14 trillion in debt, the US had chosen Clinton’s path over the last eleven years, paid its bills, and begun paying down the previous debt. Go crazy for a moment and imagine that Europe and Japan had done something similar.

Corporations and rich people would have less cash, because governments would have collected much of it in taxes instead of borrowing it from them. China would have sold us less junk, but, lacking a convenient place to park all the cash they did earn, would likely have bought more from the rest of us. The rest of us would just have less government debt hanging over our heads, fewer foreclosed mortgages, and probably fewer big screen TVs.