So Why do Governments get to Borrow and Never Repay

Watching the Irish go through all their hair-shirt measures, it made me wonder.  The question will probably show me as an economic ingenue, but nevertheless it occurred to me. Why the hell do governments get to borrow so much without having to pay it back?

Looking at other enterprises, getting away with that sort of thing is unusual. Take individuals for instance. It’s fair enough to borrow early in one’s working life, either for education, though this is becoming of doubtful value, or to buy a house. In the past you tended to aim to pay these back over time. Take a company. It raises debt, but ideally uses this to finance productive capacity, that creates more money than the debt destroys in interest, eventually repaying the debt or rolling it over to finance more productive expansion.

The theory is meant to be that governments do this too – borrowing either to finance productive infrastructure expansion or to oppose the variations in the business cycle. The first gets paid for by increased tax receipts on the economic activity facilitated by the infrastructure, the second by the tax receipts during the upswing parts of the economic cycle, remember the golden rule of Gordon “no more boom and bust” Brown… He had the theory okay, just the practice was wrong.

All that theory seems to have gone to pot in the last few decades. The Irish situation just highlights it. It seems nutty enough for the 5 million strong taxpayers to take on the amassed debts of banks that have behaved like drunken sailors over the last decade and a half. Now they get to borrow money to pay for those debts from the EU and the IMF. Since when was borrowing to pay for borrowing the way to financial Nirvana?

It’s not like the taxpayer had the benefit of the binge drinking at the party, but they sure get to experience the hangover at best, or the morgue at worst. I can’t see how they can come back from here, they might as well throw in the towel and take the hit of defaulting now. They’ll struggle on, only to default later.

Finally, what is so special about bondholders, anyway? One of the problems seems to be that governments have got into the habit of endlessly borrowing money they have no intention of paying back, merely of servicing the interest. Obviously if you plan to keep on doing that you have to suck up to the sources of lending.

Something I learned in clearing all my debts including the mortgage is that I didn’t want to be beholden to anybody. Nobody is entitled to knock on my door and demand to be repaid, and I’d tell them to stick it if they tried. You gain a certain amount of power through not owing people money, and you lose a lot of power if you do.

Redeeming my mortgage was an irrational thing to do in a low-interest rate environment, but at least now if I lose my job my main problems are how to get to eat, heat and drink, rather than if the repo men with thick necks and baseball bats want to visit. Or even their sharp-suited counterparts from a mortgage company.

Governments could do with learning some of that attitude. We were told that we were within hours of the ATMs not working when Alistair Darling stepped in. At the time most of my capital assets were in £ demoninated investments apart from my house, so perhaps I would have rued him taking a default strategy as I would have been wiped out. I have corrected that since, getting about half my capital wealth into non-financial assets to forestall that sort of thing in future, since I expect the second dip sometime in the next five years. For what it’s worth, though I’ve been tempted to goldbuggery I consider gold as a financial investment, albeit independent of of the UK governments devaluationary policies 😉

However, let’s face it, the majority of people in the UK don’t have capital assets – they have debts, in terms of mortgages and unsecured debt. A default strategy might have more attraction for them, rather than being clobbered for years with declining real terms wages and employment falling. Although Argentina showed in 2001 that the social unrest following default on loans wasn’t pretty, it was survivable, and Argentina’s economy has largely recovered. Issuing the haircut command to bondholders is something an economy can come back from.

Either way we can’t carry on endlessly borrowing and never repaying. Otherwise, as the Irish are discovering, economic policy is not determined by the people you elect as a government – it’s decided by the people who own your debt. Hello IMF, hello EU, perhaps hello Angela Merkel, the only European country that seems to have a working economy at the moment. Living on the never-never catches you out in the end, whether you’re an individual or a country. Sometimes bankruptcy is the only way out.


what are all you moaning minnies on about, you’ve never had it so good?

Thus spake the good Lord Young. I’m surprised that there wasn’t a hush in the room, followed by some Young Tory yelling out

“Jeeves, bring me a crowbar old chap. This old buffer seems to have his foot wedged so far into his gob we need mechanical aids to get it out”

But no such spectacle ensued. If you want to hear it from the horse’s old buffer’s mouth itself, then those nice chaps at the Torygraph have the audio in it’s crackly glory.

It’s such an absolute peach, it makes Marie Antoinette look street-savvy when she exhorted the revolting Frenchmen to eat cake if they weren’t able to lay their grime-stained mitts on bread at the moment.

And yet… What if the old buffer is partly right? If you have a shockingly high mortgage and a job that is holding up, then you’re probably having a pretty good recession. True, you get pasted with tax rises and a cut in Tarquin and Jemima’s child tax credit, but against that your mortgage payments have gone down. Even when I nuked my mortgage in 2008 the payments were already rock-bottom.

The somewhat Austrian School-esque Institute for Economic Affairs says pretty much the same. With bedfellows like that you can see why Cameron instructed Lord “You’ve Never Had It So Good” Young to fall on his sword. It’s always disturbing when the lizard’s eye blinks and the true heart of darkness is revealed for a microsecond before normal service is resumed…

The corollary is of course that there is a general atmosphere of fear and loathing in the air. Everybody is running scared, the falling ordure from the banks still hasn’t hit the ground, nobody knows how much money we have burned, or whether the pitful amounts we have left are going to be worth anything any more when the forces of inflation have finished.

First they come for the Irish, then they come for us – the stalking rapacious bond-holders seem to be circling the EU demanding pounds of flesh, first picking off the easy meat in the PIGS area.You can’t blame them too much, we did all borrow far too much money when the good times rolled. Now the enforcers would like it back, please. Otherwise the guys in the background with thick necks and baseball bats will come to break your legs, y’know.

So yes, Lord Young, in a narrow theoretical and intellectual sense, those of us who still have jobs, and particularly those of us who have over-inflated mortgages are having a good recession. But we hear distant hoofbeats thundering towards us from all points, so if you don’t mind, we are shit scared and don’t need any of your jive right now. Send not to know for whom the bell tolls, m’Lord – it tolls for thee.

It’s going to be a great decade for British music

Watching those revolting students on the telly last night, I have to admit to a frisson of excitement at he sound of smashing glass. I’m very glad nobody got killed, and hope that the 10 people hospitalised make a full recovery. The topic of student fees is important, but it’s not so important as to give people the right to lob fire extinguishers off roofs at people or endanger human life.

Batman to David Cameron - Want some? Bring it on...

But as for wrecking Tory party headquarters, well it’s hard to argue with the logic of the cricket-bat wielding student who said:

“If the Government knows we’re willing to take this kind of action, they will take us more seriously.”

Sadly, history is on his side. The biggest protest ever in the UK was the Iraq War protest in 2003, about a million strong according to the BBC. That changed the course of action by all of….Zilch, Zip, nada.

Whereas the Poll Tax riots of 1990 actually changed things.  It’s not pretty, it’s not nice, but it’s the way life is.

As a side effect, the early 1980s and early 1990s were pretty good times for music. Great music is born on the streets from dissatisfaction welling up and finding its voice, not produced by Simon Cowell on the X factor.

The problem here is that the students are quite right. Borrowing £30,000 to pay for three years at university is an astronomical amount. Other than my mortgage, I’ve never borrowed that much for anything – indeed I have never spent that much on any one thing other than my house. And the Tories are also right. We haven’t got the money to pay for 50% of 18 year olds to go to university. Cameron did manage to score a brilliant own goal by letting the Chinese know that he felt their pain in subsidising British university students so he was increasing British university fees so overseas students wouldn’t have to suffer increases. Nice tin ear, Dave 🙂

There is a solution. We used to be able to pay for about 10% of 18 years olds to go to university. When modern students whinge about the baby-boomers getting their university education free, they also have to be prepared to face up to the corollary of that – the exams were hard enough to discriminate by ability and top-slice by ability. If students want free university education, they have to also accept that 80% of the typical modern student cohort won’t make the grade to qualify.

Somewhere between those extremes lies the answer. It’s going to be a long hard slog, because the educational establishment has considered selection by ability an anathema for over thirty years. Faced with the economic tsunami coming from the rise of China and India, a squeeze on natural resources and the total SNAFU made of our economy, we can’t afford to carry passengers any more. We are going to have to prioritise our resources, and that probably doesn’t include paying for people to do media studies.

We could bring back free university education by fixing the exam system, introducing a numerus clausus and drastically reducing student numbers. Whether that is really what the student revolutionaries want is another matter.

the white heat of technology seems to be alive again

In July 1969 when I was in primary school they rigged a TV in the assembly hall and we watched the Apollo 11 Moon landing sometime in the afternoon ISTR, so it must have been a replay rather than live. Harold Wilson was the prime minister, mouthing off about the white heat of technology, though that must have been as reported since I can’t have heard his original speech.

It was an exciting time to be into science, and some of that rubbed off which is how I got to get into engineering – all sorts of exciting things were possible. This was a time when there no downsides and you could solve things by throwing technology at them, I also recall a school trip to the newfangled Thames Barrier. There had been a couple of years where London had flooded and you had water four foot deep in the High Street – the Thames Barrier fixed that as it never happened again.

There’s a feeling of deja vu around as all sorts of things seem to be happening that are solutions to age-old dreams. This last week I’ve read about

It all stirs the inner schoolboy in me, and I’m jingoistically chuffed that all these innovations seem to be originated in our burnt-out and decadent West rather than the fiery intellectual cauldrons of the East. It’s as if there’s the glimmer of life in the old dog yet…

Why do we make such a pig’s ear of housing in the UK?

An Englishman’s home may be his castle, but let’s face it, we are making a pretty poor fist of housing in general in the UK. We pay too much for it, it makes us miserable, and apparently there aren’t any design and construction standards for housing in the UK after the demise of the Parker Morris Standards in the 1960s and 1970s.

In Germany familes seem to be happy to occupy flats until well into middle age, whereupon richer people often have acquired the cash to buy an Einfamilienhaus with a modest mortgage.

In Britain we flog ourselves to buy a house with a highly leveraged mortgage, it seems ideally in our twenties. Which is a barmy way to carry on in the modern world, if you sit down and think about it. It was all very well when you could expect to start a job with a company in your early twenties and stay there until you get to your retirement party at 65, collect the carriage clock and sail into the sunset.  You would have paid off your mortgage in your 50s, 25 years after taking it out, and would be sitting pretty.

Life ain’t like that any more.  Instead of the 2.5*single salary income multiple, it seems we are buying at 5* income multiples, and in order to do that we seem to be opting out of nasty little wrinkle of a mortgage which is that you are meant to be paying some of the capital off. It’s hard to see how this is any better than renting, with the added liability that you are responsible for a whole heap of downsides that a landlord would have to pick up. In the end, after 25 years you still don’t own the house if you don’t pay down the capital, or intelligently invest the money elsewhere.

Part of the problem is that we don’t really like living in flats. As a single man, I was living in a terraced house with a mortgage, where in some ways a town centre rented flat would have suited me better. Not only that, but I wouldn’t have lost a shed-load of money on it too. Okay, so I did get to learn how to plumb in a thermostatic shower, install a washing machine and replace the guttering. But the tiny garden was always a right pain for me. Basically because stuff tended to grow in it which I had to hack back every so often. Oh, and I learned the mistake of planting leylandii. Don’t. ever. do. that. If you do, keep the buggers trimmed back. Don’t hack ’em back after 8 years of running riot. They don’t grow on old wood – you might as well go for the firewood option from the off.

The problem is that your twenties isn’t really the time for picking up long-term commitments. Obviously if you’ve settled down and aim to have kids by then, this may be different for you, though you still have the problem of the increasing transience of employment to contend with. This Torygraph article says that UK homeowners will increasingly be in their 40s plus. I’m not so sure that is such a dreadful thing – it matches the age profile of German homeowners, for instance. About 50% of Germans aged 45+ are homeowners compared to 28% of 18-45 year old Germans (source).

Europeans seem more at ease with the whole renting and apartment living scenario than we are. They have the physical infrastructure for it too – in my twenties the choice was either renting houses with a bunch of mates, or renting bedsits in houses that sleazy landlords had subdivided. Our house builders are busy building rabbit hutches on postage stamp plots of land. I was amazed when looking for a house to check out a new house that was described as detached. Yes, technically it was, there was all of about six inches separating it from the house next door!

A buddy of mine had a 1980s house in Felixstowe, it was big enough, he had enough garden. And a stylish spiral staircase. I was sitting down having a coffee when all of a sudden there was a thundering noise and the house shook. Apparently the staircase on the house next door was bolted through the thin wall to his. So we had a couple of tuned resonant structures designed to make his house shake when the neighbour went up their staircase to go to the bog!

So the question is, why do we make such a pig’s ear of housing? It’s not enough to do the Daily Mail routine of blaming too many people. Some of the Low Countries are just as bad but they don’t spend so much on it. Our housing is peculiarly crap, it’s peculiarly expensive, and it’s peculiarly low-rise high-density junk if it’s built after the 1970s. For something that seems to consume such an outrageous proportion of our national wealth and worry, we don’t seem to be making a particularly good job of it.

Something really bad seems to have happened since the 1980s. It would be easy to blame Mrs Thatcher and her purchase of council house tenants’ votes via the infernal right to buy scheme. This broke down the divide between those who aspired to own, and those who didn’t have the means. Some of the latter got a free gift of housing equity. Non owners used to have an alternative which had many of the attractions of owning without the financial costs in council housing, where now they don’t. Around the same time the rent acts were changed in favour of landlords. All of this made home ownership more attractive in the UK than the alternatives, which presumably pumped up demand, and this presumably pushed up prices until the supply/demand curves equalised at a higher income multiple than before.

That increase in price was another free gift made to all exisiting homeowners by raising the price of their property relative to their income, hence the British belief that house prices only go up over the long term, though the early 1990s challenged that assumption for nearly a decade for dimwits like me that bought in 1989. Unlike this time, that peak was of relatively short duration, amplifed by the Lawson boom and the ending of MIRAS and the end of tax relief for multiple owners, so not too many people were suckered into that rally. This time, as they say, it’s different, and whenever it really is different, it’s never in a good way….

Samhain and All Hallows Day, the beginning of the ancient year

Yesterday was Samhain, the beginning of the dark half of the year. It is the time of retrenchment, of communal pursuits rather than individual enterprises, as the land gets colder with the waning Sun. It was the time of harvest, the last of the plenty of summer.

Though the air hasn’t yet picked up the winter crispness, the first frosts have improved the sprouts and parsnips. Birds are feeding communally, finch flocks are massing in the countryside. Yesterday I was near Grundisburgh and a huge flock of chaffinches worked their way over a hawthorn hedge. The arrow-shaped blaze of white in their tail feathers, only visible in flight, flickered daintily against the green and red of the remaining leaves and berries.

Closer to home the goldfinches are calling to each other are their growing flocks seek out seeds as they swoop over the fields. The sound is a charming metallic tinkle mixed in with resonant lower buzzing tones rich in harmonics.

On the way back I called in at Tesco, where I observed a stupendous tack-fest that Halloween has become. Somewhere in China there are factories beavering away producing plastic rubbish that is designed for landfill after one night…


Sounds of the Halloween display in Tesco. The cheer obviously doesn’t extend to the presumed Tesco off-duty employee fearful of being fired if her kid broke something.