Why United Kingdom Should Not Bailout Defaulting Eurozone Countries?
Since 2008, the globe is facing serious issues of recession and right since then almost every government is trying to provide as much stimulus package and bailouts for the failing companies as it could. And now, in order to support the European countries against the Eurozone crisis, many governments are again pushing the idea of bailouts for countries suffering Eurozone crisis.
Our world is facing a global debt crisis; almost every other nation is suffering the burden of huge national debt which is increasing regularly. The current national debt of the United States is $15.03 trillion1 , while the current national debt of United Kingdom is around £1.1 trillion. However, government often doesn’t care about the national debt because basically, it is not the government which is meant to pay any of this debt; rather the citizens of a nation are responsible to pay back all this debt. During the recession of 2008, the governments of the United States and the United Kingdom offered bailout packages free handedly that resulted in huge increment in national debt.
United Kingdom is again expected to pay £5 billion to bail out Spain2 as the UK government is starting to prepare for a Eurozone collapse. Obviously, the Eurozone crisis is increasing pressure on UK economy which is already in shambles.
Bailing out PIIGS through Government Bonds
In order to meet expenses, government offers securities or government bonds which are also known as treasury bonds or government stocks. By selling these government bonds the government attains currency to invest in its progressive welfare policies, infrastructure, and provision for bailouts. Often it is said that government bonds are a better way for government to collect money as it is not robbery like direct increment in taxes however it is false. Government bonds are generally believed to be risk free assets because in order to pay the investment back, the government can always increase taxes on citizens or it can print new money out of thin air. Here we will discuss the basic immorality of the government bonds to offer bailout packages for defaulting business conglomerates or sovereign countries.
Who Buys Government Bonds?
It is believed that private parties buy these government bonds to support the government while enjoying risk free bonds that are believed to pay good returns. However, history reveals that government bonds never work any good. As for example, the national debt of the United States has increased by $500 billion since the financial year 2003 and in FY2008, it increased by $1 trillion and again in 2009; the national debt got an increment of $1.9 trillion and in 2010, national debt increased by $1.7 trillion. Same is the case with the United Kingdom. Britain owed £967bn in October, up from £837bn a year earlier, which is an increment of £ 130 billion3 . Obviously, private parties often desist the idea of buying government bonds specially because of the fear of inflation risk that remains with the government bonds. However, this lack of interest of private enterprises or foreign governments in government bonds seldom restricts the government from spending as much as it wants. In case government fails to attain private buyers, the national bank (Bank of England in UK and FED in the United States) prints new money out of thin air to buy government securities or bonds.
Who Pays for the Government Bonds?
While the government enjoys the new money printed out by the Bank of England (or Reserve Bank of India, or the FED of United States), or the money offered by the private players who choose to buy government bonds, this loan is considered as an increment in national debt. It means that the whole nation and every citizen of the United Kingdom will be liable to pay the share of his or her debt when the government bonds will mature. Thus, government actually extorts the money to be returned to the private buyers of government bonds. However, government never ask for the consent of each individual citizen to decide whether he personally wants to take a loan which he will pay responsibly. Thus, in case of bankruptcy of Portugal, Ireland, Italy, Greece, Spain, Hungary, Belgium and other Eurozone nations because of the suspected Eurozone crisis, the government of the United States will offer handsome bailout package at the expense of the citizens of the United States as they will be liable to pay for the maturity of government bonds.
How Government Pays Backs the Government Bonds?
In cases when the Bank of England prints new money to buy government bonds, this new money creates ripples of inflation right when it starts reaching market. This inflation or increased quantity of currency causes steep price rise as a consequence which results in declining purchasing price and saving values of the individual citizens. In other words, the government actually robs the individual citizen through government bonds by enforcing an unwanted, irrational inflation. As for example, the government of the United Kingdom introduced government bonds in the year 1693 to raise enough money to wage war against France. Inflation is a form of indirect tax which is no less than robbery. However, nobody likes inflation and hence, on the name of controlling inflation, the government starts increasing direct and indirect taxes on citizens. Not only income tax is increased but the VAT, sales tax, corporate tax, road tax and other bureaucratic taxes are also increased. Thus, government bonds actually acts like a robbery against citizens as the loan attained through government bond is expected to be paid by citizens. This national debt on every citizen of a country is paid back by more extortion against the citizens in the form of inflation and increased direct and indirect taxes.
In another case, when the government bonds are bought by foreign investors or foreign sovereign governments, these investors can be easily paid back by the government if government auctions its share in public sector. However, no government actually enjoys the idea of selling public sector because selling majority of public sector will mean the redundancy of the government. In order to maintain government control over public sector, government opts to print money out of thin air which causes extreme inflation and to increase taxes on citizens, who were forced to bear national debt.
In both of the cases, the government actually robs the citizens by issuing government securities and bonds in the market. Government bonds have always succeeded in increasing the government debt (national debt). As for example, the National Debt of United States in 1800 was $83 million and each individual American citizen at that time was liable to pay $28 right at his birth. In 1962, the national debt reached $290 billion and every American citizen was required to pay $1,700 at his birth. In 2011, the national debt is $15.03 trillion and every American citizen attains a debt burden of $48, 140 at his birth4 .
Major increase in this national debt started in 1933 when the then American president Franklin D. Roosevelt decided to abolish the gold standard so that he could make money redeemable in money. Fiat currency offered government the power of printing and spending as much money as it wanted to tackle its expenses and to invest in the wars.
Can Government Bonds remain Honest?
Yes, government can remain honest about the government bond and may decide to not to burden individuals with extreme national debt by deciding to disinvest public sector and privatize all profitable public sector. Yet, this never happens and government keeps trying to control people while increasing national debt on citizens. This happens because of fiat currency that allows government to print as much money as it needs out of thin air while reducing (robbing) the purchasing power of citizens.
Eurozone Crisis Solution for Portugal, Ireland, Italy, Greece and Spain
Government Bonds ultimately increases the government debt (national debt) up to extreme levels where the government just cannot sustain it and hence it defaults and goes bankrupt. In such cases, government may decide to disinvest its market especially if it fails to attain any bailout from other nations. This happened in India in 1991 when Indian government was facing bankruptcy and was forced by IMF to open up telecommunication and insurance market along with a few more public sectors for privatization and foreign investment.
In current situation, Germany, France, United Kingdom and other major global economies along with the IMF and World Bank are planning to offer bailout packages for PIIGS and other defaulting countries of Eurozone5 . However, bailout is not the solution, rather it will prove to be extreme problem for Germany, United States, United Kingdom and other countries offering bailout package for Eurozone crisis. Better way is to allow these defaulting countries to go bankrupt and then let them mend their ways by privatizing their public economic sectors. Same happened with India, and same will be the right process for the improvement of Greece, or Spain.
- US National Debt, US National Debt Clock [↩]
- UK faces £5 billion bill to bail out Spain, Daily mail online [↩]
- How Big is Britain’s Debt Problem, What next for Britain’s collective wealth? [↩]
- US National Debt, US National Debt Clock [↩]
- Eurozone Debt Crisis, Possibilities of Fallout of Eurozone, Rational Libertarian Corner [↩]