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Government is not reason, it is not eloquence – it is a force! Like fire, it is a dangerous servant and a fearful master; never for a moment should it be left to irresponsible action.
— George Washington

If you’ve ever read George Orwell’s Animal Farm, the message conveyed in it will remain with you forever.  The book is a portrayal and critique of human nature and the political systems that people create. For those that need a reminder, or have not read the book, here is the basic plot.

There is a farm run by a Mr. Jones, who drinks so much he becomes unable to take care of the farm and feed his animals.  Eventually the animals, (in particular the pigs), decide human beings are parasites and the pigs lead a revolt and chase Mr. Jones off his property.  They change the farm’s name from ‘Manor Farm’ to ‘Animal Farm’ and create a list of seven commandments.  They are:

Whatever goes upon two legs is an enemy.
Whatever goes upon four legs, or has wings, is a friend.
No animal shall wear clothes.
No animal shall sleep in a bed.
No animal shall drink alcohol.
No animal shall kill any other animal.
All animals are equal.

 

In a short space of time the pigs assume leadership over the farm and one pig in particular, Napoleon, consolidates power after running his primary competitor off the property. It is not long before the pigs begin to walk on two legs, drink alcohol, sleep in beds and generally act like humans. Recognizing that their new lifestyle is contrary to the inspirations listed in their original seven commandments; they simply decide to make some adjustments:

No animal shall sleep in a bed with sheets.
No animal shall drink alcohol to excess.
No animal shall kill any other animal without cause.


Before long even these adjustments become too binding for the gluttonous and power-hungry pig, oligarch class.  They decide to condense everything down into one commandment:

 

All animals are equal, but some animals are more equal than others

 

This process describes what has happened to governments all over the world, and which has especially accelerated since the 2008 financial crisis, as the ruling class of the military/industrial complex have formed a cabal with bankers and politicians to manage the global economy for their own benefit with no regard whatsoever for the remaining 95% of the people.

Our illusion of democracy, the rule of the people by the people, has been shattered… encouraged by the rapid spread of information throughout the Internet and instant communication systems. Developments in technology have brought many advantages and benefits to the masses but at the same time have exposed the dark secrets of government as never before. One of the major secrets to be revealed is how governments are financed and how they interact with other connected parties in their management of taxpayers’ money. ShopSquawk will follow the pattern set in previous lessons by briefly examining the history of our government system. Many will already know that our democratic system was derived from the Greeks, particularly the Athenians, who developed techniques to prevent the rise of *oligarchy:

*A definition from Wikipedia:

“Oligarchy is a form of power structure in which power effectively rests with a small number of people. These people could be distinguished by royalty, wealth, family ties, education, corporate, or military control. Such states are often controlled by a few prominent families who pass their influence from one generation to the next. In his 2011 book, “Oligarchy,” Jeffrey A. Winters defines oligarchy as “the politics of wealth defense by materially endowed actors.” Winters’ definition is that massive wealth is the key factor in identifying oligarchs”.

During the fourth century BCE (Before the Common/Current/Christian Era), after the restoration of democracy from oligarchic coups, the Athenians used the drawing of lots for selecting government officers in order to counteract, what the Athenians acutely saw as a tendency toward oligarchy in government, if a professional governing class were allowed to use their skills for their own benefit. They drew lots from large groups of adult volunteers as a selection technique for civil servants performing judicial, executive, and administrative functions. They also used lots for key executive posts, such as judges, administrators and jurors in the political courts which had the power to overrule the Assembly.

ShopSquawk can find no consensus on how to define democracy; but equality before the law, having equal access to legislative processes and various freedoms appear as important characteristics of democracy. In the US and the United Kingdoms the main feature is that of congressional and parliamentary sovereignty while maintaining judicial independence. Freedom of political expression, freedom of speech, and freedom of the press are considered to be essential rights that allow citizens to be adequately informed and be able to vote according to their own interests. It has also been suggested that an important aspect of democracy is the capacity of all voters to participate freely and fully in the life of their society. With its emphasis on notions of social contract and the collective will of all the voters, democracy can also be described as a form of political collectivism because it acts as a form of government in which all citizens have an equal say in the decisions that affect their lives. For example from: Wikipedia:

“Some contemporary authors have characterized current conditions in the United States of America as being oligarchic in nature. Simon Johnson wrote that “the re-emergence of an American financial oligarchy is quite recent,” a structure which he delineated as being the “most advanced” in the world. Jeffrey A. Winters argues that “oligarchy and democracy operate within a single system, and American politics is a daily display of their interplay.” Bernie Sanders is quoted in a 2010 ‘The Nation’ article that: “an upper-crust of extremely wealthy families is hell-bent on destroying the democratic vision of a strong middle-class which has made the United States the envy of the world. In its place they are determined to create an oligarchy in which a small number of families control the economic and political life of our country.”

 

Note: Wikipedia, although used here anecdotally, is NOT a reliable source for ‘facts’. It is good as a resource to gather possible information to be later evaluated for accuracy. Case in point: IP addresses (where the source of the edit comes from) have been detected from Congressional addresses, agency addresses, and corporate addresses.

 

We are all aware that, although we have in the USA and UK a voting process that can change our governments according to the peoples’ will, it does not work this way in practice. Not only have the two ruling parties found mutually supportive ground in their common policies but since 2008 it has become evident that the politicians might make the laws but the bankers and financial oligarchs control and manage the executive. This may be described as “Corporatocracy and Crony capitalism” and is manifest in a corporate oligarchy as a form of power, governmental or operational, where such power effectively rests with a small, elite group of inside individuals. These often come from small groups of educational institutions, influential economic entities such as banks or commercial organizations with lobbyists that act in complicity with the oligarchy but often with little or no regard for the prevailing constitutional rules. Today’s multinational corporations function as corporate oligarchies with exceptional influence over democratically elected officials. Again, from our most illustrious Wikipedia:

“Robert Michels believed [like the Athenians] that any political system eventually evolves into an oligarchy. He called this the iron law of oligarchy. According to this school of thought, many modern democracies should be considered as oligarchies. In these systems, actual differences between viable political rivals are small, the oligarchic elite impose strict limits on what constitutes an acceptable and respectable political position, and politicians’ careers depend heavily on unelected economic and media elites. Thus the popular phrase: there is only one political party, the incumbent party, and that is the end”.

 

               A picture of our system

               A picture of our system

We have already covered some aspects of debt and credit in Lesson 3 showing when governments exceed the limits of reasonable debt levels bad things can happen. Gross Domestic Product (written as ‘GDP’, and remembered by looking at the belly above and thinking ‘gross’) is the accepted method of measuring a country’s economic health; the total borrowing of the government (the national debt) is expressed as a percentage of GDP. Unpleasant things can happen when government debt exceeds 100% of GDP (Reinhart & Rogoff-2009). Four studies published in just the past three years document this conclusion. These studies are highly relevant since OECD (Office of Economic Co-operation and Development) figures indicate that gross government debt exceeds 100% in the USA, UK, Europe, and Japan as well as in many other OECD member countries. Three of these studies were conducted by foreign scholars and published outside the United States:


Study 1
Swedish economists Andreas Bergh and Magnus Henrekson find a “significant negative correlation between size of government and economic growth in as much that an increase in government size by ten percentage points is associated with a 0.5% to 1% lower annual growth rate.” (Journal of Economic Surveys, April, 2011)

Study 2
In an empirical investigation for the euro area, Cristina Checherita and Philipp Rother find that government debt to GDP ratio above the turning point of 90-100% has a “deleterious” impact on long-term growth. Additionally, the impact of debt on growth is ‘non-linear’. This means that as the government debt rises to higher levels, the adverse growth consequences accelerate. (European Central Bank, Working Paper 1237, August 2010)

Study 3
In The Real Effects of Debt, Stephen G. Cecchetti, M.S. Mohanty and Fabrizio Zampolli determine “beyond a certain level, debt is bad for growth. For government debt, the number is about 85% of GDP.” (Bank for International Settlements (BIS) in Basel, Switzerland, September, 2011)

Study 4
In Debt Overhangs: Past and Present – Post 1800 Episodes Characterized by Public Debt to GDP Levels Exceeding 90% for At Least Five Years, Carmen M. Reinhart, Vincent R. Reinhart and Kenneth S. Rogoff confirm that public debt overhang episodes are associated with growth over one percent lower than during other periods, and such episodes lasted an average of twenty three years. They write: “the long duration also implies that cumulative shortfall in output from debt overhang is potentially massive”. (National Bureau of Economic Research, Working Paper 18015, August 2012). Reinhart and Rogoff had made a detailed study of public debt in their book: “This Time is Different – 2009”. Furthermore when private debt rises above 160% to 175% of GDP, growth is also stunted. This argument is important since private debt in U.S.A. was 260% of GDP in the fourth quarter of 2012.

 

Public and private debt is merely one aspect of the distortions apparent in all economies throughout the world today. There are many other features associated with government fiscal management when combined with the nefarious activities of global financial institutions. ShopSquawk promises not to dwell on the causes of the global financial crisis of 2008 but it might be helpful to gain some understanding of how one key individual sees potential solutions unfolding in order to prevent another meltdown.


Henry Merritt “Hank” Paulson, Jr. (born March 28, 1946) is an American banker who served as the 74th United States Secretary of the Treasury. He had served as the Chairman and Chief Executive Officer of Goldman Sachs, and is now chairman of the Paulson Institute, which he founded in 2011 to promote sustainable economic growth and a cleaner environment around the world, with an initial focus on the United States and China. Hank’s book: “On the Brink” describes his experiences as Treasury Secretary when he managed a team of experts handling the financial meltdown during 2007-08. He writes of the lessons he learned and noted some observations critical of the current financial system, especially of that used in the USA. Since he left Treasury he had been approached by people eager to hear about his experiences and two questions often appeared: “What was it like to live through the crisis?” and “What lessons did he learn that could help us avoid a similar calamity in future?” He hopes that the first one is answered by reading his book and goes on to list some lessons, although complex, he narrowed them down to just four crucial ones:

1. “The structural economic imbalances among the major economies of the world that led to massive cross-border capital flows are an important source of the justly criticized excesses in our financial system. These imbalances lay at the root of the crisis which causes the US government to borrow large amounts of money from oil-exporting countries and Asian nations which it can never repay except by printing money and thus inflating away the debt burden”.

2. “Our regulatory system remains a hopelessly outmoded patchwork quilt built for another day and age. The system has not kept pace with financial innovations [see Lesson 8 about Financial Engineering] and needs to be fixed so that we have capacity and the authority to respond to constantly evolving global capital markets”.

3. “The financial system contained far too much leverage [excessive borrowings], as evidenced by inadequate cushions of both capital and liquidity [money]. Much of the leverage was embedded in largely opaque and highly complex financial products [derivatives]. It is generally understood that both commercial and investment banks in USA, UK, and Europe as well as the rest of the world did not have enough capital [they ran out of money!]. Less well understood is the important role that liquidity [cash – again!] needs to play in bolstering the safety and stability of the banks. The credit crisis [global financial meltdown] exposed widespread reliance on poor liquidity practices, notably a dependence on short-term funding; which means institutions using these methods need to have plenty of cash on hand for bad times and many did not”.

4. “The largest financial institutions are so big and complex that they pose a dangerously large risk”. Today the top ten financial institutions in the USA hold close to 60% of total financial assets, up from 10% in 1990, and continually growing bigger. The concept of ‘To Big To Fail’ (TBTF) has moved from the academic literature to reality and must be addressed.

Let’s call him ‘Hank’, OK?

Hank goes on to list a number of steps to be taken by the US government to reduce global imbalances that have been decried for years by many prominent economists, some even Nobel Prize winners, who should know better. Perhaps they actually do know better but, like many politicians and media pundits, they are captured in the merry-go-round of financial opportunity and reward? It is important to quote Hank Paulson in his book, “On the Brink,” [at page 441]: “Our government needs to tackle its number one economic challenge, which is reducing its fiscal deficit. Our ability to meet this challenge will to a large extent determine our future economic success. We are now on a path where deficits will rise to a point at which we may simply be unable to raise the necessary revenues even if significant tax increases are imposed on the middle class.”



This sentiment echoes the ideas of economist Henry Morgenthau, Jr. (1891-1967) the U.S. Secretary of the Treasury during the administration of Franklin D. Roosevelt. Morgenthau believed in balanced budgets, stable currency, reduction of the national debt, and the need for more private investment. On November 10, 1937, Morgenthau gave a speech to the Academy of Political Science at New York’s Hotel Astor, in which he noted that the Depression had required deficit spending, but that the government needed to cut spending to revive the economy. In his speech, he said:

We want to see private business expand. … We believe that one of the most important ways of achieving these ends at this time is to continue progress toward a balance of the federal budget.
— Henry Morgenthau, Jr.

Morgenthau’s propositions are as relevant today as they were 76 years ago. If a leader of Hank Paulson’s stature can reach similar dramatic conclusions, someone who is at the heart of the problem, then one expects that changes would have been made by now. Sadly this is not the case, and ShopSquawk is sure Hank Paulson will be the first to agree that the measures taken so far fall significantly short of any remedy sufficient to avoid a repeat banking or sovereign debt crisis (government debt crisis); even both simultaneously occurring in the future. In fact we have already had the “Cyprus” event in 2013, which has to be a portent of things to come, unless governments around the world sit up and take serious notice of what is being signaled by those with inside knowledge of these complex matters.

Morgenthau’s propositions are as relevant today as they were 76 years ago. If a leader of Hank Paulson’s stature can reach similar dramatic conclusions, someone who is at the heart of the problem, then one expects that changes would have been made by now. Sadly this is not the case, and ShopSquawk is sure Hank Paulson will be the first to agree that the measures taken so far fall significantly short of any remedy sufficient to avoid a repeat banking or sovereign debt crisis (government debt crisis); even both simultaneously occurring in the future. In fact we have already had the “Cyprus” event in 2013, which has to be a portent of things to come, unless governments around the world sit up and take serious notice of what is being signaled by those with inside knowledge of these complex matters.

From the outside looking in we can only marvel at the impotence exercised by our governments. Their excessive spending habits, driven by puerile (meaning ‘silly’) political motives, leave the general populace to wallow in ‘austerity’ while those connected or close to the financial apparatus party on. It is apparent that what politicians claim they can do in no way meets the reality of their mandate to prudently manage public debt. They have devolved their responsibilities to the barons of finance who now undertake to monitor and control those systems to which end they have failed miserably. As Hank Paulson intimates, the solution must be a complete rewrite of financial systems from top to bottom, in the meantime we can only look forward to more of the same until the next generation hopefully rises to the occasion. As it is now, we can only look at how government finance functions today, and ShopSquawk trusts that the student will be able to stifle a cynical guffaw as you read on.

 

‘Austerity’, when speaking in economic terms refers to policies that may include spending cuts, tax increases, or both.



It is the government’s main job, in peacetime at least, to promote the economic wellbeing of the country and effectively manage its finances and welfare. To do this properly it needs to fund its projects by raising taxes, on a fair and equitable basis, and disbursing these taxes throughout the economy to the benefit of improved environment, health, education, enterprise, defence and many other worthy causes. However, in spite of all the taxes collected during a year, they are nowhere near enough to fund all the projects and match the aspirations of rapacious political elites. Therefore, it is argued, the government must ‘borrow’ the money they need; the mechanism for this was described in the last lesson.

What is now of interest is how much should the established authorities borrow in order to maintain a stable and orderly society? This is the question we answered a few pages back; but of course, the ‘powers-that-be’ do not subscribe to ‘balancing their books’ and continue merrily spending, beyond all reasonable limits, and promoting their prescriptions through their captured media: the national press and TV.

Regardless of the current debate in the world of economics ShopSquawk believes Reinhart and Rogoff are right (remember them?). What all the studies have shown is that when Debt to GDP rises between 90-100% it damages economic growth. However, when debt to GDP rises above 100% negative returns occur (Phillip Rother and Christina Checherita). There are connections between changes in government debt and economic growth rates in the following areas:

 

  • Private Saving levels
  • Amount of Public Investment
  • Factor Productivity Growth*
  • Long term nominal and real interest rates

 

* OPTIONAL SUPER-GEEK EXTRA! READ AT YOUR YOUR OWN PERIL – In economics, total-factor productivity (TFP), also called multi-factor productivity, is a variable which accounts for effects in total output not caused by traditionally measured inputs. If all inputs are accounted for, then total factor productivity (TFP) can be taken as a measure of an economy’s long-term technological change or technological dynamism.In past examples there has also been a negative impact on output when private sector debt rises above 160%. This is why in USA 260% (100% of Federal debt to GDP plus 160% of private debt to GDP) of total debt is the level at which the economy eventually experiences negative growth.


It is clear, from all of the available evidence that higher public debt levels are leading to weaker economic growth. The problem, longer term, is that extreme over-indebtedness has historically led to higher inflation in developed economies.

It is one thing when one country is over indebted because there have always been other countries to bail them out. It is quite a different story when virtually every economy on the globe is over-indebted, to some degree or another, as a result of the flawed global financial system.

Financial and other markets are not currently reflecting the reality of poor economic growth worldwide. Stock market prices are back to levels reached before the crisis and bond yields are artificially low due to QE; so much so that the result is a negative return after taking into account inflation albeit at a low level for the present. Despite QE creating massive amounts of free money to flow into commodity prices, markets have actually seen a fall. There is no sign of significant inflation; more a period of deflation (lower prices and lower real wages) which appears to be baked into the global cake (the phenomenon of ‘inflation’ and its consequences is examined in Lesson 9).


As we have seen, GDP is a key measure of a nation’s total income against which government debt is measured and is the market value of all final goods and services produced within a country in a given period of time, usually a year. In addition, ‘GDP per capita’ is a measure of a country’s standard of living and equates to the total population number divided by GDP). The US and Britain are two of the most indebted nations on earth but have a high standard of living.

 

Stop! Read that paragraph again.

 

Both the US and the UK national debt is large in relation to the economy and growing rapidly; it is owed to a variety of investors and financial institutions as well as some 35% being owed to overseas governments and investors. This is the most risky part of the debt because foreign investors are fickle like cats, and can choose to sell their bonds in the market and cause a run on the bond markets which can quickly result in higher interest rates and greater inflation.   Since 2008, when the US and the British economy slowed sharply and fell into recession, the national debt has risen dramatically, mainly caused by increased spending on welfare benefits, bank bailouts, and a significant drop in receipts from taxation due to poor economic performance.

There are a huge number and percentage of public sector employees compared to those employed in the private sector; clearly this is far too many government employees representing some 20% of the working population for the size of the economy in the UK, and by some estimates 40% in the US. Some would argue that ‘Big Government’ needs many people to run it; just so, but ShopSquawk, together with many others, will argue for a much reduced government model allowing private enterprise to do what it does best without undue interference from government with its often attendant negative outcomes.

Governments naturally grow exponentially unless politicians and the executive act decisively to manage it, especially the expansion of jobs. A serious, apolitical, non partisan, approach to this leviathan of government could swiftly reduce the % to a more reasonable % without the people noticing any significant difference in service delivery. The reader can do the math and see the savings on salaries alone going a long way to balance the budget. However, balancing the budget in this way, it will be argued, would have dire affects on unemployment costs and so the problem comes down to the principle of employer versus employee relationships and finding enough ‘work’ for all the working-age people to do rather than ‘make-work’ jobs in government. This subject will be discussed more fully in Lesson 10 about National Economies and how a complete reappraisal and restructure of government services is required with the objective of making for much smaller government.

Fiscal policy is the use of the government budget to influence economic activity; it deals with the raising of taxation and the ways it is spent. When our politicians (policy-makers and lawmakers) seek to influence the economy, they have two ways to act: through monetary policy and by fiscal policy. We have seen in the last lesson how central banks use monetary policy by indirectly controlling the money supply through adjustments to interest rates, bank reserve requirements, and the purchase and sale of government securities and foreign exchange. On the other hand, governments influence the economy by changing the level and types of taxes, the extent and composition of spending, and the degree and form of borrowing.

 

RELAX AND DO NOT FREAK OUT! THE FOLLOWING WILL NOT BITE YOU!

 

The value of all final goods and services produced in the economy, the GDP, is calculated by adding four key sources of national income together according to the formula:

GDP = C + I + G + NX:

Overall national spending or demand, that is, private consumption (C),
private investment (I),
purchases of goods and services by the government (G),
exports minus imports (net exports, NX).


Fiscal policy that increases overall demand directly through an increase in government spending is typically called expansionary; it is contractionary if it reduces demand through lower spending. In the short term governments may focus on expanding spending or cutting taxes to stimulate an ailing economy, or reduce spending and raise taxes to combat rising inflation and ‘cool’ the economy down. In any event the goal is to maintain a reasonably stable economic environment that is steadily growing. These targets apply to most countries but the application varies depending on the special circumstances of each nation. The desire to reduce poverty might lead a low-income country to tilt spending toward primary health care, whereas in an advanced economy, pension reforms might target growing long-term costs related to an aging population, as we find today.

Differing fiscal policies are influenced by the type of economic theories adopted from time to time. Economies evolve through cycles and economists often differ on what ‘economic levers to pull’ at any one time. Politicians are constantly ‘experimenting’ by what might appear as ‘tinkering’ with various taxes, welfare subsidies or making changes to the structure of government services. For example, a favorite policy of governments in the 1980s was the ‘so called ‘Private Public Partnership’; this called for public services joining with private enterprise to form a joint venture but with a profit motive. It was a way to ‘commercialize’ national services by selling off large chunks of publicly owned assets to large corporations and allowing them to be managed as profit-making businesses. Unfortunately not all national services are suitable for this type of treatment and several failures caused subsequent governments to rethink the policy. Unfortunately the action stopped at ‘re-thinking’ and there is scant evidence of any reversals except of course in the banking sector some of which, in any case, was forced into government ownership as a result of the 2008 crisis.

ShopSquawk is sure the reader is able to think of several examples through their or their parents personal experiences. Water Utilities, Electricity companies, Pensions and Environment have all been affected by privatization in one way or another. The net result has been a rise in costs and therefore price increases for many of these services as we have all witnessed. There is a case to consider taking important utilities, housing and vital transport hubs back into public ownership with subsidies to moderate the end cost to the customer. It is, of course, economic heresy at this stage of national development but it is fairly certain that significant changes in this direction will have to be made as a response to the crippling effects of the global crisis.

The crisis hurt most economies causing financial sector difficulties and flagging confidence disrupting private consumption, investment, and international trade; all of which adversely affect national output (GDP). Governments responded by trying to stimulate economic activity through new discretionary spending targets, reductions in some taxes, subsidies and increased public works programs because these actions help to soften the effects of an economic downturn. However, stimulus may take time and be difficult to design, troublesome to implement effectively and hard to reverse when a recovery begins. The correct response ultimately depends on the fiscal flexibility a government has for new spending initiatives or tax cuts. Governments face a trade-off in deciding between targeting stimulus to the poor, where the likelihood of full spending and a strong economic effect is higher; funding capital investments, which may create jobs and help bolster longer-term growth; or providing tax cuts that may encourage firms to take on more workers or buy new capital equipment. In practice, governments try to take a “balanced” approach with measures in all of these areas in some degree or another.

Fiscal deficits and public debt ratios (the ratio of debt to GDP as discussed earlier) have expanded sharply in many countries because of the crisis. Financial support and guarantees to banks, financial institutions and industrial sectors have added to concerns about the deterioration of government finances. Countries can afford to run moderate fiscal deficits for extended periods of time supported by domestic and international financial players remaining convinced of the government’s ability to meet their present and future debt obligations. Deficits that grow too large and linger too long may, however, undermine that confidence. A collapse in financial markets causes a high degree of fear to enter the global arena and for money to flow quickly and in large quantities into what investors call ‘safe havens’ such as the US dollar and US Treasury bond. These events cause distortions in the normal operation of markets where the forces of supply and demand are compromised, prices become unrealistic and the flows of goods and services are interrupted.

The IMF is NOT a gangsta rapper! Although there are some that would disagree.

The IMF is NOT a gangsta rapper! Although there are some that would disagree.

Aware of these risks in the present crisis, the IMF, in late 2008 and early 2009, called on governments to establish fiscal policy strategies to help ensure the continued solvency of nation states:

  • Stimulus should not have permanent effects on budget deficits
  • Medium-term frameworks should include commitment to fiscal correction once conditions improve
  • Structural reforms should be identified and implemented to enhance growth
  • Countries facing medium and long-term demographic pressures should firmly commit to clear strategies for health care and pension reform [two of the largest national commitments]

To date, none of these proposals have been effectively implemented anywhere around the world due mainly to the inertia of massive public institutions and the continued pressure exerted by a cabal of international corporations, bankers and politicians whose aim is to maintain the status quo.

The national debt is often confused with the Government budget deficit and was previously known as the ‘Public Sector Borrowing Requirement’ (PSBR) but now is officially quoted as the ‘Public Sector Net Cash Requirement’ (PSNCR), but in either case it is a euphemism for the rate at which the Government needs to ‘borrow money’.

 

The UK Prime Minister, David Cameron, was reprimanded in February 2013 by the UK Statistics Authority for creating confusion between the National Debt and the PSNCR by stating, in a political broadcast, that his administration was “paying down Britain’s debts”. In fact, his administration has been attempting to ‘reduce the deficit’, not the overall debt. The national debt will continue to rise, even if the deficit shrinks, for as long as can be projected into the future; which is as good as saying forever unless radical and structural changes are made to the economic models.

The question of course remains, how long can this go on? Nobody has any answers but many have suggestions; all we know is that serious changes must be made to not only reduce deficits but actually start reducing the overall government debt by spending less money! The public debt increases or decreases as a result of the annual deficit or, not often it must be said, a surplus. The budget deficit is the cash difference between government receipts and spending; it is as simple as that. All these politicians have to do is balance their books just like any other person or business. Why they find this so difficult is beyond me; perhaps the mammoth undertaking is just too massive for any one group of people to take on. Alternatively, perhaps there are too many vested interests determined to maintain the status quo because they have their “noses well in the trough of graft”. We will let the students here decide for themselves!


Don’t be a bonehead! Read the next paragraph and internalize it.

 

The Government finances its debt by issuing government IOUs called bonds (in England they’re called ‘gilts’); these are Government securities which are sold through the US Treasury and the Bank of England and the bond markets and which we covered in the last lesson. These securities are the simplest form of government bond and make up the largest share of Government debt; a conventional bond issued by the Government pays the holder a fixed cash payment (coupon) every six months until maturity, at which point the holder receives their final coupon payment and the return of the initial sum invested. Each bond is dated for a period of time from 1-12 months to 1-30 years and they each carry differing rates of interest and other characteristics which cause them to be ‘rated’ as good or otherwise for investment purposes.

If your eyes just glazed over, come back and read this again after your nap!

If your eyes just glazed over, come back and read this again after your nap!

National credit ratings influence the cost of servicing national debt through the rate of interest that is to be paid. The national debt is rated by various ratings agencies, mainly the American ‘big three’: Standard & Poors, Moodys and Fitch. On February 23, 2013 Moody’s downgraded UK debt from AAA to Aa1, the first time since 1978 that the country had been downgraded. Both France and the USA lost their AAA credit ratings in 2012. All the main political parties agree that the national debt is too high, but there is disagreement as to the remedy. As of 2012 the national debt was forecast to approach 100% of (GDP), far above the government’s sustainable investment rule of a national debt no greater than 40% of GDP. The size of the debt can be reduced in several ways all of which are not without financial and political pain:

 

  • Economic expansion, which tends to cause tax revenues to grow and also leads to lower spending on welfare benefits
  • An improvement in the banking sector, taking the pressure off government intervention
  • Cuts to public spending
  • Defaulting on all or part of the debt
  • Tax increases
  • Inflation, which reduces the total value of the existing debt

 

Unfortunately, large scale cuts in public spending have the potential to significantly dampen consumer demand and, by reducing economic growth, slow the increase in tax revenues. One significant aspect of advanced economies is their reliance on the level of spending by consumers – ‘consumerism’. Almost 70% of both US and UK GDP is made up of consumer spending such that when an economic slowdown occurs the economy goes into freefall (recession) with rising unemployment, less spending and further unemployment causing a vicious cycle.

There is disagreement between the political parties regarding the national debt; Conservative Party politicians typically advocate a larger role for cuts to public spending. By contrast, the Democrat or Labor Party tends to advocate fewer cuts and more emphasis on greater government spending in order to stimulate growth. Sadly the general outcome is that nothing really gets done properly or long enough to take effect; the country continues to drift, muddling on, as the deficits mount up and the nation becomes poorer. Drastic action is needed to change the very nature of our political and economic systems if we are ever to make progress in the right direction to improve everyone’s lot, not only for the privileged few.


Unpeeling the onion to see the bilderBURGER beneath

Unpeeling the onion to see the bilderBURGER beneath

This piece of the jigsaw is fundamental in our overall picture, now emerging, of a dysfunctional global system designed and run by an oligarchy of bankers and politicians whose main objective is to accumulate more and more resources and wealth to the exclusion of the rest of world. Unless there is a will to change and improve the lot of the majority surely a revolution of some kind is inevitable? We witness every day the influence of the internet together with Twitter, Skype and all the other technologies that allow people around the world to know more about what is happening every minute. The ‘powers-that-be’ can no longer hide behind their veil of secrecy, although they will still try with groups such as the ‘Bilderbergers’, but to no avail; the truth will out, it’s coming soon to a country near you.

When the Bilderberg Group meets, there is usually a clampdown on media coverage. British Prime Minister David Cameron, International Monetary Fund chief Christine Lagarde, Amazon founder Jeff Bezos, Google chairman Eric Schmidt, and former US secretary of state Henry Kissinger are some of the people who attend the Bilderberg meetings. The Bilderberg Group is an invitation-only community which holds annual meetings with approximately 140 guests attending. It is comprised of many wealthy and influential people in the fields of politics, banking, business, the military, and news media.

Although the names of attendees and the agenda for meetings are available on their website, the group holds its meetings in private and there are no press releases about them, which has raised suspicions about the Bilderbergers. The group first convened in 1954 at the Hotel de Bilderberg in The Netherlands, which the group was named after.

 

ShopSquawk brings this lesson as a great debate has emerged because of an American ‘whistle-blower’ from the US National Security Agency (NSA) who has provided evidence that the American Empire has been collecting massive amounts of data on each and every American citizen and others around the world, listening-in to phone calls, reading emails and other electronic transmissions. It appears that the US Government has gone well beyond its legal remit, has ridden roughshod over the American Constitution and has certainly stirred the patriotic US citizen who is ever vigilant for his constitutional rights. Governments around the world seem to have taken extreme measures to limit civil liberties in the wake of the global crisis. It seems that this event has been a trigger to instill a greater level of fear within these establishments the like of which has never been seen before.