Thursday, November 08, 2012

Do you want to stand behind the left's debt ?

It occurs to me that debt addicts like the US Democrats & UK Labour party can only run up massive national debts as the lenders are betting on future right of centre governments to pay them of.

What if the right declared it would default on debt created by spending it thought excessive. Would the sovereign wealth funds be so keen to lend ?

What made me think of this was ready James Delingpole's apocalyptic forecast for the US under Obama and cronies.

The right is always told its mean and uncaring, but always expected to pay the bill.

Time to strike and change the terms of the game.

Sent from my HTC


Antisthenes said...

The BoE has suspended QE because it does not work. Quelle surprise.

Jim said...

A nice idea, but couldn't be done, because government debt is rolled over constantly. Not all debt issuance in any given year is just for that years spending. Thus you would find that a 30 gilt issued in 1982 is coming up for repayment, and a new one is issued to fund that payment. Is that new debt or old? It would be impossible to determine exactly which gilts issued in any given year were the ones responsible for increasing the overall debt level, and thus would be liable to be cancelled by an incoming Right Wing government in the future. Without being able to roll over old debt, the whole government debt situation would be untenable. No-one would buy any debt at all, and the State would be instantly bankrupted.

Man in a Shed said...

Antisthenes - I suspect its a pause. QE has allowed govt to borrow cheaply which hiding the cost by stealth. Now the gene's has been allowed out of the box, no politician is going to put it back.

Jim - Yes there are difficulties, but they can be resolved using a bit of arbitrary logic. Just say the first X gilts offered are covered and anything afterwards won't be. It will then be up to the govt of the day to decide how to prioritses the way it uses the money.

In effect left wing govts are just spending the money they raise, but that of future right wing governments that are needed to resolve the fiscal disaster they leave behind. We need to cut this link.

I've also wondered about fiscal as well as temporal electoral mandates. The faster you spend - the sooner you face the electorate.

Govt debt is distorting democracy and destroying our societies - we need to tackle the causes as well as the figure.

Wildgoose said...

Despite the practical difficulties it is still an idea worth exploring.

After the last election but before the Coalition had been agreed, the Labour Party gave away a fortune to the EU in various monetary commitments. They should have been told that any attempt to sign away our money was null and void without the agreement of the whole House of Commons, that it would not be honoured, and that anyone attempting to do so would be prosecuted.

Jim said...

I think there are further issues as well - would it be legal for a start? If a part of the UK government signs a contract with a private individual then it should honour that contract. Unless the UK govt ceases to exist, then it must honour contracts signed by its predecessors, because if it doesn't the whole thing falls apart. Because its not a one way process - a right wing opposition might say it won't honour the debts of a left wing one, but equally a left wing opposition might refuse to honour contracts signed by a right wing govt.

Any government needs to be able to plan on the longer term than just the next 4-5 years at best, often just a year or two. It can't do that if no-one will sign contracts because they are worried the next govt will rip them up. Which I don't think they can even if they wanted to, there is such a thing as contract law, and an independent judiciary.

Unless you want to live in a State where the rule of law means nothing, this is a bad idea. Superficially tempting, but bad.

Man in a Shed said...

Jim -

Oddly enough you show exactly how this would work. In essence anyone lending money to a government that runs over its fiscal mandate would need to factor in the risk it would never be repaid. Hence the government of the day would pay more for its risky spending.

The key here is for other political parties to announce before hand how much they are willing to stand behind. Similar moves have been made in the past over privatisation.

There is a consitutional approach here since vast borrowoing by a governemnt supported by one parliament binds the next - which in theory is uncontitional.

Of course governments do currently default of debts ( and the courts do nothing )- just as the last and current governement are doing by quantitative easing - which defrauds holders of sterling and instruments denominated in sterling.

The mechanics of this could take a bit of work - but the ability of the current generation to tax future generations is clearly undemocratic and needs to be counter-balanced against. It is also a clear necessity for those who want to argue for government virtue.

It's true that more work is needed on the idea.

Any ideas anyone ?

Wildgoose said...

By convention, no Government is supposed to enter into lengthy and/or expensive contracts that are opposed by the Opposition in the final year of their Government. It was yet another convention that was simply ignored by the last Labour Government.

I think one possible answer would be that in the last year of a Government, the Opposition should have the right to make clear that any such commitments signed before the next General Election was potentially null and void if they were to get elected.

This would solely apply to clearly (and publically) identified contentious legislation in the 12 months running up to a General Election only. In effect, it would be declaring that the final signature on such contracts to make them legally valid would be that of the people actually paying for the contract. If the contracted parties then wish to begin work they would be doing so at their own risk knowing that the contract was not completely signed off.

Sobers said...

Look legally constituted State bodies cannot just walk away from their contracts. The only way for an incoming government to not honour its legally binding contracts already in place would be to dissolve/make bankrupt the bodies that signed the contract.

Lets say a NHS trust sign a PFI agreement that the incoming government don't agree with. The only way that contract can be made null and void is if both parties agree. If the new contractor says 'No I want my payments, I've already started building the hospital' the only way out would be for the State to refuse that NHS trust the money to pay for it, and then the contractor would sue for his money and the NHS trust would either be bankrupt, or have to sell off its assets to pay.

No government is ever going to go down that route, however much they dislike what has been signed by their predecessors. Look at the new Royal Navy aircraft carrier fiasco - there was no way out for the Coalition. The shipyard had cast iron contracts with the MoD. If they reneged, it would have cost them as much in damages in court as it would to build the things anyway. So we are left with 2 white elephants.

As I said, either contracts and the rule of law mean something in a country, or they don't. I'd rather live in one where they do, even if we do get situations such as the above.

Man in a Shed said...

Sobers - When is really comes down to it the government of the day can do whatever it likes.

Quantitative Easing is a form of default and contact breaking. So is allowing runaway inflation. ( The current government is engaged in both right now. )

Or the good old fashioned straight default ( see Argentina / Spain etc ).

I'm not suggesting cheating anyone - my point is to make it clear beforehand what's going to be done - then its buyer ( or lender in this case ) beware.

Let me ask you a question - where's the justice in the current generation enslaving the next one in debt ?

The reason it's happening now is a sort of debt fuelled political tragedy of the commons. We need to change the terms under which this self destructive behaviour is favoured.