Can a country exist without running a deficit?

[Firefly]

jCountries would be un much better shape if they were constitutionally forced to balance the budget, and politicians were forbidden to borrow even one cent from anyone.

Hi Chris,

I would be very interested in hearing your views regarding the moves that are supposedly underway currently by France and Germany to limit the budget deficits of member states or take those countries to court in return for "saving the euro".

Whilst this is not exactly the same as what you are calling for above (where no borrowing should be permitted) do you think it's at least a move in the right direction?

At first I thought it was, but perhaps this would restrict competition between member states themselves and give a clear advantage (at least in the short term) to the "good" countries? Also, is this just interference in the market at the end of the day?

 

[horusd]

Hi Chris, my premise is that borrowing prudently for investment is rational and defensible. The shannon hydro project or good infrastructure are prudent investments in this sense which may require borrowing and facilitate wealth generation. Education is another one.

The issue you raise around governments being unwise is somewhat valid., but one cannot assume that private companies, regardless of the incentives, are necessarily better, or more saavy o that public investment is always poor, Norway's investments on behalf of it populace being a case in point.

 

[Chris]

Hi Chris,

I would be very interested in hearing your views regarding the moves that are supposedly underway currently by France and Germany to limit the budget deficits of member states or take those countries to court in return for "saving the euro".

Whilst this is not exactly the same as what you are calling for above (where no borrowing should be permitted) do you think it's at least a move in the right direction?

At first I thought it was, but perhaps this would restrict competition between member states themselves and give a clear advantage (at least in the short term) to the "good" countries? Also, is this just interference in the market at the end of the day?

Fundamentally I do not agree with the EU setting national policies top down, but that has more to do with the fact that I have become a total EU skeptic regardless of the policies being suggested.

But essentially I think this talk of new rules is purely political PR for Merkel and Sarkozy. There were rules in place before called the stability and growth pact, but every single country including Germany and France, broke the rules. Nothing will convince me that the same exceptions will not be made again.

The second issue is that given the level of debt, rules should be put in place to reduce debt, but the rules suggested are simply going to slow down the speed at which we are going over the cliff; the end result will be the same.

Hi Chris, my premise is that borrowing prudently for investment is rational and defensible. The shannon hydro project or good infrastructure are prudent investments in this sense which may require borrowing and facilitate wealth generation. Education is another one.

The issue you raise around governments being unwise is somewhat valid., but one cannot assume that private companies, regardless of the incentives, are necessarily better, or more saavy o that public investment is always poor, Norway's investments on behalf of it populace being a case in point.

The problem is though that politicians and bureaucrats are no good at making good investment decisions, if they were then they would be successful investors making millions. Paying for everything out of taxation ensures that the public is convinced that a project will be beneficial. Paying for it through borrowing simply disguises the cost of investment as it doesn't have to be paid for until some future date. This is dishonest and very opaque.

Yes Norway has made some good investments in oil, but it is impossible for them to tell if the resources were utilised most efficiently. Private investment has to always make the most efficient use it can achieve otherwise it risks losing business, this same incentive does not exist when politicians make investment decisions.

Look up two of the most disastrous "investments" made by the US government in the companies Solyndra and EnerDel. Both companies could not get loans, so the US government stepped in to fund what was termed a no-brain investment in the green energy industry. $700m have been wasted as Solyndra has declared bankruptcy and EnerDel is scaling back operations to avoid bankruptcy.
Burt Folsom has some quick commentary about this:

 

[Firefly]

But essentially I think this talk of new rules is purely political PR for Merkel and Sarkozy. There were rules in place before called the stability and growth pact, but every single country including Germany and France, broke the rules. Nothing will convince me that the same exceptions will not be made again.

I tend to agree. Also, taking a country to court who breaks the new rules will (you would imagine) result in fines. Given that the country broke the rules because they needed to borrow more money in the first place how will these fines be paid?

 

[zztop]

How can we have a surplus if we are the deficit
is 20bn for the year.

 

[Protocol]

There has been a massive drop in investment exp by the private sector (households and firms), esp on houses.

So the private sector is no longer borrowing from abroad.

In fact, it is a net saver.

If it saves more than the Govt borrows, then the nation as a whole is a net saver.

That is what's happening in 2011.

 

[Protocol]

See here:

[broken link removed]

The nation was a net saver of 761m in 2010.

However, we still have huge stock of foreign liabilities.

 

[mainasia]

Running a balanced budget wouldn't work. As Sunny says countries need to borrow and not all borrowing is bad, in fact it can be wealth-generating. The problem isn't borrowing per se, it's imprudent borrowing. As a rule of thumb,borrowing to fund day to day spending is bad.

But we also have a ideological, social and economic problem: we are addicted to growth, and economic growth has become the objective and measure of well-being. The inherent premise is that the more wealth the better the country, the happier the people. This is patently false, or at least substantially false. As the philosopher Khalil Gibran (The Prophet) says "Beware of comfort that enters your house as a guest and becomes the master."

Yes spot on..imprudent borrowing or poor debt management or relying on debt too much is the issue.

For instance a country could balance it's country perfectly well for 20 years, but the country could face any number of problems because it had not prepared properly for military invasion, technological change, economic change, climate change etc. Also as it would be forced to balance the budget every year large capital projects could take X number of times to finish compared to a country than can borrow that money and pay for it over it's lifetime.

In addition, inflation can make using borrowed money the cheaper option compared to cash.

 

[mainasia]

There has been a massive drop in investment exp by the private sector (households and firms), esp on houses.

So the private sector is no longer borrowing from abroad.

In fact, it is a net saver.

If it saves more than the Govt borrows, then the nation as a whole is a net saver.

That is what's happening in 2011.

Eh..by some accounts Ireland has the largest public and private debt per citizen in the WORLD.

http://cormaclucey.blogspot.com/2012/01/prospects-for-irish-residential.html

Just because 2011 was a net saving year doesn't really mean a whole lot, a bit like a drop in the ocean unless debt is written off.

 

[mainasia]

Look up two of the most disastrous "investments" made by the US government in the companies Solyndra and EnerDel. Both companies could not get loans, so the US government stepped in to fund what was termed a no-brain investment in the green energy industry. $700m have been wasted as Solyndra has declared bankruptcy and EnerDel is scaling back operations to avoid bankruptcy.
Burt Folsom has some quick commentary about this:

Well sometimes things don't work out and a large problem is the fact that the US allows importation of cheaper goods from China from companies that are funded by the state there.
The idea was good, the overall implementation bad.

On the other side of the coin, government intervention following the credit crisis actually saved 100,000s of jobs in the auto industry and other industries in the US and almost all the money has already been paid back at a net profit to the taxpayer!

So be careful reading commentaries from the US as they usually have a political slant rather than a balance viewpoint.

 

[Chris]

Well sometimes things don't work out and a large problem is the fact that the US allows importation of cheaper goods from China from companies that are funded by the state there.
The idea was good, the overall implementation bad.

Yes, sometimes things don't work out, but when the money you play around with is not yours then you are not as careful with it as a private investor would be. Fact is that Solyndra could not get investment from the private sector, that means that no private investor thought that the company was worth investing in. What magic insight do bureaucrats have that allows them to bet against the market?
The idea was a disaster from the start. If you can get something cheaper from elsewhere then that is a good thing, as you can put your own resources to better use. It is cheeper for my family to buy food than it would be to produce it ourselves. The logic applies when looking at a country's economy as a whole.

On the other side of the coin, government intervention following the credit crisis actually saved 100,000s of jobs in the auto industry and other industries in the US and almost all the money has already been paid back at a net profit to the taxpayer!

This is not correct. there has been absolutely no profit from all the bail outs in the US.
GM is still majority owned by the US taxpayer, but GM as a company has not changed one bit since it was bailed out, so it is just going to go bust again, shares are already down 35% since the IPO. If the auto industry had not been bailed out then those jobs would not have disappeared. When companies go into bankruptcy they do not vanish from the earth, they are sold off whole or in parts to companies that can do a better job at managing the resources.
The bailouts of the financial industry were even worse. Yes the money directly lent to companies has been returned, but what no politician is willing to factor in is all the toxic debt that the FED bought ($1.25tr). This is held on balance sheet with the par value, not the market value, as there is essentially no market value for them, i.e. they are worth 0.

So be careful reading commentaries from the US as they usually have a political slant rather than a balance viewpoint.

The commentary I pointed to is based on basic economics, something that is never correctly represented in commentary about the bailouts. Your argumentation is that if the government had not bailed out the auto industry then thousands of jobs would have been lost, i.e. absent the government "investment" these jobs would have gone. But this completely ignores the fact that government has no money of its own, it takes it out of the productive economy. So that means that the money "invested" in the auto industry is money that was not invested by the private sector, so there is no net gain!