(Note: this is my article for "People's Brigada News", May 29, 2010)
A new global financial turmoil has been forming recently. Unlike the recent financial turmoil in 2008-09 which originated from corporate bankruptcies, this time, the originators are governments. Governments which have huge budget deficit (revenues are lower than expenditures and huge public debts.
The generator of the crisis was a small European country with big public debt, Greece. Then other European countries with similar problem of persistent high budget deficit and high indebtedness are lining up to be the next crisis-in-the-making. In particular, Portugal and Spain.
Actually it is not only the smaller European countries that characterize heavy indebtedness. The world’s seven major industrialized countries (the G7) are also guilty. See the table below.
Table 1. General Government Gross Debt, percent of GDP
1990 2000 2009
Japan, 66.7 141.7 217.6
Italy, 94.6 109.2 115.8
US, 63.8 54.8 83.2
Canada, 75.2 80.8 81.6
France, 35.2 57.3 77.4
Germany, n.a. 59.7 72.5
UK, 32.6 40.9 68.2
Source: IMF, World Economic Outlook 2010, database, http://www.imf.org/external/pubs/ft/weo/2010/01/weodata/weorept.aspx?sy=1980&ey=2015&scsm=1&ssd=1&sort=country&ds=.&br=1&c=156%2C158%2C132%2C112%2C134%2C111%2C136&s=GGXWDG_NGDP&grp=0&a=&pr.x=49&pr.y=10
The G7 countries are seen as the richest and the most industrialized economies in the world. Hence, they are expected to provide the financial muscles in bailing out smaller governments and economies which experience fiscal and monetary problems.
That may be true two or three decades ago. Now, some if not all of them will need to be bailed out soon. By whom? By their own taxpayers, who else. Governments have no money of their own except what they collect or forcibly get from the pockets and savings of the hard-working people. Governments though, has another power: to print money out of nowhere through their central banks.
Thus, when a government needs lots of money to pursue certain “developmental” or welfarist programs, it has three major options. (1) Collect more taxes from the people, (2) Borrow money from elsewhere, domestic or foreign, and (c) Print money.
Printing money repeatedly is not advisable. Money itself is useless unless it is used to buy or purchase certain goods or services. When there is plenty of money but little goods and services produced in the economy, the result is very high inflation, and people will complain that they need to fork out lots of money to buy very little consumer items.
The incoming Philippine government should not fall into the trap entered by many administrations before it. To continue the fiscal irresponsibility of forever bloating the public debt, of borrowing and borrowing to plug the lack of revenues while spending huge money on various expenditures and bureaucracies.
If revenues are not big, then the most logical step is to cut spending, or to sell (privatize) certain assets that are not earning, if not directly contributing to public debt. Households and individuals who spend more than what they earn are courting trouble. The same applies to corporations and governments.
US Debt 1: How Bloated is the US Govt? May 08, 2006
US Debt 2: Private Sector Bailout of Government, September 26, 2008
US Debt 3: Crisis of Irresponsibility, October 13, 2008
US Debt 4: Obama and US Entitlement, November 11, 2008
US Debt 5: Obama's Taxes, Bail Outs, $56 Trillion Debt Bomb, November 13, 2008
US Debt 6: Stimulus Trap, $1.75 Trillion Deficit, and Taxation Blackhole, March 08, 2009
US Debt 7: US Budget Deficit and G8 Debt, July 29, 2009
US Debt 8: Big Government Getting Bigger, So Are Their Debt, January 23, 2010