Story of a three legged chair
It was only the end of the year before last, the entire banking system of Europe and the USA effectively went bankrupt.
This in turn could have caused a vast amount of financial damage to institutions, persons or governments who held shares of, loans to or were counter party with, the entire banking system. Even the actual flow on losses were impressive including major housing slumps of 20% and share index falls of up to 45% in many countries.
Academics will probable argue for decades about the ‘true’ causes of this crash, but I suspect outrageous and systemic fraud on a monumental scale was a key ingredient. Not to say this will ever see the light of day.
As we all know, western governments decided, on balance, the best thing was to bail out their banking systems. That is to say, pay their debts for them. Wikipedia quotes the direct cost to do so as $2.8 Trillion dollars. Of course, disasters of this nature are like weeping wounds and the blood loss is on going, so who knows what that cost is now. And what do we call direct costs or secondary costs? And who has any enthusiasm to keep track?
What is now of concern is the answer to this important question — where did governments get the money they used to pay out the bankrupt bankers?
Governments, contrary to the belief of some, are not wealth creating entities. Although, nominally, they control the money supply they cannot simply print all the money they need whenever they want. If they could, then general taxation of a nations workforce would be a pointless affair. Companies could enjoy a tax free existence and governments would magically pay their bills with that modern version of the printing press, the computer. Sadly, the grand real life experiment in Zimbabwe highlighted some severe down side effects in doing so and thus proved the theory bunk.
So if they can’t create it, where did they get it from?
Without getting bogged in technical jargon seemingly designed to blur the truth, they seem to have three avenues. They can take it from someone, borrow it from someone, print the money or a combination of all three. Of course, how this is done is the where the rubber meets the road. The nitty gritty. The rub. You can take in plain view, you can take in hidden view. You can borrow in plain view of the marketplace, or do it quietly under the table. You can report on the state of things with a spirit of truth, you can hide dealings behind clever accounting or statistical practice. Strange things happen when people police their own performance with someone else’s money.
Given the size of the losses bankers made, it’s almost certain they did all three.
But of course, tax is made by tax payers. Interest bills for government loans are paid by future tax payers, your children and your children’s children. And the consequent inflation from money printing slowly but surely dissolves wealth and savings in real terms. So regardless of the exact combination of what was done we could boil it all down like this. They used money they took from tax payers. They borrowed money tax payers have to pay the interest on. They devalued the remaining wealth and savings of tax payers.
All well and good if you don’t pay tax, other wise a triple whammy.
If we pause to think for a moment it brings into stark relief the drive in the western world for governments to ‘tighten their belts’. Even if they were spending a little more than they should before - now it’s a magnitude worse. The bankruptcy of the bankers is threatening to become the bankruptcy of the governments. Or at least the crippling interest costs.
Casting my eye about me, I don’t see any obvious doubling in personal or company taxation. Unsurprisingly we do see the idea of a new mining tax and discussion about changes to tax regulations. I’m willing to venture those changes will not be designed to reduce the governments net income. There seems enough machinations to suggest they’re trying to increase their tax take any place they can get away with it.
For obvious reasons governments are not keen to advertise how much money they create, so a it’s a difficult line of enquiry. What we can see is interest rates on the uphill path in the middle of the biggest world recession since the great depression. Interest rates often go up in high inflation environments, which occur when governments get carried away with money creation. Also, have you noticed the price of anything used for daily life dropping lately?
One thought I did have is this idea of compulsory superannuation was a wonderful windfall for the government. Imagine how enticing a shoebox of cash that big must look to a government in this situation. If I was cynical I would wonder about the timing of regulatory changes to superannuation to stop it from being paid out to you in one lump sum on retirement. I wonder how much will be left 20 years from now that hasn’t been tied to some kind of government debt program or other.
But c’est la vie, what is really happening seems to be kept under wraps, far from inquiring minds.
Overall one can’t help but feel sorry for the poor old tax payer. She had to bail out the banks for trillions, has to now live through regulation changes designed to make her pay more tax and though the cost of living keeps going up there’s not a wage rise in sight. To rub salt in the wound, banks worldwide are back to record profits. Welcome to the brave new world of post bailout blues.
You know, Henry Ford once stated this piece of wisdom; ‘There is one rule for the industrialist, this: make the best quality of goods possible at the lowest cost possible, paying the highest wages possible’. At this juncture, I can’t help but think we’ve forgotten the wages leg of his three legged chair.
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