Public Debt - how high can you get?

Extract: Quintessence has often pointed at unsustainably high public debt as a symptom of the decline of the Government as an institution. See for example the article Reject Public Debt!. It now looks as if the US Government will have a budget surplus. Does this fit in with Quintessence's earlier analyses? Read about it below!

A. The Asian Currency Crisis

The Asian currency crisis has made headlines all over the world. Some argue that, if the Japanese and Chinese currencies follow the downfall, the entire financial system could collapse. At present, there is a huge run on the $US and US shares. The US sharemarket has never before seen a period of such sustained rise. Why do investors continue to choose the $US and US shares?

B. The situation in the US

Today the US is in remarkable health:
  • Crime figures are down substantially
  • Unemployment is under 5%
  • $US is strong, with no sign of decline
  • Interest rates are low, which encourages investment
  • Low inflation, some analysts even predict deflation
  • Predictions of a surplus go as high as $40 billion

The prediction of a surplus has surprised many. Does this mean that the US Government has found the recipe how to survive in the future? Quintessence argues that the US Government has indeed been more successful than many other governments. Of course, this success has come at a price, such as high rates of imprisonment, low social welfare, etc. But these are not the arguments that Quintessence wants to focus on.

Quintessence argues that the main reason for this healthy situation is that the US has successfully moved into services, particularly telecommunications, computers, media, banking, the Internet, in short all the ingredients of the Information Society. Also, US has prevented monopolies and argued against protection of domestic industries.

C. Opening up the Borders.

The fortunate situation in the US is not so much caused by geographics, but by economic policies. The IMF is right in insisting that the East-Asian countries open up their economies, abolish tariffs and stop subsidizing non-competitive domestic industries. The agendas agreed upon within organizations such as the APEC, OECD and WTO to open up the borders for trade in financial services, computers, telecommunications and other services should be implemented as fast as possible. The waiting is for bureaucrats to abolish legal restrictions.

The problem with multinational trade argreements is that they are agreements between nations. National governments will only go that far in opening up borders. After all, national governments owe their very existance to such borders. National governments are particularly reluctant in releasing their grip over the mass media. National governments typically organize the mass media in a way that represents one giant call for government intervention.

D. National Currency.

Currency by definition has a national character. A national currency is generally issued and protected by a Reserve Bank, a Central Bank or whatever name one wants to give such an institution. But such currencies become more and more out of step with globalization trends. National currency is too much tied up with a specific national government.

As multinational companies start operating in more and more countries, start accessing previously closed shops and as trade becomes more global, there will be a growing demand for alternatives to national currency. After all, each conversion from one currency into the other takes time, costs money and leaves a bureaucratic trail. Already, large US multinationals have a greater turnover than the GDP of small countries.

The US dollar can be expected to become more prominent, while many local currencies will be avoided. But Quintessence does not predict that the US dollar will ever become some kind of world currency. Instead, Quintessence argues that it will become increasingly attractive to use shares of such companies instead of money. The US economy may look strong compared to other economies. But the US Government has a huge amount of debt. Any company with such a level of debt and exposure to litigation, would be avoided like the plague. This has been discussed before, e.g. in the December 1992 issue of Optionality on Finance.

E. Conclusions.

A budget surplus of one government, whether the US, the NZ or any other one, does not mean that the Government as an institution is capable of surviving in the future. As before, Quintessence predicts that it will become more and more attractive to use shares in transactions, rather than national currency. Eventually, things will be measured differently, i.e. not in the economical terms of trade and transactions. But even if measured in money, it should be clear that many governments in the world are technically broke. The comparative success of one government is no evidence of success of the Government as an institution. Any government has by definition a national focus and is thus out of step with globalization trends.

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