By Malachy McDermott *
If there’s one thing all honest savings advisers would agree on, it’s that a payday loan is a bad idea. Taking out a high-interest loan secured by nothing but your word to pay off your checking account to consume fuel with no capital investment only leads you down the road to ruin.
However, this simple message of living within your means does not seem to have reached the golden ears of central banks and governments around the world. As inflation rises (who would have guessed that the borrowing frenzy of 2021 would have resulted in higher inflation?), The governments of the EU and the United States are now caught between a rock and … eh well, a rock.
Trapped in a cycle of borrowing to cover current spending, even debt-resistant economies like Germany and New Zealand must continue on this self-defeating path. The collateral used is bond, about as useful and stable as ever; the international bond market has exploded over the past ten years.
Some of these modern bonds (in all their forms and forms) are now also backed by CACs (collective action clauses), which means that if the creditors agree, they can reduce the amount of the payment on the bond if the country issuing the bond is falling behind. Unfortunately, this paves the way for one of two (very bad) results:
- Bonds are bought by friendly creditors like the European Central Bank (ECB), big blocks that will lean favorably on the issuer’s side due to a back door political method. As an example, Mario Draghi has more than a few friends at the ECB (being the former head of the organization) and is now Prime Minister of Italy, running into debt on oceans. However, once the big political elements decide on the reduction in value, small commercial holders will lose and insurance companies with large holdings of domestic bonds will suffer a trade blow.
- Bonds are bought by hostile nations like China, and they refuse to allow CAC to activate, meaning countries that have issued billions will not be able to burn any bondholders (as Iceland was able to do it) and will be plunged into further turmoil, with majority ownership of what is happening in the hands of rivals.
Going back to the original analogy, a bond is similar to a payday loan in that the only promise behind it is that the person taking out the loan will have money to repay in the future at an agreed price. For the CAC, now imagine that your personal loan is financed by people in your neighborhood and that this debt can be freely sold to anyone. It doesn’t matter if it ends up in your friends’ hands, but if it ends up with that neighbor still annoyed by your house party last Halloween, things could get complicated.
And what about the money itself? The crux of the payday loan economist’s arguments is that all of this money will pay future dividends. It will be invested and reinvested and will flow down the drain, creating jobs and money and whatever they feel is calming. But we know that doesn’t happen. The bad investment, costly vanity projects, and discouragement from saving will mean that this money would have been better burnt than spent, at least we could have derived utility from the heat.
In the midst of this, our old friend Mr. Krugman, the genius who thought the internet would be a failure and one of the architects of the 2008 crash, once again shouted his high horse about “the goblin economy.” Shamelessly offensive (in the soothing guise of ‘Fortunately the Irish have a sense of humor’; thank you, Mr Krugman, but we did not find any cartoons in Punch funny and we don’t find you funny) and still wrong, Krugman does not see the point in Ireland maintaining a low capital gains tax.
However, his binge-spending and spending plans (nothing has changed since Keynes) are the epitome of reckless consumerism. He and his payday buddies want to create a utopia where no one ever (really) has to pay back anything and where credit and resources are limitless. But Mr Krugman, I fear the Irish will find a pot of gold at the end of their rainbow in the form of jobs, FDI (foreign direct investment) and a better trade balance.
What we find with these payday loan economists is an unpaid bill, possibly in the hands of our enemies, that will have to be paid because the party doesn’t last forever and eventually someone has to be paid.
* About the author: Malachy McDermott graduated in economics from University College Dublin in Ireland.
Source: This article was published by the MISES Institute