Tuesday, June 26, 2012

The OPM of the Masses

Government debt is the OPM of the Masses

Just like the NINJA borrowers of the US housing boom, governments have proved to be dishonest and imprudent borrowers.

In India, debt has been raised to pay black-marketers of kerosene, smugglers of PDS wheat, and cooks of public works books. In the US, it is paying the indigent to stay at home, and corporate jailors to house people for consuming and trading one of the most harmless intoxicants, marijuana. But even the largest public debt in the history of civilisation will be hugely inadequate to pay for the inflated medical bills and social security that the US citizenry have come to take as their birth-right. And I guess we better mention Greece, whose citizens have taken to calling German a Nazi nation because its government, whose officials work till 65, are asking their Greek counterparts, who retire at 60, to go easy on their entitlement programs.

This is a world gone crazy. And yet, it was entirely predictable. The phenomenon is called OPM, or ‘Other People’s Money’. Government funds are of course someone else’s money, and the millions of Someone Elses from whom the money is taxed are usually too disorganised to come together to protest. Even if they did, those from whom the bulk of money is taken are a much smaller number than those in whose name the money is spent, so in the rules of the electoral game, they count for little. This leaves those who seek office to compete with each other in promising to extract enough OPM to make the majority, and the most vocal minorities, better off. This process is the true OPM of the masses.

Increasingly, the tax collections of the world’s governments have not been able to keep pace with its spending ambitions. But heads of government would rather not let reality intrude on the OPM-fuelled promise that they can generate prosperity by redistribution. Increasingly, they have been funding their electoral promises by borrowing money. If money markets became tighter, they leaned on Central bankers to open up the money supply, and keep borrowing cheap. In the US, they succeeded; in Greece, since the central bank is shared with Angela Merkel, they got a ‘Nein’. Which is why the US government can borrow money for next to nothing, while the Greek leaders are having to deal with reality.

Reality, of course, has a way of catching up with dreams. If Merkel holds her stance, the European reality check will come this weekend, and this could mean that world markets hit a wall. If, on the other hand, she gives a little - which has been the story of the last couple of years - there will be a little more OPM available in Greece. And Spain. And tiny little Cyprus.

But, run out it will, in Europe to begin with, but also in India, in China, in Japan, in Argentina. Not to mention the US. For the time being, the world is largely ignoring the magnitude of US government debt, but Obama’s administration is the most egregious borrower of all. Any realistic price for US government borrowing will make its public finances completely unviable. When this reset happens, there will be a horrific fallout for the global economy, currently coasting on the illusion that the dollar is a safe haven. In the aftermath, there will be a demagogic deluge about the viciousness of markets.

Markets, of course, are only a forum for individuals to take the decisions they deem most rational at the time. And unlike the electoral process, which gives unbridled power to its periodic winners for long periods of time, financial markets are continuously dynamic; no individual player can hope to set, say, the yield for US debt, in the manner in which monopolistic central bankers routinely do.

It will take a while for our collective economic wisdom to understand the profound fallacy of allowing central bankers to fix the price of money, and yet talk of market failure. It will be convenient to demonise investment bankers when bankrupt governments can’t borrow more. And we may never be able to quantify the distortions introduced into societies spoiled by millions of perverse economic incentives introduced by government policy.

Nevertheless, when the OPM dream fades, we will all be in a cold sweat. It won’t be pleasant for anyone, but it is one more step on the painful path of realisation that centralised decision-making is hugely flawed and deeply demeaning. 

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