Greece Is Not Unique; Unsustainable Government Debt Has No Upside

Executive Brief

Burgeoning government debt is now the rule rather than the exception, and many people would argue that fiat money has been a major factor in it's growth. That opinion holds that today’s money regime, or fiat, is economically and socially destructive. It is inflationary, it corrupts society’s morals, and it benefits the few at the expense of everybody else. Those who hold that opinion assert that fiat money invariably leads to indebtedness, boom and bust cycles, and crippling depressions. At best, they say, fiat systems represent a safe means for bankers and those in political office to leverage the system in their favor and unfairly enrich themselves at the expense of the society they purport to serve.

In contrast, digital currencies remove arbitrary power over the money supply, mitigate currency exchange-rate risk for foreign firms, and encourage trade regardless of national economic performance. Because digital currency is not leveraged nor created as debt like fiat, funds are always available from an account the moment they are requested. The exchange rate of an internationally accepted cryptocurrency would be set by a much larger international user base than is possible with any national fiat currency; savings held in digital money are exempt from the impact that local political turmoil has on national currencies. This means a globally accepted digital currency has a much improved long-term stability and trade prospectus than any fiat regime.

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After the latest round of Greek financial crisis, government debt and currency stability have come to the forefront of mainstream political discourse. Despite the media attention to Greece’s government debt and banking problem, Greece’s situation is not unique. According to Global Research, there are no less than 24 countries facing debt crises including the likes of Ireland, Spain, Portugal, and 14 more rapidly heading towards a similar crisis situation. The report also claims that world debt to global GDP is at an all time high of 286 percent.

The real kicker is that nobody seems to know ‘who’ all this money is ‘owed’ to. Fiat money is created as debt through government issue or bank credit expansion, and the moment that money is issued as debt there is an interest cost associated with it. The only way this interest can be repaid is by more money entering the economy with the creation of more money (as loans) used to repay the older debt. The cycle repeats; the divide between debt levels and the amount of ‘money’ in existence grows - and herein lies the definition of ‘boom and bust’. Repaying debt destroys money: If everybody tried to repay all of their debt today, there would be no money left in the system and yet lots of outstanding debt would remain. When people repay debt, their spending in the economy decreases, and so does the amount of debt (money) in the system. Just like a car running out of gas, the economy ceases to work; the continued functioning of the fiat monetary system relies on unsustainable debt growth, and without it the whole system collapses.

It is easy to think that the national debt doesn’t affect us personally since it doesn’t show up on any single individual's balance sheet, but the national debt has a profound effect on everybody. Politicians promise a large variety of ‘free-stuff’ to get elected, and this ‘free-stuff’ always needs to be paid for by somebody. Politicians have relatively short terms in office, and tax increases are universally unpopular with voters. That makes debt financing for current election promises unduly attractive. The cunning vote-seeking politician knows that increasing spending to get votes while staving off tax increases in the short-term can ensure their reelection. Future recession is an afterthought, and fairly so - after all, it won’t be remembered as happening while they were in office. Fiat money also benefits wealthy bond holders who loan money to the government, confident they will benefit from taxes imposed on the general public siphoning wealth upwards towards the elite, and the bankers who can create the stuff out of thin air through loans.

When national debt rises to concerning levels, and with it the risk of government default, the government must raise the yield on its bond rates to attract new investors to enable further deficit spending. This leads to an even larger national debt and the increased costs associated with servicing it - money that could have gone to front-line social services that already cannot be provided within budget. Budget deficits today increase the magnitude of austerity in the future. At best this concludes with austerity and increased taxes once the politicians responsible for the spending have long left office, ensuring whoever implemented them is never re-elected, and at worst: currency crisis, bank runs, lack of private investment, unemployment, and of course, war.

The most recent debt default with wide media attention was in Greece earlier this year. Greece’s financial problems led to a bank run that resulted in ‘withdrawal’ limits being imposed on its citizens. Greeks were no longer entitled to their ‘own’ money. No further proof should be required to see that the money in your bank account doesn’t actually exist - only some of it does. You may be given ‘permission’ to withdraw some of your money on a good day, but only if not enough of your fellow citizens have the same idea. The real winners of a value-positive money system over a debt-based fiat one are everyday citizens. Digital currency is not leveraged, nor is it created as debt. Digital currency is real money; your money. It is available the moment it is requested, and can be withdrawn regardless of local political or economic turmoil. When you hold fiat money, you bear a risk of not being able to recover the funds in your account in the event of a bank run - the speed at which one happens being the only changing variable depending on who holds political office. Fiat money is mere fantasy money; money promised to somebody else, money you are just taking care of, a number on a computer screen, a number without guarantee.

Digital currency’s algorithmic money creation process removes the ability of any third party to decide how much money should exist in the system. It does not allow for limitless credit expansion. It ensures a more stable economic environment for those who use, trade in, and hold it. The exchange value of a global cryptocurrency would be set by a much larger international user base than is possible with any national currency, meaning a much larger potential market cap and improved stability. A stable alternative digital currency accepted for international trade would enable businesses to invest and operate in a foreign nation's economy without requiring them to give more than a cursory nod to the exchange-rate risks prevalent today when trading between two fiat currencies. Firms too would become immune to the consequences of irresponsible government fiscal decrees.

Unsustainable government debt has no upside for anyone other than the bankers, entrenched bureaucrats, and the wealthy who enable deficit spending through bond purchases. It is important that political leaders treat the financial environment in which we all operate within with a duty of care, and fiat money has only provided incentives to do the exact opposite dating back to the dissolution of the gold standard. By comparison, a globally accepted digital currency limits money (debt) creation, reduces exchange-rate risk, encourages global trade, and promotes sustainable economic practice by not gambling with the economic future of the next generation.

The views expressed by the authors on this site do not necessarily represent the views of DCEBrief or the management team.

Author: Timothy Goggin

Timothy Goggin is an Austrian School economic analyst with an interest in the application of moral philosophy and decentralized systems. He studies economics at the Business School at Victoria University of Wellington, New Zealand. His area of research is the consequential and moral dimensions of implementing digital currencies and the resulting synergies for consumers in the trading environment.

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