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Meditations On the External Public Debt

Privado, dinero, financian,

Available: Español

[Leer en español]

In order to progress, it is imperative to abandon the closed mind of the conservative, always stuck in the status quo, incapable of accepting change because his conceptual cobwebs suffocate his thinking. As Albert Einstein pointed out, “it is impossible to obtain different effects by repeating the same causes.”

When Thomas Jefferson, as ambassador in Paris, received the brand new American Constitution, he wrote that if he could have included an additional clause in that document, it would have been to prohibit external public debt, since it is incompatible with democracy, as it compromises the patrimony of future generations that didn’t elect the government that contracted the debt. When I invited James M. Buchanan, Nobel Prize winner in economics, to lecture in Buenos Aires for the second time, he said the same thing in the context of “Public Choice”, which he initiated with Gordon Tullock.

And there is no correlation with private activity in terms of the evaluation of the respective investments, since in the state sphere it is not pertinent to refer to investments which, as is well known, refers to subjective appraisals in terms of the relation of present value with respect to the future. It is as incoherent as when in the Argentine environment the incoherence of “forced savings” was imposed. In the Budget, what fits are the items of current expenses or expenses in fixed assets, but not “investments.”

Now, heated debates on the alleged indebtedness of various governmental administrations of our country (Argentina) have arisen, which usually involve three blunders.

Firstly, in order to speak properly about indebtedness, it is necessary to refer to absolute values and not as a percentage of GDP. Secondly, the latter refers to repayment capacity, but does not illustrate the level of debt. Finally, for the ratio over GNP to be meaningful, it is indispensable that the currency be stated in real terms, because otherwise, with a devalued currency, figures are artificially inflated.

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This problem is not limited to the Argentine case which, although it is an extreme example, most of the nations of the so-called free world incur in a superlative degree of public indebtedness. That is to say, in addition to galloping tax pressures and monetary manipulations of varying degrees, governments also resort to debt to finance increasing degrees of Leviathan.

Without prejudice to fundamental monetary and banking reforms and substantial tax reforms, on which we have commented in detail on other occasions, it is urgent to contemplate the prohibition of contracting external public debt (internal government debt has other meanings) so as not to allow “kicking the ball out of the park” by committing resources beyond present income.

Many times we have warned about the monumental debt crisis looming on the planet, which is being pushed to a great extent by governmental institutions such as the International Monetary Fund (IMF), which finances failed governments with dollars compulsively subtracted from the taxpayers of several countries. That is why, among others, prominent authors such as Anna Schwartz (co-author with Milton Friedman of the famous monetary history of the United States) and Peter Bauer (London School of Economics) have suggested the immediate closure of this international entity.

But perhaps the most illustrative book on the subject is the one with the suggestive title that summarizes the thesis: “When aid is the problem”, by Dambisa Moyo, African and PhD in Economics from Oxford University. In the same line of argument, the detailed study of the work of Melvyn Krauss, entitled “Development without Aid,” is of great interest.

We must focus attention on the ravages of debt which, as we have said, not only compromises the assets of people who cannot express themselves, but also opens the floodgates so that unbridled rulers can live off the future.