Do Defaulting Governments' Citizens Have a Moral Obligation to Repay Debt?

[SillyWilly]

I've been reading a rather interesting thread lately about personal debt default, of the student loan variety. I think most of you know which one I'm talking about. Some rather indignant opinions surfaced during the discussion, and that made me wonder: How do these people feel about government default?

Is it moral for a government to default on its debt? Do the citizens of spendthrift nations have a moral obligation to, through austerity, cut public spending (and benefits) and pay down their nation’s public debt? A nation, after all, is just the sum total of its individual citizens.

Recently Greece defaulted on their debt and the creditors had to take a 50% haircut, i.e. investors (pension funds, banks, other sovereign nations) had 50% of their original investment written off as unrecoverable. Certainly the argument is that the Greeks were profligate and reckless with their borrowing; as I’m sure some will point out. But the Greek government spent all that money and increased the living standard of its citizens without an adequate understanding of the risks associated with their borrowing (debatable, I’m sure) and on the advice of a certain major investment bank, which functioned as their “financial adviser.”

Why do nations (or individuals, for that matter) become over indebted? IMHO, I think it’s because they (1) want (a lot of) stuff they can’t afford (2) and they want a living standard that is beyond their means. Also, they are prepared to ignore reality for as long as possible no matter the consequences to investors or their citizens. So the proverbial “can” gets kicked down the road. To me this sounds like the most lethal cocktail of all: greed mixed with stupidity.

Just to clarify, I’m not against sovereign debt as a means to finance public projects, like infrastructure. I have a problem with governments which are borrowing billions (or even trillions) of dollars to finance utterly useless programs or projects.

Here’s a list of 30 such projects by the US government (other governments are spending money on similar or even more ludicrous junk, I’m sure. I’m not picking on the US; data is just easier to get for the US.):

#1 In 2011, the National Institutes of Health spent $592,527 on a study that sought to figure out once and for all why chimpanzees throw poop.
#2 The National Institutes of Health has spent more than 5 million dollars on a website called Sexpulse that is targeted at "men who use the Internet to seek sex with men". According to Fox News, the website "includes pornographic images of homosexual sex as well as naked and scantily clad men" and features "a Space Invaders-style interactive game that uses a penis-shaped blaster to shoot down gay epithets."
#3 The General Services Administration spent $822,751 on a "training conference" for 300 west coast employees at the M Resort and Casino in Las Vegas.
The following is how the Washington Post described some of the wasteful expenses that happened during this "conference"....
Among the “excessive, wasteful and in some cases impermissable” spending the inspector general documented: $5,600 for three semi-private catered in-room parties and $44 per person daily breakfasts; $75,000 for a “team-building” exercise — the goal was to build a bicycle; $146,000 on catered food and drinks; and $6,325 on commemorative coins in velvet boxes to reward all participants for their work on stimulus projects. The $31,208 “networking” reception featured a $19-per-person artisanal cheese display and $7,000 of sushi. At the conference’s closing-night dinner, employees received “yearbooks” with their pictures, at a cost of $8,130.
You can see some stunning pictures of GSA employees living the high life in Las Vegas right here.
#4 Do you remember a few days ago when credit rating agency Egan Jones downgraded U.S. government debt from AA+ to AA? Well, someone in the federal government apparently did not like that at all. According to Zero Hedge, the SEC plans to file charges against Egan Jones for "misstatements" on a regulatory application with the SEC.
Normally, the SEC does not go after anyone. After all, when is the last time a major banker went to prison?
No, the truth is that the SEC is usually just a huge waste of taxpayer money. According to ABC News, one investigation found that 17 senior SEC officials had been regularly viewing pornography while at work. While the American people were paying their salaries, this is what senior SEC officials were busy doing....
One senior attorney at SEC headquarters in Washington spent up to eight hours a day accessing Internet porn, according to the report, which has yet to be released. When he filled all the space on his government computer with pornographic images, he downloaded more to CDs and DVDs that accumulated in boxes in his offices.
An SEC accountant attempted to access porn websites 1,800 times in a two-week period and had 600 pornographic images on her computer hard drive.
Another SEC accountant used his SEC-issued computer to upload his own sexually explicit videos onto porn websites he joined.
And another SEC accountant attempted to access porn sites 16,000 times in a single month.
#5 According to InformationWeek, the federal government is spending "millions of dollars" to train Asian call center workers.
#6 If you can believe it, the federal government has actually spent $750,000 on a new soccer field for detainees held at Guantanamo Bay.
#7 The U.S. Agency for International Development spent 10 million dollars to create a version of "Sesame Street" for Pakistani television.
#8 The Obama administration has plans to spend between 16 and 20 million dollars to help students from Indonesia get master's degrees.
#9 The National Science Foundation spent $198,000 on a University of California-Riverside study that explored "motivations, expectations and goal pursuit in social media." One of the questions the study sought an answer to was the following: "Do unhappy people spend more time on Twitter or Facebook?"
#10 The federal government actually has spent $175,587 "to determine if cocaine makes Japanese quail engage in sexually risky behavior".
#11 In 2011, $147,138 was given to the American Museum of Magic in Marshall, Michigan. Their best magic trick is making U.S. taxpayer dollars disappear.
#12 The federal government recently spent $74,000 to help Michigan "increase awareness about the role Michigan plays in the production of trees and poinsettias."
#13 In 2011, the federal government gave $550,000 toward the making of a documentary about how rock and roll contributed to the fall of the Soviet Union.
#14 The National Institutes of Health has contributed $55,382 toward a study of "hookah smoking habits" in the country of Jordan.
#15 The federal government gave $606,000 to researchers at Columbia University to study how heterosexuals use the Internet to find love.
#16 A total of $133,277 was recently given to the International Center for the History of Electronic Games for video game preservation. The International Center for the History of Electronic Games says that it "collects, studies, and interprets video games, other electronic games, and related materials and the ways in which electronic games are changing how people play, learn, and connect with each other, including across boundaries of culture and geography."
#17 The federal government has given approximately $3 million to researchers at the University of California at Irvine to fund their research into video games such as World of Warcraft.
#18 In 2011, the National Science Foundation gave one team of researchers $149,990 to create a video game called "RapidGuppy" for cell phones and other mobile devices.
#19 The U.S. Department of Agriculture once handed researchers at the University of New Hampshire $700,000 to study methane gas emissions from dairy cows.
#20 In 2011, $936,818 was spent developing an online soap opera entitled "Diary of a Single Mom". The show "chronicles the lives and challenges of three single mothers and their families trying to get ahead despite obstacles that all single mothers face, such as childcare, healthcare, education, and finances."
#21 The federal government once shelled out $2.6 million to train Chinese prostitutes to drink responsibly.
#22 Last year, the federal government spent $96,000 to buy iPads for kindergarten students in Maine.
#23 The U.S. Postal Service once spent $13,500 for a single dinner at Ruth's Chris Steakhouse.
#24 In 2011, the Air Force Academy completed work on an outdoor worship area for pagans and Wiccans. The worship area consists of "a small Stonehenge-like circle of boulders with [a] propane fire pit" and it cost $51,474 to build. The worship area is "for the handful of current or future cadets whose religions fall under the broad category of 'Earth-based', which includes Wiccans, druids and pagans." At this point, that only includes 3 current students at the Air Force Academy.
#25 The National Institutes of Health once gave researchers $400,000 to study why gay men in Argentina engage in risky sexual behavior when they are drunk.
#26 The National Institutes of Health once gave researchers $442,340 to study the behavior of male prostitutes in Vietnam.
#27 The National Institutes of Health once spent $800,000 in "stimulus funds" to study the impact of a "genital-washing program" on men in South Africa.
#28 The National Science Foundation recently spent $200,000 on a study that examined how voters react when politicians change their stances on climate change.
#29 The federal government recently spent $484,000 to help build a Mellow Mushroom pizzeria in Arlington, Texas.
#30 At this point, China is holding over a trillion dollars of U.S. government debt. But that didn't stop the United States from sending 17.8 million dollars in foreign aid to China in 2011.

If you don’t believe the veracity of these expenditures, please follow the link to the source and find all the links to different expenditures there.
http://theeconomiccollapseblog.com/arch ... your-money

Now, how would you feel if your government defaults on its debt and leaves 1000s of pension funds, insurance companies, individuals, banks, and sovereign wealth funds, with 50% or less of their original investments, effectively destroying tens-of-thousands of people’s lives?

Would you feel a moral obligation to pay back your part of the public debt? (Remember: you enjoyed the new roads, bridges, health care, etc.) Would you accept draconian austerity measures forced on you by outside creditors so they can recover their money?

Don’t the citizens of defaulting nations have the responsibility to, at least, try to repay their nation’s creditors, through cutting public benefits and services?

[Formosa Fitness]

Now, how would you feel if your government defaults on its debt and leaves 1000s of pension funds, insurance companies, individuals, banks, and sovereign wealth funds, with 50% or less of their original investments, effectively destroying tens-of-thousands of people’s lives?

Would you feel a moral obligation to pay back your part of the public debt? (Remember: you enjoyed the new roads, bridges, health care, etc.) Would you accept draconian austerity measures forced on you by outside creditors so they can recover their money?

Don’t the citizens of defaulting nations have the responsibility to, at least, try to repay their nation’s creditors, through cutting public benefits and services?

Interesting question. My answer would be no, I feel less than zero responsibility to repay any government debt if the government is engaging in the abject nonsense you listed above, as all of them are. The capital could burn to the ground for all I'd care. Individuals are expected to cut spending when they can't pay their bills and government should be held to the same standards. Placating every politically powerful group in existence isn't a necessary part of the equation.

[Jaboney]

Depends on what kind of government it is, not whether or not you approve of the programs funded.
If it's a representative democracy or republic, yes. If not, no.

[SillyWilly]

Depends on what kind of government it is, not whether or not you approve of the programs funded.
If it's a representative democracy or republic, yes. If not, no.

For argument's sake, lets assume we're talking about a democracy or republic in the capitalist West.

[finley]

I'm just curious how you train Chinese prostitutes to drink responsibly. Does it, perchance, involve getting them drunk and naked, and then telling them when the sober up, "See? you shouldn't have got that drunk".

But yeah, it is a very interesting question, especially since citizens have very little control over what their country spends on what, and don't have enough information or smarts to decide what's "worthwhile" even if they did. I see very little difference between "representative democracies" and a dictatorship in that regard.

It seems to me the underlying problem is the modern obsession with debt funding, which makes it almost impossible to tell what's "real" wealth and what isn't. I imagine debt as the closest we're likely to get to time travel: it's a method of pulling forward wealth from the future so that we can use it to (presumably) achieve some greater effect in the present. This works when it's your OWN future you're talking about, because you can make (fairly) reliable predictions about it, if you're honest with yourself. When it's the collective future of an entire country, not so much. When the borrowing is being done by people with no "skin in the game", it gets ugly. Money gets borrowed from the future to fund stupid schemes in the present which are almost certainly of less value than equivalent schemes that might have otherwise occurred in the future (yeah, I know, I'm sounding like Doc Emmett Brown here). Anyway, point is, if debt were used MUCH less carelessly than it is now, even for supposedly "useful" things, this sort of question would arise less often.

[Zla'od]

An interesting side-question is whether the moral responsibility of the average Greek for the misdeeds of its politicians, is greater or lesser than the moral responsibility of Germany for the misdeeds of Greece. In other words, how are we to draw the circle of responsibility, so that everyone within it shares responsibility for...whatever?

[headhonchoII]

Debt funding is hardly a modern idea. Usually inflation would rampant by now though, thats the confusing part.

[finley]

Debt funding is hardly a modern idea. Usually inflation would rampant by now though, thats the confusing part.

Certainly. But it seems to come and go in cycles. Hugely-indebted countries invariably fail catastrophically (various revolutions from the past 3-4 centuries were precipitated partly by out-of-control sovereign debt, usually to fund wars). Then people get (temporarily) a lot more cautious about it. Then when everyone's forgotten it's a bad idea to live beyond your means, it happens all over again. But yeah - the difference this time is that people haven't lost faith in the currency, with inflation as a result. Very weird, and I wouldn't like to hazard an explanation. I suppose it could still be on the cards!

[headhonchoII]

Well I guess there have been major currency adjustments and currency:commodity adjustments. West down, East up.

The ECB has backed the PIIGS with more debt thus preventing default and rampant deflation. Thus far inflationary effects just seems to have become really apparent in oil pricing. This is working it's way through the system now mainly because it is priced in USD if course.

One reasons why there hasn't been much inflation is the deflationary effect of the property bust and unemployment of course in the US and other countries.

Still we will see what happens.

[SillyWilly]

Debt funding is hardly a modern idea. Usually inflation would rampant by now though, thats the confusing part.

But yeah - the difference this time is that people haven't lost faith in the currency, with inflation as a result. Very weird, and I wouldn't like to hazard an explanation.

HH and Fin: I hope this helps explain the lack of inflation and the real threat of deflation. Here's a chart of the velocity of money (M2 stock).


Definition of 'Velocity Of Money'
The rate at which money is exchanged from one transaction to another, and how much a unit of currency is used in a given period of time.

Read more: http://www.investopedia.com/terms/v/vel ... z1v0SbzUHr

The velocity of money (also called velocity of circulation) is the average frequency with which a unit of money is spent on new goods and services produced domestically in a specific period of time. Velocity has to do with the amount of economic activity associated with a given money supply.

From the chart it is clear that the velocity of money is at an all-time low. That means that even though enormous amounts of fresh currency units (JPY, EUR, USD, RMB, etc) have been created out of thin air, those new currency units have not found their way into "normal" economic activity, but instead have been used to prop up failing banks (repairing capital requirements) and impaired corporate balance sheets, finance insolvent governments (government bonds) and quasi-government agencies (Fannie, Freddie), and used, by banks, to speculate on everything from cotton to oil to soybeans.

The velocity of money is a measure of confidence in the economy. When people are uncertain about where the economy is going, they spend less and the velocity of money decreases.

In the quantity theory of money, which explains how inflation is created, the formula used is MV=PQ. M=money supply (the trillions of units created), V=velocity of money (how fast these units exchange hands),and PQ is another way of expressing the same quantity. Q is the quantity of “stuff” produced in a year, and P is the average price of that stuff. The problem with the theory is that it assumes V (velocity of money) is constant in the long run, which the chart clearly contradicts, and that ALL inflation is caused by increases in money supply. The conclusion then is that in the long-term changes in the money supply directly cause changes in the price level (inflation).

This is obviously not correct as severe declines in the velocity of money can negate very high growth in money supply. With money velocity at an all time low, we will never experience very high inflation. Yes, we've experienced higher inflation, but that's mainly due to commodity prices being bid up by all those newly printed currency units held by banks (and not as a result of currency units exchanging hands more).

When the velocity of money finally reverses and heads back up, all bets are off. When might this happen? Well, that's the million dollar question. An educated guess is when economic activity starts recovering significantly. Until business confidence and consumer sentiment improves markedly, the speed at which money changes hands will not increase. So for the time being, we're safe from run-away inflation.

Here's a link to an excellent article explaining the "velocity" phenomenon and its inflation implications. http://www.marketoracle.co.uk/Article34649.html