Contact us
CALL US NOW 1-888-GOLD-160

Government Debt Looking as Sketchy as a Payday Loan

  by    0   2

The US government continues to borrow and spend at a torrid pace, running massive deficits month after month.

The US national debt currently stands at nearly $28.5 trillion. That doesn’t account for the trillions of unfunded liabilities. And there is no end to the spending in sight. There are trillions of dollars in new spending programs coming down the pike.

The debt phenomenon isn’t limited to the US. Countries all over the world are following the same path. The world is awash with government bonds as countries borrow more and more in a vain effort to keep up with their spending.

Economist Malachy McDermott likens the international bond market to a payday loan scheme. Needless to say, it’s not something anybody would advise getting caught up in.

The following article by Malachy McDermott was originally published by the Mises Wire. The opinions expressed are those of the author and don’t necessarily reflect those of Peter Schiff or Schiff Gold.

If there is one thing every honest money-saving advisor would agree on, it’s that a payday loan is a bad idea. Taking a high-interest loan backed by nothing but your word to pay off your current account to fuel consumption with no capital investment is just leading you on the road to ruin.

However, this simple message of living within one’s means does not seem to have reached the gilded ears of central banks and governments around the world. As inflation rises (who could have guessed the borrowing binge of 2021 would have resulted in higher inflation?), both the EU and American governments are now caught between a rock and … well, a rock.

Trapped into a cycle of borrowing to cover current account expenditure, even debt-resistant economies like Germany and New Zealand need to keep on this self-destructive path. The collateral used is bonds, about as useful and as stable as ever; the international bond market has exploded in the last ten years.

Some of these modern bonds (In all their shapes and forms) are now also backed by CACs (collective action clauses), meaning that should the creditors agree, they can reduce the amount of payout on the bond if the country issuing the bond is falling behind. Unfortunately, this does pave the way for one of two (very bad) outcomes:

  • The bonds are bought by unfriendly nations like China, and they refuse to allow the CAC to be activated, meaning that countries that have issued billions will not be able to burn any bondholders (as Iceland was able to) and will be thrown into further economic turmoil, with the controlling stake of what happens in the hands of rivals.

To return to the initial analogy, a bond is similar to a payday loan in that the only promise behind it is that the person taking the loan will have money to repay in the future at an agreed price. For the CAC, now imagine your payday loan is being funded by people in your neighborhood and that this debt can be freely sold to anyone. It’s fine if it ends up in your mates’ hands, but should it end up with that neighbor still annoyed about your house party last Hallowe’en, things could get messy.

And what of the money itself? The crux of the payday loan economist’s arguments is that all of this money will yield future dividends. It will be invested and reinvested and slosh through the pipes, creating jobs and money and whatever else they think sounds appeasing. But we know this doesn’t happen. Malinvestment, expensive vanity projects, and the discouragement of savings will mean this money would have been better burned than spent, at least we could have gotten utility from the heat.

In the midst of this, our old friend Mr. Krugman, the genius who thought that the internet would be a failure and one of the architects of the 2008 crash, has been shouting from his high horse about “leprechaun economics” again. Unashamedly offensive (under the placating guise of “Fortunately, the Irish have a sense of humor”; thank you, Mr. Krugman, but we didn’t find caricatures in Punch funny and we don’t find you funny) and consistently wrong, Krugman cannot see the value in Ireland maintaining a low capital gains tax.

However, his tax and spending binge plans (nothing has changed since Keynes) are the epitome of reckless consumerism. He and his payday cronies want to create a utopia where no one ever (really) has to pay anything back and there is unlimited credit and resources. But Mr. Krugman, I’m afraid the Irish do find a pot of gold at the end of their Rainbow in the form of Jobs, FDI (foreign direct investment), and a better balance of trade.

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, as the party doesn’t last forever and eventually, someone needs to be paid.

Gold IRA Rollover to 401k

Get Peter Schiff’s key gold headlines in your inbox every week – click here – for a free subscription to his exclusive weekly email updates.
Interested in learning how to buy gold and buy silver?
Call 1-888-GOLD-160 and speak with a Precious Metals Specialist today!

Photo by Taber Andrew Bain via Flickr

Related Posts

Ron Paul: Fed Rate Increase too Little too Late

After a weak swipe at inflation at its May meeting, the Federal Reserve delivered the biggest rate hike since 1994 at its June FOMC gathering. But is it enough to tackle persistently red-hot inflation? Ron Paul doesn’t think so. He notes that the recent rate hikes have only raised rates to the level they were […]


Is Fed Chair Jerome Powell’s “Soft Landing” Even Possible?

After last week’s FOMC meeting, Federal Reserve Chairman Jerome Powell claimed that a “soft landing” was still possible. In other words, he thinks the central bank will be able to slay red-hot inflation without tipping the economy into a recession. Is this feasible? Or is it a fairytale?


The Fed: Totally Just Winging It

A 75 basis-point rate hike wasn’t even on the table a month ago. It appears that the central bankers over at the Fed were crawling around under the table because they found a 75-basis point rate hike. The Fed went big at the June FOMC meeting in response to hotter-than-expected May CPI data just a week […]


Ron Paul: Should We “Respect” the Fed?

The Federal Reserve doesn’t have a very good track record. It was wrong about transitory inflation. It was wrong about peak inflation. And it’s almost certainly wrong in thinking the economy is strong enough to withstand tighter monetary policy to fight inflation. But President Joe Biden trusts the Fed. The cornerstone of his inflation-fighting plan […]


Inflation Explained on a Napkin

People come up with all kinds of excuses for inflation. First, they told us there was no inflation. Then they insisted that it was transitory. Then they claimed it was caused by greedy corporations. Later they shifted the blame to Putin. But none of this gets to the root cause of inflation – the expansion […]


Comments are closed.

Call Now