Are we living in the Matrix?

I know what you're thinking — you're thinking 1. that I'm crazy and 2. that this is old hat. When The Matrix came out in 1999 many people talked about whether we live in it or not. Let me reassure you that I am not interested in that. The other day as I drove to work I was idly considering Morpheus' statements about the Matrix and I realised that although I don't believe we are living in exactly what he described, there is one social institution that, almost word for word, can replace the word Matrix when Morpheus mentions it. Consider the following quote:

The Matrix is everywhere. It is all around us. Even now, in this very room. You can see it when you look out your window or when you turn on your television. You can feel it when you go to work... when you go to church... when you pay your taxes. It is the world that has been pulled over your eyes to blind you from the truth. That you are a slave, Neo. Like everyone else you were born into bondage. Born into a prison that you cannot smell or taste or touch. A prison for your mind.

What is everywhere? What is a lie? How are we enslaved? The answer, when it struck me, was obvious: the State. In fact I think Donald Livingston is correct when he says that the modern State, while presenting itself as republic or democracy (or a combination), has little more in common with those modes of government than it has with, say, monarchy. Instead we can call it the Leviathan State, the Total State, that form of government in which one will — that of the supreme People — alone is sovereign over any and all desires of individuals themselves. Of course this is pure fiction — there is no such thing as "the People", there are only individuals. In the Total State there are broadly two classes of individuals: those who produce and pay taxes and those who consume and receive taxes. The fiction is necessary to keep the tax-payers paying without too much complaint. Speaking of fiction:

What is the Matrix? Control. The Matrix is a computer-generated dream world built to keep us under control in order to change a human being into this. [Energy]

Needless to say the dream world we live in is not the product of a computer program, it is the product of a vast edifice of ideas and lies that tell the human mind it is more free as a slave, more wealthy as a vassal, more wise to be ignorant. The State exists to control the taxed and redirect the wealth they produce for the ends of those who control the State — mostly the "liberal" intellectual and the political class. More generally it is those that live from the proceeds of taxes. For most people of either class, since the State is all they've known people promote it and prefer it:

The Matrix is a system, Neo. That system is our enemy. But when you're inside, you look around, what do you see? Businessmen, teachers, lawyers, carpenters. The very minds of the people we are trying to save. But until we do, these people are still a part of that system and that makes them our enemy. You have to understand, most of these people are not ready to be unplugged. And many of them are so inured, so hopelessly dependent on the system, that they will fight to protect it. 

 A more fitting description of those who daily defend the violence of the State even as it engages in violence against them is hard to imagine. This type of person is the chief enemy of liberty, even though he would be the chief beneficiary of it. And why? Because he believes in the State. He cherishes its power to curb the vices of others. Every year he makes his offering of cash, if grudgingly, to ensure that the dangerous liberty of others is crushed by the State. In a sense this is the core belief of those who support the Total State. They believe freedom is dangerous, not because they themselves would abuse it, but because other people would. Others would produce bad and dangerous products, others would rampage with guns, others would spend their money with profligacy, others would fail to care for the parents and children. It is fear of the liberty of others. While this fear governs all thought any excuse will do to curb the freedom of others. Most of the time the excuse is not needed, it is simply treated as self-evident, and the individual may go on in ignorance:

I know this steak doesn't exist. I know that when I put it in my mouth, the Matrix is telling my brain that it is juicy and delicious. After 9 years, you know what I have learned? [Eats the piece of steak and sighs contently] Ignorance is bliss.

Not all people are content with ignorance, however. The State needs a permanent army of intellectuals ready to do battle in its name. They constantly fight the war of ideas to make the insane and irrational basis for the State look like science and wisdom. They must be the gatekeepers of information and the teachers of the next generation. They must be in all places, at one moment an ordinary person, the next an Agent ready to crush the ideas of liberty with a chimera of arguments. Because the State cannot tolerate the spread of anti-State ideas. Its power and permanence are founded on lies and ideas, so any outbreak of truth and the ideas of liberty, that the State is not only not necessary but antithetical to human flourishing must be crushed without delay.

That means that anyone we haven't unplugged is potentially an agent. Inside the Matrix, they are everyone and they are no one. We have survived by hiding from them, by running from them, but they are the gatekeepers. They are guarding all the doors, they are holding all the keys, which means that sooner or later, someone is going to have to fight them.
I won't lie to you, Neo. Every single man or woman who has stood their ground, everyone who has fought an agent has died. But where they have failed, you will succeed. I've seen an agent punch through a concrete wall. Men have emptied entire clips at them and hit nothing but air. Yet their strength and their speed are still based in a world that is built on rules. Because of that, they will never be as strong or as fast as you can be.

Now, I admit this might be stretching the analogy a bit, but hear me out and judge for yourself. The ordinary person may occasionally wake from the fiction of the State, but when he does he faces the intellectual equivalent of an Agent: a barrage of ideas all centred around the goal of convincing him that the State is the solution to his problems, and not their principal cause. That is why every day I seek to arm myself with the only weapon that can defeat the State: truth. Truth is the sword that never loses its edge, it is the shield that remains forever intact and perfect. It kills the Leviathan by unmasking its friends as the fiends they are and defeating its hubris, turning the ordinary person who formerly loved the State into its unwavering enemy. The State lives in the mind, so every person who rejects the State, is enabled to pierce the fog of lies that surrounds it and see its true nature, is a death of the State. Every time someone wakes up and sees the justice and reason of liberty, the State dies.

Let me tell you why you're here. You're here because you know something. What you know you can't explain, but you feel it. You've felt it your entire life, that there's something wrong with the world. You don't know what it is, but it's there, like a splinter in your mind, driving you mad.

Mises knew it. He saw that all was not right, that the State could not be God. He helped provide us with the ideas that build on the foundation of human liberty, that advance the cause of freedom and bring death to the State not with violence but with the gentle whisper of thought.

The following is a modified quote, also from The Matrix. See if you can work out the original: "Do not try to defeat the State — that's impossible. Instead, only try to realize the truth: there is no State. Then you will see it is not the State that dies, only your support of it."

I know you're out there. I can feel you now. I know that you're afraid... you're afraid of us. You're afraid of change. I don't know the future. I didn't come here to tell you how this is going to end. I came here to tell you how it's going to begin. I'm going to hang up this phone, and then I'm going to show these people what you don't want them to see. I'm going to show them a world without you. A world without rules and controls, without borders or boundaries. A world where anything is possible. Where we go from there is a choice I leave to you.

Why does the State fight so stolidly against liberty? Why must it crush the ideas of freedom and spread its influence into every aspect of life? I put it to you that it is because the State is fragile. Leviathan is not a battleship but a jellyfish. Its justification is so tenuous, so patently illogical and unreasonable that it fears even a hint of truth. It cannot stand to be examined, to be argued and debated. It cannot abide opposition even from a child. That is why if we stand ready to engage the soldiers of the State, if we argue and oppose it, if every day we walk the path of truth it is as a body blow to the State. We may never wake to find that there is only seawater where before the jellyfish swum, but we can enjoy the warm glow that comes from sticking Leviathan in a tender spot. The truth can be its own reward, and that may entice us to strive against the State, not giving in to it but proceeding ever more boldly against it. I don't know the future. I do know that the Mises Institute and its academics and contributors are showing us a world without the State. A sea with no jellyfish. I, for one, intend to take a swim.

Why the carbon tax?

Julia Gillard has been having an awful time in politics because of the carbon tax. She's been roundly criticised for stating during the election that it was not on the table, then backflipping the moment she became PM (this is not an isolated case, of course). The opposition really lay into her for that. Then there's the fact that it is mathematically certain that a) the carbon tax will have no direct measurable effect on global temperatures even if in theory it did reduce overall carbon dioxide emissions and carbon dioxide is a major problem and global temperature rises are a major issue, and b) it will further hollow out the already nearly dead industrial base in Australia. Point a means that it will never be possible to tell from the global temperature measurement whether the carbon tax has had the desired effect. Point b means that production currently happening in Australia will almost certainly move to other countries where the power is cheaper and dirtier, so the nett effect will be to increase over all carbon dioxide emissions in accordance with the well-known Law of Unintended Consequences.

Given the furore and the heavy hits she's taken in the polls, and the fact that she's still the Labor leader, I have speculated in the past that it may be due to pressure from the UN that this is happening at all. It is well known that Labor and the Greens are in cahoots, especially given the fact that the Labor government is a minority government, but to me that did not seem like enough reason to waste all the Labor party's political capital in this way. UN countries really hate it when some people become too wealthy, and a carbon tax is an ideal way to really scupper a country's productive capacity and make its people poorer. Thus it's possible the UN wanted to cut us down to size. If Gillard gets a job at the UN, World Bank, IMF or ITO in the near future we'll know beyond a reasonable doubt, but in the mean time there is another issue that has come up.

Recently ol' Julia has been criticising the states for the extreme rise in electricity prices, and threatening that if prices don't come down the Federal Government will act to force them down. For anyone familiar with economics this should be ringing alarm bells the size of planets. A few of the questions that might be raised are:
If prices genuinely are too high, why isn't the "market competition" that's been introduced in recent years driving down the prices?
If prices are simply the response to carbon taxes, won't a plan to force them down cause shortages?
Why didn't the energy futures market provide a better buffer to the power prices?

This threat from the Federal Government got me thinking about who is benefiting from this whole thing. In politics one should always look for where the money is. The people who asked for a given piece of legislation are usually the ones who benefit from it, this is merely common sense.

One group that might benefit from this bill is producers of "green" power and the manufacturers of the technology used in its production (mostly windmills). Of course, it's mostly the foreign manufacturers of the technology are helped because CO2 inducing electricity must be used in the types of heavy manufacture that producers of green power technology employ.

Another group that could conceivably benefit is the Federal Government itself. This could well be some type of power grab to seize control of all of Australia's power infrastructure from the states. Another obvious benefit is the potential for greater tax takes and indirect control of the energy producers themselves who will be only too happy to beg and roll over if the Federal Government threatens to raise taxes.

The third group I can think of that might benefit is unionised and or skilled labour. Expensive energy makes capital intensive processes more expensive and will increase the over-all demand for labour. This, in turn, will drive up the price of labour, especially of skilled labour of the type that can stand in for capital goods. Along with the controls over entry into the skilled labour market due to barriers to entry, licensing, compulsory unionisation and a number of other regulations this could well have a significant effect on the price of skilled labour, which will of course have a negative impact on the general welfare and particularly on the poor.

Now, I know that any minute now you expect me to reach for my tinfoil hat. Why so conspiratorial? you might well ask. We have learned the hard way that in a democracy politicians are still only doing what will get them more votes, money and power. I think I've outlined a credible case of how those three objectives might be served by this bill. The policy is merely a continuation of the fundamentally fascist way public affairs and "public good" businesses have been conducted in Australia for some time, and most especially since the acceleration of privatisation during the Howard government.

I believe this attack by Gillard on the states is an extremely worrying sign, another expression of the economic fallacy that if a small group of monopolists are doing a bad job the solution is to create a single monopoly. Time will tell if it will materialise into a fully-fledged takeover of the power grid by the Federal Government but I wouldn't be the slightest bit surprised if that were the endgame.

They are there to see that Justice is Done.

The following comes from an episode of The Games:

John: "Who are the other side?"
Dennis: "When I say 'the other side' I mean the people running the inquiry."
"Who are they?"
"There's a chairman and a barrister who's called Counsel Assisting."
"And who employs these people?"
"Well, they're employed by the legal process. They're there to see that justice is done. That is their duty, that is their sacred trust, and that supervenes any and all other responsibilities in their mind."
"Yeah. They're employed by the government, aren't they?"
"They're indipendent people, chosen for their jurisprudential and evidential skills in areas deemed most useful for determinations of this kind."
"Are they paid for their services, these people?"
"Oh, some moiety may inhere in work of this type, of some kind, yes."
"And who pays them?"
"The question of emoluments would rest with the state in this instance."
"Yeah, they're paid for by the government."
"Yes."
"The government the Mininster's a minister in."
"Well, the enquiry will have quite clear guidelines."
"And who writes the guidelines?"
"They'll be prepared by the Attorney General."
"Yeah, another minister. So the government's going to hold an inquiry into its own activities, supervised by itself and run under conditions jacked up by the Attorney General. It's no wonder they want a bit of fresh blood in there, is it?"

Sound familiar?

There's still time - just - for an orderly Greek exit from the Euro

So, austerity is not working (big surprise) and my earlier plan for a Greek exit from the Euro is also now unworkable. The reason is that I think it is now impossible for the Greek government to get a hold of enough gold to make the plan workable. This was in fact already somewhat dubious before, but now it definitely isn't possible.

However there is still time to exit the Euro without consigning the Greek economy to the metaphorical basket. Unfortunately in this case the solution is only partially free market. I'm sorry, Greeks, it's the best I could think of.

What many people expect must ultimately happen is that Greece must create its own currency and replace all Euros in Greece with this new currency. This is a terrible plan (and yes, I know the alternatives are worse) because inevitably it will result in bank runs, people having their savings partially wiped out or, if hyperinflaion results, which is extremely likely, all of their savings.

My solution is a partial default. Tada.

It's obvious to everyone that this is what must happen, the only question is how. I believe my solution can provide bond holders with some confidence, protects the Greek people's savings, restores Greece's currency sovereignty and gives the lowest chance of hyperinflation. It also doesn't require any bank holidays

Brief outline:

The purpose of stage 1 is to prepare the world and Greece for the changes.
1. a) Announce debt repudiation. Redenominate all outstanding bonds in new Drachma currency at 1:1 Euro.
1. b) Announce low tax liability for transactions or income involving new Drachma.
1. c) Establish new Drachma as sovereign fiat currency receivable in taxes.
1. d) Announce no additional bond issuance by Greek government.

The purpose of stage two is to make the necessary changes to bring about a prosperous Greece.
2. a) Pay off bonds when due with newly printed Drachma.
2. b) Establish limiting of Drachma supply (to ultimate ceiling of total Drachma bond liabilities) to prevent hyperinflation.
2. c) Rapidly but smoothly reduce governent spending to near 0.

The purpose of stage three is to prevent the same from occurring ever again.
3. a) End fractional reserve banking and eliminate most legislation.
3. b) Create a new constitution.
3. c) Establish citizenry as the first line of policing and defence.

The first stage of this plan is to hit the bond holders with the default. Announce that all outstanding Greek bonds will be redenominated in the new currency, which I will call Drachma. This will not be popular, but it is necessary and bond holders will prefer it to alternatives, because they will be the first reipients of the new currency.

A parallel announcement will be made in Greece that the new currency will attract a consumption tax of say 10% and no other taxes of any kind. This is in order to drive demand for the Drachma over the Euro in Greece itself. If the tax for Euros is high and for Drachmas is low, people will start to prefer it. This is how the Drachma is monetised in Greece. At this point no Drachma are in the possession of any Greek. The Euro and Drachma will be parallel currencies until the Euro is effectively demonetised. Both will be acceptable for tax liabilities.

Stage two is to print new Drachma to pay off the bonds denominated in Drachma. The new money will be fully sovereign currency - in other words, no bonds will be required to expand the money supply. The size of the money supply will be determined by the Greek government, but an excellent practice would be to only print all money necessary to pay off the existing bonds, and then only print such money as is needed to replace worn out currency. The money supply will be constant. There will be no need for a central bank as such, only a government printer replacing worn out notes and a mint to coin the lower denominations. Constant money supply will make it an exceedingly safe currency and increase its trust and money value in the eyes of trading partners and the Greek people themselves. It makes hyperinflation an extremely remote scenario.

Fractional reserve banking would end.

The era of Greek government bonds would have to end - only a balanced budget would be possible going forward. This will be an economic shock, for sure, but people will be heartened by the low taxes in their near future. Investors might well find Greece an attractive place to do business if they are confident that business could be conducted in a currency that attracted minimal taxes. This would be a big boost to confidence in Greece itself and prevent the depression from spiralling too far. Once Drachma started to circulate back to the government it would be time to redenominate certain avenues of government spending in Drachma. What is clear is that with Drachma taxes so low Greek government spending will also need to decrease drastically. The shock of this, as stated before, will be partially offset by dramatic increases in investment funds flooding the newly liberalised Greek economy and low priced labour. Even so, great care would be taken to make sure that people relying on the State for their livelihood are not suddenly dumped. Pensioners and the old are particularly vulnerable, so might be worthy recipients of newly printed Drachma themselves. They might be considered a secondary vehicle for the monetisation of the Drachma, however this is not really necessary. The 10% consumption tax will soon provide adequate funds to give state dependents a living income if they have no other sources, however entitlements will have to be the same for all recipients and anyone with an amount of Euro savings would not be eligible. All previously contracted pension obligations would have to be reneged on. All government employees would have to gradually be given the sack and join the real economy which hopefully will begin to boom because of the influx of investment.

Two major exceptions are police and military. In the mean time the police and military would be responsible for maintaining law and order and preventing foreign invasion, respectively. To aid law enforcement all Greek adults would be encouraged to buy and carry firearms that may be used to deter unauthorised access to one's property. However this will not be a free for all in murder because the police would still treat any death as a potential murder case. Citizens should be encouraged to use non-lethal force except in cases of imminent threat to life. The number of police and military personnel could thus be greatly reduced, leaving the state's main spending to the old who cannot adapt to the new situation, and the small number of law enforcement and judicial officials. It is clear that only the most basic laws could be handled under this reduced judicial system. No fraud, no theft, no rape, no murder would pretty much be the scope. In such severe times all other regulations are an unacceptable burden. What remains of the government should focus on creating a new constitution that enumerates the constant money supply condition, a common law framework, and otherwise establishes the Greek people as the master of their government, not the other way around.

In the long run, whatever happens Greece will eventually recover. The purpose of this plan is to make that transition as fast and painless as possible - for Greece and the rest of Europe. It requires a radical rollback of the Greek state and a radical plan for monetising a new currency, but when the situation is unique the solutions must be also. I only hope that whatever happens is as kind or kinder to all parties than my proposal.

This plan may begin implemetation at any time, under almost any conditions as long as the government sitll exists and has some clout. It goes without saying, however, that sooner is better. Between the beginning of stage one and the end of the whole process would be about two years, so time is of the essence. I greatly fear that no such plan will be used and the Greek people and other Europeans of modest means will continue to suffer under the heavy yoke of poor growth and high taxes. If that happens things could become violent, and no one wants that.

A fresh look at Austrian business cycle theory

I recently read a very interesting critique of the Austrian business cycle theory (ABC), and I just couldn't resist adding a few of my thoughts. Here follows my comment on the piece.

1,2,3) If a lot of capital goods turned out to be in the wrong use at the same time then a large investment in labour would be required to convert them. Capital conversion is thus a natural part of the economy but would spike at certain times - namely some time during a recession. The same applies to labour itself because retraining takes time of course, and when a person studies he is investing intellectually in that career path.

4,5) Any unnatural change in the money supply will cause a shock, it is just that those shocks are of a different kind. Gradually falling prices are no problem if the money supply is not contracting in a sudden unnatural way. Austrians, I think rightly, blame the fact that such a deflation shock can occur at all on the prior inflation. Once the money supply has been unnaturally (through fiat inflation, FRB expansion, take your pick) increased price stability becomes impossible, because as that additional money filters through the economy and increases the price level the only way to put a halt to that price increase is to actually reduce the money supply. The severity of this will be decided by what level of inflation is considered acceptable. Thus I think that it is the central bank's desire to prevent the price inflation that causes much of the "downside" problem. It would be a much better policy to refuse to change the supply in any way and allow prices to stabilise at a higher level.

6,7,8) I think it is reasonable to say that Austrians discount risk in the interest rate issue. The question then becomes, is it that lower interest rates will decrease savings because of poor returns or increase them because of lower perceived risk? I think this is at the core of what causes the business cycle, because low interest rates will cause low yield investments to become more populous while at the saver end the average man will save less because the perceived risk in a bank is usually close to 0, and thus the interest rate is very much a supply/demand. Personally I think that at very low interest rates (say, less than 3%) the savings rate is inelastic because those savings are prudential rather than an investment.
So if we assume that time preference is the wrong way to look at it and we instead consider risk perception, we need to understand why perception changes suddenly. I believe that the injection of cash into the investment sector will gradually cause the prices of capital goods to rise and at some tipping point it will become evident that some enterprises will not be profitable under the current price levels and expected future prices (for capital goods). These higher prices will thus conceivably cause a crash in the demand for capital goods as the contageon spreads. The demand crash causes unemployment from those unprofitable companies, causing a demand crash in the consumer goods sector as well, further exascerbating the unemployment problems.
As a result of these demand crashes only the highly profitable producer companies will be able to keep trading. From their perspective it is better if the money supply remains constant because then the price inflation will allow them to pay off their creditors through higher numerical revenue despite decreased sales. If the central bank elects to focus on inflation and raises interest rates these companies will face reduced revenue and higher interest rates, likely making many of them insolvent as well. I believe this is a very plausible explanation for the Great Depression, since we know deflation occurred. In a sense the motivations for deflation are immaterial - it will cause a bust proportionate to the deflation. The magnitude of the impact of the previous inflation is then a function of how far deflation is allowed to continue - if it goes to the money supply before the boom then it will be as mild as the boom, if allowed or forced all the way down to the monetary base then you could have a truly catastrophic contraction unless the boom started when the money supply was already at the monetary base.
The Austrians do have the cause of producer goods price rises correct, I believe: that low interest rates cause real savings to be lower than real investment, thereby eventually causing increased competition between consumers and producers for raw materials.
So to summarise: deflation is bad because it causes naturally profitable enterprises to go bust, inflation is bad because it causes naturally unprofitable enterprises to be started. There's a pleasing symmetry there, isn't there?

10,11,12) I agree with most of what you said here. Under my construction the idea of a malinvestment is in a sense not there. The investments are all profitable when investment is high and prices are still low. So it's not that the entrepreneurs make a mistake at the time given the conditions, it's that later price increases are unforseen and reveal those investments as unprofitable. The difference, in real terms, between a profitable and unprofitable enterprise is that the former uses fewer real goods than are given up by people when they save, and the latter uses more. The problem with a boom is that it reduces the real resources available to those enterprises on the margin and makes many otherwise profitable ventures fail when the bust comes.

Any way you cut it some companies will have to fail. There are only three options: Deflation, which destroys profitable companies; constant money, which I believe is the cure; and inflation which, in order to prevent the failure of those companies that used real resources not "saved" by consumers would have to constantly increase until the result was hyperinflation. That's the only way to get the necessary "forced saving" and hyperinflation will be inevitable as people realise their money is losing value, since by definition they will be forced to give up more real goods than they actually want to.

All of this suggests what I have been thinking about for a while: the best monetary policy is one where the central bank does not alter the money supply at all. I really need to do some analysis to find out if this theory is borne out by the facts but that is for another time. Look for future posts on this topic.

EDIT: I realised after this that the central bank can continue to inflate even at high levels without this causing hyperinflation (which as I define it is not to be thought of as a threshold level of price rises) because the economy can adjust to permanent money supply increases. It all depends on the psychology of the people and whether they are willing to accept the situation. If they do accept it then through the general ignorance of the effects of inflation real wealth will be transferred to those otherwise unprofitable enterprises.

A novel model for event ticket sales

This is going to be short. Recently I have been rewatching the comdy series The Games, mostly created by John Clarke, master of satirical comedy:

One of the episodes deals with a scandal that broke during the filming of the series: tickets were secretly sold to the rich at extraordinary prices when they were supposed to be allocated on a first-come-first-served basis. This also put me in mind of the Athens Olympics when the stands were virtually empty because people didn't buy the tickets. Same thing happened in Beijing, although the reason there was less clear.

I have a solution for this type of issue and I don't think I'm giving anything away when is say that the core of the idea rhymes with "tree kark-it". That's right: I want people to be able to pay however much or little they want to for any ticket they want.

Technically, this would be done via online auction. It would be trivial to automate such a system. I imagine a system where packages of one or several tickets for some event at some place in the arena would be made available in decreasing quantities as the event approaches. Each auction could last something like a week to give plenty of chance for those who want those tickets most at that particular time to bid for them. One could also envision a certain stock of tickets that might be sold at lottery. You could have anyone who wants them commit to pay whatever price they are sold for but the ultimate recipient and buyer to be selected by lottery. The buyer would then pay for and receive the tickets. That way you could have some tickets available at lower prices than they might be bid to at auction.

The beauty is that all tickets would be sold, since any event that most people are not interested in might have the less popular tickets going for dollars, even cents, while the most demanded tickets would be decided by the democracy of cash.

If any events organisers are desirous of paying me a small retainer I'll take it in hard currency, thanks.

Reasons why you should never buy a government bond

If there's one financial asset that should really be treated like radioactive ebola virus, it's the government bond. In the past this was not necessarily true, because way back when gold and silver were money and when the government's debts fell due it had to find the money somewhere to repay it. It had to increase taxes. This might not sound like such a fantastic thing, and you right, it's not - really all governments should run balanced budgets no matter what, but at least back then people knew what was going to happen. Of course such tax hikes in the wake of government borrowing were pretty unpopular so all monarchs were always looking for a way around that and the most effective instrument was coin clipping. Governments would reduce the precious metal content of their coins but remint them at the old valuation. When this became really popular after a while you end up with something like the late Roman Denarius with a precious metal content of 0-1%.

All this is to underline why government debt is always a bad investment. In recent times the debt of stable, high performing economies like the US, Switzerland and Germany has come under such high demand that in Switzerland the yield is now negative. In other words, the price of the bonds themselves are now so high that investors are certain to lose money, even after you consider the interest the bonds are going to pay. They are willing to lose the money because they are so afraid of any other inverstment crashing and they want something that is certain to repay their money. All of these investors are going to lose their money, or if not them, then whoever ends up with the equivalent of those bonds down the track. This is certain. Even the ever prudent Swiss or the mighty Germans will eventually end up in the same sort of tight spot Greece, the US and all the rest. Let me explain why.

First we need to examine the purpose of government debts. When a private company goes into debt it usually uses that money to invest in plant, land, resources, anything they need to grow the business and generate the profits that are going to repay the loan plus interest and leave them with plenty of new cash left over. When the government goes into debt it never does it with the intention of spending on things that will eventually repay the debt. This was originally the theory - the government would borrow from its citizens, do some large construction project like a road or a dam or whatever it might be, and as a result of this new infrastructure the economy would be more productive and the tax take would increase and allow the repayment of the original debts. Precious though this theory was to satisfy the general populace that they wouldn't suffer a burden of extra taxes later to make up for it this is not how it has ever, to my knowledge, worked out. The investment was always supposed to pay itself back in taxes and even if it didn't, the bond holders had no fear because if the project turned out to be a dud they would get their money back anyway because the government could always tax the rest of the people more to make up the shortfall. However this lovely theory has never been a reality. The reasons are multiple but the chief reasons are a) if the government's idea for an investment was profitable private investors would be doing it already and b) if - and I stress, if - the government's plan actually did make the economy more productive and did increase the tax take, none of that tax was ever earmarked for the purposes of repaying the debt. It was always more tempting to spend that money straight away and worry about the bondholders when the time came. And what typically happens when it actually does come time to worry about the bondholders? Naturally the government does not actually have the money, so instead of risking the unpopularity of forcing the populace to actually pay for the stuff the goverment had bought on their behalf, it simply sells new bonds to pay off the old bonds.

Are you seeing the problem now? You see now why those bondholders were stupid to buy the bonds at all? The government's incentives always lie towards repaying old debts with new debts. That's why nearly all western governments have had a sustained increase in debt. No one ever stopped to think about the fact that these were loans and that eventually people might ask for their money back and lose faith in the government to such a degree that they would not be willing to give up any more. Everyone knows the US government is never ever going to repay their bonds, and even so investors are still giving it up for new bonds in the certain knowledge that the money ultimately won't be repaid. They simply expect that at some future date they'll be able to find another sucker to sell it to before the bottom falls out, or that the bond will fall due and they won't be trapped into buying back into America's pyramid scheme right before it all goes west. The only reason, in other words, that the bonds have any value at all right now is because the investors expect to be able to sell them or get paid back by the US government before it has to resort to devaluing the Dollar, which, by the way, it has already been doing heavily.

Greece is substantially different from the US. In the US if they really wanted to give those bond holders back their dollars they could always print some up and give everyone their full amount. Of course that would result in instant hyperinflation the minute the investors started to try to buy real stuff with that money, but their bank accounts would at least have the right number in them. In Greece they're on the Euro standard which is one of the reasons for their woes. They can't repay the bonds they've issued because the only place for those euros to come from is taxes and the only way the economy could ever sustain such a tax take is if they were brilliant exporters to the rest of the Eurozone or, failing that, to anywhere else in the world. Needless to say, they are not. As a result of this Greek bond holders (not necessarily Greeks, people holding their bonds) have already had to take a "voluntary haircut" of 74%. That means that every single person who owned a Greek bond just before the bottom fell out has lost 74% of his money and that's despite the bailouts. Spanish, Portuguese, Italian, and other bond holders are on the same road, which is why recently they've started to edge away from those bonds, resulting in a spike in long-term bond yields:
So, to recap: you should never buy a bond because no government will ever pay it back in the long term. Even if you get your money back it's at the expense of some other sucker down the line, and even if he gets his money back in nominal terms its value will be so low he'll wish he hadn't. The eventual crisis is certain to come and when it does the economy of that country is going to tank. Do you want to be partly responsible for making that government's spending possible? Do you want to wear even a millionth part of the blame for lowering the interest rate on those bonds, which kept the state spending and made the eventual collapse worse? State issued bonds are simply a deferred stealth tax - a tax that deludes people into thinking it's an investment and produces a massive crisis when people snap out of it and realise they'll never see their money again. Now that you know, if you have a conscience or any compassion for your fellow man, don't buy a government bond. Not a single one. Not ever.