Page 11 - PowerPoint Presentation

> Governments – How they can destroy your savings

The government offers these incentives to encourage savings while running a large
spending deficit:

T – G < 0 Where; T = Tax revenue and G = Government expenditure

Where is the money coming from if the country is in endless debt? Obviously, some other

part of an economy has to suffer. The government has to borrow the money or raise taxes.

This may improve GDP but not an economy in the long run.

How governments shrink loanable funds and push interest rates up

Governments often run a large debt. This arises from poor budgeting, political will, endless

expansion and many other sources. a result of non-efficient money allocation. Politicians
spend vast amounts on all sorts of short term schemes, on a national scale, in part to try to

make sure that they will be re-elected. The growing bill is always left to those coming after

the current crop of politicians.

Governments finance their debt with the surplus money that is left after (T-G).

By doing this they reduce the amount of capital available for investment. Supply of loanable
funds diminish, causing interest rates to rise. Not good at all!

Not only that, but now there is no incentive for business to invest, as cost of the loan is high.

Money still gets allocated in places with higher yields; Places like China, South Korea and
Singapore. Small government, little regulation and freedom are the biggest competitive

advantages.

Bond Auctions
But what if the government is running a budget deficit and keeps increasing the principle

every year?

Then the government organises bond auctions to sell bonds. If there is no buyer, they buy

them themselves!

In real terms, this is a Ponzi scheme.

Any government running a large national debt and large budget deficit is on a very slippery

slope. Almost all western world governments are already in this situation. They continue to
increase the principle every year. At the same time, they still spend more than they raise in

tax revenues.

This sends a signal to bond holders that those governments might not be able to make the
repayments. This, together with shrinking loanable funds, causes interest rates to go

through the roof. Governments may not able to pay off even the interest.

A few years ago, in Europe, thanks to this phenomenon, Ireland or Greece became insolvent
and within weeks asked the IMF for aid. IMF “aid” is nothing else other than more debt. A

different source, with a little lower interest rate, but still more debt.