11. Pseudo-investment 2: Government Tailgating

Because continuous tailgating is so short sighted and ultimately detrimental to your long-term wealth, you might assume that governments would want no part of it, and yet they are regular offenders.

If you live in a country that is in continuous debt, then your government is tailgating. The government may try to dress this up as a necessary “investment” but in reality most of the money will simply have been spent on the wages of government workers.

The temptation for governments to tailgate is almost irresistible. The short-term benefits are just so convenient and the bad effects so subtle and, at least to start with, so far off in the future, that country after country throughout history has become addicted to it, only to ultimately come unstuck.

A choice of mechanisms for making up tax shortfalls

Imagine for a moment a country with no national debt. An election is coming up and during the election a party promises to lower taxes. They go on to win but once in power find that it is harder to cut back on government spending than they had anticipated. A government’s spending is largely composed of wages and pensions for government workers: doctors and nurses, teachers, police etc. as well as benefits for the unemployed. So in order for governments to reduce their spending, they must either reduce the wages of their employees or reduce their number or reduce the, often already low, benefits for the unemployed, all of which are likely to incur the wrath of the electorate. So how else might the government get the money to cover the shortfall?

Printing the money

The easy option for governments historically was often to simply print money but printing more money often brought about high inflation. Printing money like this brought about the collapse of so many currencies throughout history that this method became discredited. Indeed the very mention of the words “printing money” instantly brings about a strong mental picture of high inflation in the minds of almost everyone, including most economists. Because of this fact, the idea of printing money for governments to spend has become taboo. Many governments around the world have even enacted self imposed laws to ban the practice. The US, Japan and all the countries in the European Community all have such laws in place. Note that money "printing" via QE (as discussed in chapter 1) is not breaking these laws because the money created is not funding government spending.

Borrowing the money from the private sector

Governments frequently borrow money from the private sector by creating and selling government bonds. These bonds need to offer a rate of interest that is competitive with other forms of investment in order to sell.

It is worth mentioning at this point that proponents of Modern Monetary Theory stress that the size of the government debt is nothing to be concerned about and some have even suggested that it is not a burden on anyone. However the interest payments on the outstanding debt correspond to a continuous flow of money from the population as a whole (taxpayers) to whoever is holding those bonds. So, unless you just happen to be an owner of government bonds, this is a genuine burden.

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