Our quality of life depends on one and one thing only: products and services. Without them, we might as well go back to caves and hunt and gather. What makes all the difference between us and Neanderthals, is applied technology. If this is so critical, then we have to ask who provides such technology? If we know who does it, then we can make sure they continue to have the resources they need to keep providing it.

 

Private Enterprise

The answer is simple: private enterprise. This is true throughout the world and has been true in almost all countries at all times –including wars-, with a brief –and catastrophic- experiment called communism. And we all know how well it worked out.

This truth, that private enterprise provides almost all our necessities is not as self-evident as it could be. Yet another thing you can thank governments for. In order to arrive to this conclusion, you need to look beyond the surface and into the products and services you use and who provides them, not who pays for them.

We know that if we go to a supermarket, all the products are manufactured by private business. If we call a plumber, this service is provided by a private company. But what about hospitals? Aren’t some hospitals in some countries “public”? Yes and no. The building may belong to the “government” but not what counts: doctors and nurses. They are private enterprising people that happen to be paid by the government. Without their enterprising activity the government would have no doctors and nurses to hire in the first place. In some countries, health care is “socialized”; it is “free”. You go to any doctor you wish and the government pays for it. True, but again, the service providers (doctors and nurses) are private people who happen to be hired by the government. The government does not generate doctors or nurses.

How about street construction and maintenance? Well, if you look closer you will notice that the government hires private contractors to do so. Airports? Same story, built by private contractors and sometimes operated by governments by hiring private enterprising people.

Public transport? With exceedingly few exceptions, cars, trains and plains are manufactured by private companies and bought by governments to be operated by private enterprising people who are hired by governments.

We could go on and on and on like a broken record, but this is not our intention. The point we are making is that if you look close enough, almost nothing on this earth will have a seal that reads “Made by Government X” or “Educated by Government Y”. Almost everything on this earth is actually made or serviced by private enterprises.

These enterprises, through competition and hard work, strive to provide new products and services at lower costs. Products and services that continue to enhance our quality of life.

Governments have no part in this marvelous cycle or improvement. They have no part in it not for lack of trying, but for excess of failing. Almost all government enterprises, almost anywhere in the world, failed miserably. So governments stick to paying for products and services and mascaraed as the creators of well-being for their own political purposes. Politicians’ job security through lying, sounds familiar?

 

Resources

Now that this point is clear, we need to return to our original question. What resources do private enterprises need to continue improving our lives? The answer is simple: capital. More precisely: money

Businesses need money for two reasons. The first is that in a free market and in a healthy economy, they need to expand or be overrun by competition. In order to do so, they need to borrow to invest. If borrowing money is scarce, its prices (interest) will be too high and companies won’t expand. Consequence? Lower standards of living.

The second reason why businesses need money is to generate more money through the creation of products and services. Consider this, if you save money you can place it in a bank and receive a small interest. Or, you could take that money, borrow a little more and create a business which will provide you with a much larger profit. Again, if borrowing money is scarce, its prices (interest) will be too high and you simply won’t create a new company. Consequence? Lower standard of living.

So, the amount of money available for borrowing matters when it comes to our standards of living. Too little money and its interest becomes too high for productive investment purposes.

There is one more issue that we need to review. In a truly free market, you only have three options: you can save your money and keep it (no profits are created), you can deposit it into a bank (receiving a small interest) or you can lend it to companies so that they may expand (in which case the profits will be much higher).

If those are the only choices, many people will choose to take a risk and lend that money. In so doing, they provide plentiful capital at a reasonable (and stable) interest rate for companies to expand. And so the cycle of improvement continues.

However, what happens if suddenly, magically, a fourth option appears? What happens if somebody offers you a high interest for your money without any risk at all? Would you go for it? Of course, you would! Why would you take a risk if you don’t have to? Well… this is exactly what the government does. They offer risk-free investment, if you purchase their bonds.

The gist of it is that governments cannot go broke because they print money. They can always print more money; therefore, their bonds are risk-free. You will receive back the money you lent no matter what. This is so at least on the surface. In reality, all that money printing creates inflation which overtakes the interest rate those bonds are paying, and you end up losing some money in the process. But at least on paper, it looks risk-free.

And so, any money from your savings that goes into government bonds of any kind, is being removed from the pool of money available for private investment. As a consequence, the price of money for private investment (interest rate) goes up, making business expansion increasingly more difficult.

Government deficits are always covered. Governments pay. The question is where do they get that money and what effect does this mechanism have on productive businesses?

As we have seen in the lesson Deficits Debts And Inflation governments either borrow from private sources (citizens or other countries) or from banks.

If they borrow from private sources, then the re-direction of savings that would otherwise go into private investments is obvious. Savings can only be lent to businesses or governments, not both at the same time. This creates money scarcity which increases the cost of borrowing money (interest rates).

If they borrow from banks, this creates inflation. Inflation increases the cost of borrowing money (interest rates).

In other words, deficits cause damage to businesses because they either reduce the amount of money available for investment or they increase the price of new investments.

 

Critique

The three most common critiques to this reality are:

• Statistics does not support this logic
• All government income has the same effect
• It depends of the economic situation

The concept that statistics do not support this reality is, of course, flawed. In certain countries with high deficits and high government borrowing, interest rates may be dropping. How is this possible? Simple. Their economies are in recession. In this economic situation, businesses borrow less therefore interest rates drop. However, we need to dig deeper. If we look at the real interest rate (interest rate minus inflation), we will notice that it remains high. It is this real interest rate that does the damage. In these situations, the real interest rate remains high because of lack of investment money and public expectation of high inflation. Expectation that was triggered by inflation that was created by governments borrowing from banks in the first place!

The second argument is that all government income is equally damaging. This is certainly a strange argument. It declares that as all government income is damaging, we should not single-out deficits, and therefore deficits are OK. Truly mindbending. A little damage is OK because it is part of a larger damage. Not only is this argument ridiculous, it is also wrong. Taxes (the other government income) remove money from our pockets. This money would have been spent partly in consumption and partly in savings. Deficit borrowing, on the other hand, removes savings directly. Deficit borrowing has a much more devastating effect.

The third argument is as follows. If the economy is working OK (or as economists like to say: at capacity), the amount of savings available for investments is scarce. If the government siphons-out those savings, then there is less for investment and businesses suffer. However, if the economy is not at capacity, there are “excess” savings available for private investment. If the government borrows those savings it does not matter because they weren’t being used anyways. The only problem with this concept is that those “excess” savings have a critical role to play. They ensure that the price of borrowing money (interest rates) remains low. If the government removes those “excess” savings, interest rates (but not inflation) will go up. This means that the economy is being damped by preventing a recovery which would need lower interest rates.

The bottom line is that no matter how they present it, deficits damage private investment; it is not a matter of if, it is a matter of how much. However, knowing that governments will always spend more, we know that over longer periods of time the damage will only increase.

 

Our way

In our Absolute Austro-Libertarian way, there are no governments and therefore deficits are not possible. Although it is true that in a government-free world companies would borrow and make mistakes, none of these mistakes would threaten tens or hundredths of millions of people. Only governments can screw-up at such megalomaniacal levels. Think of this. Companies typically borrow in the order of millions or perhaps, on very rare occasions, one or two billions (very large mergers or acquisitions). However, in general terms, their borrowing is quite conservative and the intention is always productive. Governments, on the other hand, routinely borrow in the order of billions per months and occasionally in the order of trillions! And to make matters worse, their intention is always consumption, not investment. Only governments can borrow at such a massive scale that can impact businesses and, at the same time, waste all this money.

The only possible solution is obvious: remove all governments and the problem solves itself. For as long as there are government acting as heroin addicts when it comes to money, deficits will have increasing and devastating effects on private investments. This is a fact and there is no escape from it

Note: please see the Glossary if you are unfamiliar with certain words.