Wednesday, 13 July 2011

Borrowing to spend on present consumption

Scanning the news this morning, I read that pension funds and insurance companies are to be encouraged to hold more “safe” government bonds. I’m fairly sure this is a dreadful idea.

Government bonds amount to a promise to tax productive activity later. Unlike corporate bonds, they do not represent investment in productive assets but, overwhelmingly, spending on present consumption. Borrowing to fund present consumption is a route to poverty, not prosperity.

If major investors switch from supporting productive investment to present government consumption, we will all become poorer: where will future production come from without investment in it?

Without adding reflections on the present huge size of the state, I think I can safely say that investors should be encouraged to invest in capital goods, the means of production, not present consumption backed by the power to tax.

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