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.
Wednesday, 13 July 2011
Borrowing to spend on present consumption