How governments go bust

By Deputy editor Tim Bennett Nov 26, 2010

Tim Bennett

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With Ireland in trouble and other European governments wobbling, Tim Bennett explains how it's possible for governments to get themselves into big financial trouble - and what the solutions are.

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Published in Video tutorials | More articles by Tim Bennett

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  • 1. Bones

    (26 November 2010, 05:21PM)  Complain about this comment

    Printing money should have been in same category as issuing too much bonds,
    not in the methods to solve countries deficits.

    Only USD , as historical reasons,
    has so far maneged to fool people to buy and buy more USD-based assets.

  • 2. Tim Bennett

    (26 November 2010, 09:11PM)  Complain about this comment

    Bones - agree "money printing" - a slightly loose phrase that refers to the electronic creation of new funds rather than any new notes and coins - is in essence a confidence trick. The medium to long-term objective is to stimulate inflation. That, in turn, as anyone who had a UK mortgage in the hyper-inflationaary 1970's will confirm, erodes the real value of outstanding fgovernment debt. I will be doing a future video on this topic at some point so watch this space!

  • 3. bubblemeister

    (27 November 2010, 10:28AM)  Complain about this comment

    Tim, excuse my ignorance but if money printing can solve a country's deficit problem how come Zimbabwe is still in a mess?

  • 4. Eileen Dooley

    (27 November 2010, 11:08AM)  Complain about this comment

    Are European countries getting caught in the crossfire between the US avoiding paying their debts (mostly to China) by QE1 and QE2? There is so much debt among western countries and ingenious and confusing methods of dealing with the debt that it is hard to see where it is all going. The only thing, it seems, is that the EU is unable to print its way out of debt as the US and even UK has done. The BRICs are joining in this 'race for the bottom' in currency value.

    I can see the argument for bring back some form of gold backed currency value.

  • 5. Peter Kelly

    (27 November 2010, 11:52AM)  Complain about this comment

    Great video... So clearly explained.
    But what if they did go bust?
    It seems to me that every weak government knows they will keep getting bailout after bailout, just like the "too big to fail" banks have. Surely, at some point the Germans will get fed up... And what happens then?

  • 6. Tim Bennett

    (27 November 2010, 01:26PM)  Complain about this comment

    Bubblemeister - I am not saying money printing is a valid solution - medium to long term it's a terrible idea! And you are right that it can in extremis lead down the road to a Zimbabwe style loss of confidence in money as a means of exchange. However, sadly, it is viewed as a legitimate tool by governments here and in the US - they will happily use it as a "solution" even if it is in reality nothing of the sort. For Ireland of course this response was never available thanks to its euro membership.

  • 7. star001

    (27 November 2010, 01:50PM)  Complain about this comment

    The whole monetery system is flowed or should i say corrupt.
    People should live within their means,and governments should spend within their means.Spending money that you dont have is a reviept for desaster.Credit system should be curtailed,derivitives in the finantial system should be banned,maximum ceiling should be put on intrest rates.
    Go back to basics and the problem will be solved.

  • 8. star001

    (27 November 2010, 02:05PM)  Complain about this comment

    For now only way out is,

    Stop paying intrest on every loan there is in the world,loans from £100 To £1000 Billion does not matter how small or big ,and the actual loan should be repaid in small afordable amounts .no matter how long it takes.Any body or any country that has loans to repay should be banned from getting any more.

    The ultimate way out this mess ,and a brilliant way to go forth and succeed.

  • 9. bubblemeister

    (27 November 2010, 02:07PM)  Complain about this comment

    Thanks Tim for clearing that up for me. As to the loss of confidence in money as a means of exchange it looks like this has already started if one goes by the dollar gold price over the past few years. Ditto for sterling gold price. I think I will have to start investing in wheelbarrow manufacturers.

  • 10. Jim

    (27 November 2010, 02:11PM)  Complain about this comment

    Possible one extra that governments can do is to sell off assets to buyers.

    Didn't Gordon Brown attempt to sell some government companies some months back?

  • 11. Phlopp

    (27 November 2010, 05:00PM)  Complain about this comment

    After much headscratching when the Euro was conceived I concluded you can't have one guy holding the steering wheel and another working the throttle & brake. i.e. monetary & fiscal control MUST be in the same pair of hands. Was I wrong?

  • 12. phil

    (28 November 2010, 10:14AM)  Complain about this comment

    In terms of 'warnings' I don't think the ratings agencies have much credibility left - frankly I'm amazed they haven't been castigated more for being so wrong! Yes, spreads act as warning but the ratings agencies have been reactive or plain wrong.

  • 13. Tim Bennett

    (28 November 2010, 07:16PM)  Complain about this comment

    Phil - agree. Ratings agencies are not perfect by any means. So the best bet is to look for a range of warning signs. Widening spreads and categoric assurances from a government that "we don't need a bailout" are two of them...

  • 14. NVP

    (29 November 2010, 01:45PM)  Complain about this comment

    nice and clear Video ...........but where the fun here ?

    c'mon what if the country defaults on its bailout and becomes a economic hooligan, rioting peasants , political unrest and disorder , possible anarchy .......then what ?

    NVP

  • 15. REDFOX

    (29 November 2010, 03:01PM)  Complain about this comment

    Eire should let itself go bust.
    their will be much pain in first two years however within five years they will be one of the strongest countries in Europe pro rata to their population.
    Only fools pile more debt on top of debt, it will go on for generations.

  • 16. Will Richardson

    (30 November 2010, 08:12PM)  Complain about this comment

    If the money is used to give a Job Guarantee at Living Minimum Wage and employ the underemployed this income/demand/spending will maintain national income and tax revenue as firms sell their products and maintain/increase employment.

    Having mass unemployment is the biggest drain on our economy we've had in the last 35 years, not the gradual ageing of the population.

  • 17. Will Richardson

    (30 November 2010, 08:25PM)  Complain about this comment

    Tim, national debt is an asset for investors and is money is an iou too, bonds are simply money with interest, think of it as a savings account, maybe.

    Why is it that Japan's 10 year interest is 1.12% despite massive national debt whereas Australia's is 5.49% even though it's national debt is tiny? Does this mean Australia is more likely to default than Japan despite the disparity in their age/dependency profiles?

  • 18. Velocity

    (11 December 2010, 05:16PM)  Complain about this comment

    Money printing (QE) is equivilent to making more deckchairs to re-arrange on the Titanic to make the Gov't and bwankers feel a little easier about the bag of crap they've made out of the economy with their credit (debt) bubble and debt based fractional reserve banking system.

    This has been at the centre of political corruption of Western economies for centuries by the banksters, that our money is debt money and we are in effect all debt slaves to this fraud/ponzi scheme.

    The banks balance sheets are frauds, the Gov'ts balance sheets are frauds and printing any amount of deckchairs is not going to cover over the cracks in this criminal system by the elite.

    Iceberg ahead..... get your cash outta the banks and bring it to a head

  • 19. Rob

    (29 January 2011, 02:36AM)  Complain about this comment

    The bailout as a solution is crazy. If a country (or an individual or company for that matter) can't pay it's debts how on earth is further debt going to solve the problem?

    Printing to much money will eventually cause a run on the currency and a hyper inflationary bust. So it looks like depression is baked into the cake then? Fantastic!

    Thank you government and regulatory authorities

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