March 16th, 2013 by Hafiz Noor Shams
Let us take for granted the assertion that a government cannot default on its debt obligation if all of its debts are denominated in the local currency. For the more macroeconomic inclined, if a country controls both its fiscal and monetary policies, it can never default on its debts.
Taking the axiomatic approach notwithstanding the concerns which I put up earlier this week, there is an important political implication on the political rhetoric employed with respect to discussion regarding government finance.
These days, it is all too common for one side of the political aisle to accuse that the other side’s proposed or current policy will bankrupt the country.
Supporters of Pakatan Rakyat will accuse the cash transfer program BR1M and the likes are irresponsible populist spending. Add those leakage and outright corruption and the country is well on its way to bankruptcy. Given the current size of government debt, they said, bankruptcy can be far off over the horizon.
Against Pakatan Rakyat’s accusation of bankruptcy, supporters of Barisan Nasional can certainly use the no-default assertion. The assertion immediately blunt attack on the size of debt the government maintains at the moment.
What becomes problematic is when the supporters of Barisan Nasional in turn say free education and higher fuel subsidy as proposed by Pakatan Rakyat are unrealistic spending and that it will bankrupt the country in no time.
If you believe in the no-default axiom, then how can Pakatan Rakyat or in fact anybody bankrupt the countries with irresponsible or corrupt policy?
Now, I am not defending the policy of Pakatan Rakyat as proposed in its manifesto. I disagree with a good number of its economic promises. But there has to be consistency in the rhetoric used.
I can understand that it is hard to keep consistent rhetoric throughout since nobody truly works inside a hive colony with the queen controlling everyone’s mind. Each person can be independent to the whole political organization and its official mouthpiece. Each person can try to defend his or her side of the divide on their own. With insufficient coordination, contradictory rhetoric can happen. It does happen.
However, that does not make the no-default and bankruptcy arguments any more consistent with each other.