Economy: ADVICE TO THE FEDERAL GOVERNMENT OF NIGERIA AND MY LESSON TO UPCOMING GENERATION OF ECONOMISTS.- Caleb Edema

ITSEKIRI BROODING ECONOMISTS, PLEASE KEEP FOR RECORDS THIS MY PERSONAL ADVICE TO THE FEDERAL GOVERNMENT OF NIGERIA AND MY LESSON TO UPCOMING GENERATION OF ECONOMISTS.

In the year 1517, one of the most important innovations in financial history was invented in Amsterdam: THE GOVERNMENT BOND.

It was a pretty revolutionary concept.

Governments had been borrowing money for thousands of years… quite often at the point of a sword.

Italian city-states like Venice and Florence had been famously demanding “forced loans” from their wealthy citizens for centuries.

But the Dutch figured out how to turn government loans into an “investment”.

It caught on slowly. But eventually government bonds became an extremely popular asset class.

Secondary markets developed where people who owned bonds could sell them to other investors.

Even simple coffee shops turned into financial exchanges where investors and traders would buy and sell bonds.

In time, the government realized that its creditworthiness was paramount, and the Dutch developed a reputation as being a rock-solid bet.

This practice caught on across the world. International markets developed.

English investors bought French bonds. French investors bought Dutch bonds. Dutch investors bought American bonds.

(By 1803, Dutch investors owned a full 25% of US federal debt. By comparison, the Chinese own about 5.5% of US debt today.)

Throughout it all, debt levels kept rising.

The Dutch government used government bonds to live beyond its means, borrowing money to fund everything imaginable-- wars, infrastructure, and ballooning deficits.

But people kept buying the bonds, convinced that the Dutch government will never default.

Everyone was brainwashed; the mere suggestion that the Dutch government would default was tantamount to blasphemy.

It didn’t matter that the debt level was so high that by the early 1800s the Dutch government was spending 68% of tax revenue just to service the debt.

THE UNDERBELLY EXPOSED.

Well, in 1814 the impossible happened: the Dutch government defaulted.

And the effects were EXTREMELY devastating.

In their excellent book The First Modern Economy, financial historians Jan De Vries and Ad Van der Woude estimate that the Dutch government default wiped out between 1/3 and 1/2 of the country’s wealth.

That, of course, is just one example.

History is full of events that people thought were impossible. And yet they happened.

Looking back, they always seem so obvious.

The Dutch were spending 68% of their tax revenue just to service the debt. Of course they were going to default.

But at the time, there was always some prevailing social influence… some wisdom from the “experts” that made otherwise rational people believe in ridiculous fantasies.

THE UNITED STATES EXAMPLE.

This week, yet another debt ceiling debacle will unfold in the Land of the Free.

You may recall the major debt ceiling crisis in 2011; the US federal government almost shut down when the debt ceiling was nearly breached.

Then it happened again in 2013, at which point the government actually DID shut down.

Then it happened again in 2015, when Congress and President Obama agreed to temporarily suspend the debt ceiling, which at the time was $18.1 trillion.

That suspension ends this week, at which point a debt ceiling of $20.1 trillion will kick in.

There’s just one problem: the US government is already about to breach that new debt limit.

The national debt in the Land of the Free now stands at just a hair under $20 trillion.

In fact the government has been extremely careful to keep the debt below $20 trillion in anticipation of another debt ceiling fiasco.

One way they’ve done that is by burning through cash.

At the start of this calendar year in January, the federal government’s cash balance was nearly $400 billion.

On the day of Donald Trump’s inauguration, the government’s cash balance was $384 billion.

Today the US government’s cash balance is just $34.0 billion.

(Google has twice as much money, with cash reserves exceeding $75 billion. While Apple Inc. has more than six times that amount with well over $200 billion in cash reserves outside the United States.) I am yet to find out Apple's present cash reserves inside the United States.

One structure of the Trump explosion building up very fast I may say. The TRUTH is that this isn’t about Trump. Or even Obama. Or any other individual.

It’s about the inevitability that goes hand in hand with decades of bad choices that have taken place within the institution of government itself.

Public spending is now so indulgent that the government’s net loss exceeded $1 trillion in fiscal year 2016, according to the Treasury Department’s own numbers.

That’s extraordinary, especially considering that there was no major war, recession, financial crisis, or even substantial infrastructure project.

Basically, business as usual means that the government will lose $1 trillion annually.

Moreover, the national debt increased by 8.2% in fiscal year 2016 ($1.4 trillion), while the US economy expanded by just 1.6%, according to the US Department of Commerce.

Now they have plans to borrow even more money to fund multi-trillion dollar infrastructure projects. (Trump just requested $58 billion increase for Defence spendings.)

Then there’s the multi-trillion dollar bailouts of the various Social Security and Medicare trust funds.

And none of this takes into consideration the possibility of a recession, trade war, shooting war, or any other contingency.

This isn’t a POLITICAL problem. It’s an ARITHMETIC problem. And the MATHS just doesn’t add up.

The only question is whether the government will outrightly defaults on its creditors, defaults on promises to its citizens, or defaults on the solemn obligation to maintain a stable currency.

But of course, just like two centuries ago with the Dutch, the mere suggestion that the US government may default is tantamount to blasphemy.

I have read some modern “experts” who tells us that the US government will always pay and that a debt default is impossible. Though these experts didn't give a convincing evidence, I deduced that the two important reasons why the US government will not default is due to their technological advancement above every other nations and being the largest economy in the world. It would take me much space to critically analyse these two important reasons so I pause here and leave it for another day.

I can go on talking about Spain, Greece and Argentina but space will not also permit.

To explain the Nigerian situation, I'll have to compare it with the Venezuelan economic woes.
Venezuela has the largest Proven Oil Reserves (POR) in the world with 297.6 billion barrels compared to Nigeria in the 10th position with POR of 37.2 billion barrels. Venezuela also have the third largest refinery in the world - the Paraguana Refinery with a cracking capacity of 940,000 barrels per day, yet the Venezuelan Bond has a very low tradable value in the world's financial trading platforms called PPP for short form. This is largely due to the fact that their GDP - PPP is very low. Mismanagement of the economy from the era of Hugo Chavez as President to the present Nicolas Maduro is a catastrophe. It is therefore perceived that Venezuela will default in payment one day.
This is what is also happening to Nigeria. Our Bond is not respected by Oyibo people because they know we are very corrupt and will default one day. This is not the fault of Buhari or Jonathan alone, it is a SYSTEMIC MALAISE that have bedeviled us since independence.

Today is no different; we have our own experts (yet are economic quacks) who peddle ridiculous (and dangerous) fantasies.

Well, we’re living in a world where the “impossible” keeps happening.

So it’s hard to imagine anyone will be worse off seeking a modicum of sanity… and safety.

What is the well articulated Plan B for Nigeria? This is a question that needs an urgent answer.

NOTE: I MENTIONED TWO TYPES OF PPP IN THIS MY WRITEUP. THE FIRST IS THE PPP FOR FINANCIAL TRADING ONLY KNOWN TO FEW OF US WHO ARE PRIVILEGED. THE OTHER PPP IS A DERIVATIVE OF GDP. I WILL FIND TIME TO EXPLAIN BOTH OF THEM VERY WELL SOME OTHER DAY. THANK YOU.

Written By Mr Caleb Edema.