Public Debt, No Thanks! – Sovereign Wealth Funds, Yes Please!

Imagine that you as a citizen receive a million dollars from your bank at almost zero interest and only your grandchildren and great-grandchildren have to pay off the debts, but you never have to pay them personally? Then you could use it to build a nice house in the countryside and afford a cruise on your dream ship. You could invite your friends to a glittering champagne party with catering or to Monaco on a ship. You could be cheered today as successful, generous and popular. After all, your grandchildren and great-grandchildren pay their bills. Ultimately, you will have blown everything and only bequeath large debts to your children. Would you have a clear conscience? Or would you feel like a con man or an impostor?

Debt is the number one political drug worldwide. It allows politicians, who depend on voters, to distribute gifts to their target groups, thus baiting votes and securing their own power, career and income. The best way to do this is to use big words. The bill always goes to the successor. And from there to the next in office. The politicians’ good pensions are always safe, and they are not liable for anything. Do our politicians have a conscience as sensitive as yours as a citizen?

Comparable to a Ponzi scheme, national debts worldwide are simply transferred in a gigantic snowball system. Governments take advantage of long periods of low or negative interest rates. They keep taking on new debts to pay off old debts and interest. National debts are thus never repaid. But this only works well as lang as interest rates are lower than GDP growth rates and the primary deficit does not exceed a certain level. As long as the economy grows faster than the level of debt, this political risk game works. It is all about creditors’ confidence in the state’s ability to borrow.

The selfishness, carelessness and naivety of most politicians in financial matters often seems boundless and continues to frighten me as a long-standing international investor. They have remained stuck in the mindset of the 1970s and have overslept the new financial world and its clever instruments. They regularly let themselves be ripped off by the superior advisors to the industry, banks and lobbyists. In this case we need creative and clever thinking with regard to spending taxpayers’ money.

Should the state base its finances on credit charities to be paid for by the great-grandchildren the day after tomorrow?

Yes, when it comes to crisis stabilisation, as in the Corona pandemic. But please be smart and have a clear plan.

Yes, when it comes to investments in the future such as education, digitisation or meaningful business development of AI or 6G. After all, these investments will bear fruit later on, they are practically self-financing. These “good debts” can be justified as investments in the future.

No, if only rotten old systems in the state or in the economy are kept alive for a few years longer. Or it is consumer spending, because it disappears completely and never comes back. The billions are then lost.

Social spending must be implemented with a sense of proportion; however, it can only be financed by a growing economy. The economy alone serves as the engine of social welfare. This is the only way to funnel into the public sector. Econo- mic development is identical with social policy. Strangling the economy and the middle class with excessive taxes results is bound to result in lower tax revenue. Financing social pro- grams can only be accomplished by greater debt. Many politicians and citizens fail to understand this basic fact.

The Corona relief programs have caused national debts to soar worldwide. These aid packages are essential, but how can their effects be cushioned? So far there are more vague hopes than clear plans.

There are very bad debts and very good debts.

Debt is not so much about a “black zero”, but about meaningfulness and its effectiveness. 

Debts make no sense if they are poured like water into the desert of rotten structures – then they are lost and have no effect. It would be like watering thousands of dried flowers with billion-dollar tax champagne.

Debts only make sense if they flow into a previously solidly established and modern infrastructure, such as water for a well-tended vegetable patch with small future plants.

In detail:
Poorly managed countries and companies should receive no grants. Why are they likely to spend the money more wisely now than in recent years? Didn’t the politicians there already repeatedly as- sure you that they would do better this time? Haven’t billions already been wasted?

Why should large corporations receive billions in state aid while simultaneously paying millions in dividends to their shareholders and having billions in cash reserves? In this case it only makes sense to participate through a genuine capital increase (but not through loans) and thus maybe generate billions in profits when the share price recovers in perhaps just 24 months. Following this approach, the state could quickly generate a two or three billion asset from a one billion investment. A gigantic profit of one to two billion in a short time. This clever method costs nothing and generates a lot of profit. Wall Street bankers and fund managers in New York and London would act accordingly when trading with their investors’ money. Only this kind of debt-investment would be balanced and socially just. The shares could also be permanently invested in new sovereign wealth funds and gradually re-placed.

Investing in the future, instead of rescue aid for dying dinosaurs

Participation in new, mainly digital innovation companies, instead of risky and unprofitable grants and loans. At the same time, large sovereign wealth funds should be established.

Support for the important medium-sized companies and start-ups needs new creative and flexible financial instruments making sense for both sides. These include professionally managed venture capital investments, mezzanine loans (a mixture of equity and debt capital) and silent partnerships for short periods.

The positive effect of sensible investment debt: Within a few years, billions in profits can be generated magically from billions of debts. These are not real debts at all, but smart investments, because the assets are cheap to have in a crisis and financing is even possible without paying interest. Debt does not increase because assets offset the liability from the outset. This could even save the ‘black zero’.

Proposals:

  1. An end to the previously agreed distribution of billions via government announcements, which only need to be approved ex post (well-behaved but grumbling) and formally by parliament. Pure speculation and thin government papers are not enough. This practice is irresponsible and not very democratic. In advance of any planned expenditure above € 100 million, the government should tell parliament exactly what positive effects the expenditure will have on the economy in the long run. This requires a comprehensive 300-page report as an expert opinion. Accurate analyses providing different opinions as well as expert hearings and broad discussions in parliament are indispensable.
  2. The state becomes a successful (crisis) investor. When the shares are doubled, some of them are sold and the rest are managed professionally in sovereign wealth funds, such as successful investment funds like Warren Buffet’s or Apollo’s, as state assets by investment professionals.
  3. Following the example of Norway and Singapore, large sovereign wealth funds with assets of over € 1000 billion should be set up in each country to create solid wealth for all citizens. This would help avoid temptations in politics to spend more and more money on constituencies. Sovereign wealth funds require discipline and openness in the management of public assets. Independent auditors produce an annual report providing citizens an account of national wealth. The Norwegian sovereign wealth fund (worth € 1000 billion) invests 70 per cent in shares, 27 per cent in fixed interest securities and three per cent in real estate.

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