Borrowing from the Future

cash heaven

Although this is not a new phenomenon in the country, I have recently noticed some concerted effort at raising public funds through bonds. This only raises the hairs at the back of my neck. I have a gut feeling that tells me that this is not a good practice to keep up. Since I am not an economist, I casually asked an economist friend of mine about this last weekend.

I am of the opinion that our government is possibly having some cash flow problems, brought about by the stark drop in oil prices. Our last budget was planned on the basis that oil would stay at about $125 per barrel. However, it has dropped to less than half that value. Hence, it is very possible that our government is experiencing some cash issues.

So, the easiest solution out of this would be to issue bonds. Bonds are basically promises from the government to repay the money at a specific time in the future, with specific terms. Bonds are a good instrument for solving temporary cash flow problems as it is essentially what everyone does, borrow some cash to make more cash and then repay the loan with some interest.

But to me, this is borrowing against the future, to repay present debts. For some reason, my logic just cannot reconcile this positive feedback loop. If we are borrowing against the future, we are actually hedging that we will be able to repay those debts in the future. The trouble happens when we do not have enough cash to repay those debts, we will need to issue more bonds, to borrow even more money.

Somehow, I have a feeling that this is not sustainable and that the bubble will burst at some point. This is what our venerable TDM has described as ‘making money out of thin air’. Our government is literally ‘printing money out of thin air’. It is digging itself into debt with the rakyat. When it defaults, we are literally screwed because we have a vested interest in not letting it default.

Oh my, the picture just became even darker for me. I think that I should go run and hide away from all the Sukuk and Amanah Saham issues.

Published by

Shawn Tan

Chip Doctor, Chartered/Professional Engineer, Entrepreneur, Law Graduate.

3 thoughts on “Borrowing from the Future”

  1. I don’t know the details of course, I don’t know how much is being borrowed, but in general I don’t think it is bad to borrow from the future a little. It is perhaps a bad strategy for an individual, but it’s different for the state, simply because of its size.

    We need some way to deal with the problem that markets get overheated when things are going well, and that they come to a completely ridiculous complete halt when things are just a little bad. The only body that big and robust enough to dampen these excursions, and absorb/release the cash, is the state…

    Their will be better times, and then society will be able to afford repaying those debts. The only risk I see is that the leaders that borrow and invest now won’t be around when the good times return and when that money should be taken out of the market again… if the guys around then won’t repay the debts, to maintain their popularity, that’s when it gets ugly.

  2. I understand what you mean. The only way to test this out is to see what happens when the bonds mature. If the government needs to borrow more money in order to pay back the bonds, it’s obviously in some trouble.

  3. Well in Holland I’ve seen it being done wrong a few years ago: the economy was blossoming, the tax revenue turned out higher than expected, and so the treasury secretary decided to… return that extra money to the people, as a spending stimulus!!

    Of course it depends on your economic views whether that was wrong, and I’m definitely not an economist, but in my naive picture of the world that money should have of course been spent on buying back bonds. Now, like you say, they’re selling more bonds…

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s