>Has the bailout of multi-national companies put the existence of nation-states as the world’s dominant force at risk of collapse?

>Debt has moved from MNC balance sheets to Sovereign state balance sheets. Further exapserating the high public debt levels is the philosophy of the sovereign countries that they must spur growth with their own money, in order to save themselves in the long term.

This deficit level spending adds further fuel to the nation-state debt levels.

Although economic theory and experts agree that spending must occur to avoid a depression, will the final outcome be bankrupt nations?

Governments can only view the bailout as an investment, spend now to recoup later.

But MNC’s, the greatest beneficiaries, able to restructure their legal status and domiciles, it is quite likely that governments will not recoup their bailout money from taxes paid in future from MNC’s.

With the proliferation of off-shore structures and global tax avoidance schemes, even large national and local companies are starting to lessen their tax burden through inventive structures.

This could leave too large a burden on SME’s to help nation-states recover healthy economic footings, which may not be feasible.

If this occurs, could we see many OECD countries default and become bankrupt?

What would the ramifications of that be? Banana republics?


  • >You can't deny the level of risk involved with such large amounts of debt. It's also difficult to deny that the pre-emeninence of nation-states has been waning for some time due to globalisation and big companies with turnover larger than many countries' GDP.However I don't think it's yet time to worry about the collapse of states. It's possible of course. But it would require just about every possible worry to be realised. There just isn't any political will for any alternative to nation-states. In fact the process of moving towards nation-states is still ongoing in the Balkans and Middle East.Many Britons are literally freaking out about the debt. Yet it's by no means the highest in our history (in real terms, relative to GDP). It's by no means the highest in the world. And it's not led to calls for the abolition of states. At present national debt stands at 80% of GDP. That's high of course, but only ten percent higher than where it was in the 70s, and about a third of it's highest level just after the Napoleonic Wars (and of course Britain did very well after those). It's also more than 40% lower than Japan's debt to GDP level. Is the debt sustainable? In order for debt sustainability to occur the interest on debt would have to be lower than GDP growth. Hence in most indebted countries the debt is clearly not sustainable (nor will it become so shortly unless the defecits are addressed). In addition, the higher levels of debt in history were during huge wars like the Napoleonic and two world wars. Many indebted countries are at war today too, but not in the same sort of conflicts. Countries like Britain do not face the hope of a sudden victory today as they did during previous cases.The big risk is that countries will not address their high defecits. But in my view investing in companies to save jobs and boost output to fill the output gap was a good idea. Can firms be 'too big to fail'? Of course, but Capitalism is nothing if not adaptable. New reforms increasing regulation may in fact strengthen rather than weaken the nation-states. And just because some firms have higher revenues than states does not mean they hold more power. Companies will always be viewed by speculators as less risk free because they don't have the ability to print money or raise taxes. In addition they don't have the same military power.If countries do adopt measures of fiscal austerity then the debt may not become sustainable in the long term, but states will be allowed to further increase their temporary sustainability i.e. risk will be deemed low enough to keep lending, and avoid large interest rate hikes. If the deficits shrink, and the markets respond favourably then debt could well continue to be sustainable into the long term and we may enter a new global boom.

  • >Good response Rob. I had started a long reply but it fell apart when i got to the implication stage.Basically I was saying that the indebted govts are going to have to inflate their way out of debt, but since they are still need to sell T-bills to fund their deficits, they will start to spiral, or at least stagnate.Given the inverse relationship between interst rates and yields, i can't see China buying US T-bills at the "risk free" rate of 3% or whatever, when inflation in the US economy starts running at 8%.Then I got to the stage where I said that the UK and US will become like Japan, but thats where the argument fell apart. Because Japan is still going.However, in the instances of Greece, et al within the EU, there nation-state may just become an administrative state with no real powers. It could be that these economically weaker nations become quasi nation-states/banana republics.I never meant that the political idea of nation state will dissolve, just that their integrity as an independant sovereign nation will be reduced to a shell.

  • >Really interesting that you say about inflation. What do you think about the deflationary pressures? Do you think it will be inflation that poses the greatest risk and not deflation as in Japan?Of course you could be right that countries will try and inflate their way out of debt. However I think most major powers will try to avoid this, especially countries like Germany, Britain and the US, who all have controlling inflation high on their agenda. Indeed Bernanke, Chairman of the US Federal Board is a famous economic historian so he's likely to be very insistent on not following this route.But then as you imply with your reference to Greece, will the people display the will to let such harsh, non-inflationary decisions pass? I think a lot actually rests on Greece's shoulders and the example it sets i.e. whether or not it sets a very bad example and therefore triggers contagion in the financial markets.

  • >Not sure about what? Deflation/inflation or contagion caused by Greece? I do think Greece having to default on its debts and withdraw from the EU would cause at least a degree of contagion. After all an official from Hungary said that they were at risk of defaulting on their debt already. If that's true then a lot more countries than we previously thought are in trouble.

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