Niall Ferguson's complete guide to the sovereign debt crises

[Ben]

Re: Niall Ferguson's complete guide to the sovereign debt crises

Hah I'm surprised it's up on the web for free then.

Jay, I think his thesis is that bond markets are more sophisticated now than in 1945, so people won't accept long-term negative real returns that could deflate government debt, so the long-term solution will have to be default. I think he's got a point in that people are well aware of what a negative real return is now, and if inflation looked bad, spikes in govt bond rates would be likely, which could restart recession. He doesn't, however, seem to address the counter-arguments, such as monetizing or the possibility of fudging inflation figures.

In reference to people fleeing to gilts and tbills, he seemed to be saying that investors were making the same mistake they always do - underestimating the chance of a sudden spike in rates.

[karim0028]

Re: Niall Ferguson's complete guide to the sovereign debt crises

The thing is, i dont know how average joe/folks dont see rising interest rates as a very real possibility.... Why in the world would i buy a bond (anything more than 3 to 6 month t-bills) in the lowest interest rate environment possibly in history and at minimum in the last 50 years!!!! Thats asking to get kicked in the teeth.... Its kind of the same mentality i hear from folks that now "is a great time to buy a house".... If you get a great cash flowing deal, perhaps its a good time to buy, but a regular consumer home purchase that again gets them a "bigger home" at the limit of what they can afford to pay; will sink like a rock when interest rates hit 10% or so....

[Ben]

Re: Niall Ferguson's complete guide to the sovereign debt crises

I swear Niall Ferguson just cycled past me!

(based in Oxford)

So here is what I think the mainstream doesn't get (in reply to Jay) - the debt can be removed by currency depreciation (and inflation) but without huge drops in the major currencies or very high headline inflation. That's because governments around the world are inflating against hard assets.

So, we might not see large drops in the dollar, because what can it drop against? Everyone is printing. People use this as an argument not to worry about a dollar crash, but every currency is going down vs hard assets. Mainstream economists just don't seem to grasp this point. This is partly due to widespread disdain against gold.

I'm less sure what this means for headline inflation. First, there is the fudging of the numbers, which again is not a mainstream idea. Second, currency depreciation against hard assets should be inflationary, but I guess it might be offset by deflationary forces elsewhere in the economy (e.g. house prices), so lots of debt could be removed without CPI ever being that high.

This, the itulip scenario, is the easiest way out of high government debt.

[Aetius Romulous]

Re: Niall Ferguson's complete guide to the sovereign debt crises

His "War of the World" is a classic, one of my most influential reads.

I'm so glad that folks are beginning to get away from GDP as a measure of anything useful. GDP today is a completely different animal than it was even a decade ago. Reinart/Rogoff relied far to heavily on it.

For me, the most important factoid Ferguson presented was the creation of the "Bond" concept in the 12thc Italy. I would add that it was at this time as well that modern double entry bookkeeping and widespread acceptance of Hindu-Arabic numerals also occurred, both in Italy. This is no coincidence as each supports the other and are now the veritable frame on which we hang all our financial and economic thinking.

From there, we have a mess of complexity that no government at any time has ever had a handle on. Indeed, our liberal democratic values have grown from this same structure, and have ended up incompatible with the whole. Reinhart/Rogoff, in their seminal work "This Time it's Different", make great use of wonderfully researched data that Ferguson draws on in his presentation. What neither mention however, is that every government since those early Venetian traders has struggled with fiscal/monetary policy. In the main, that struggle produced the excesses of our funky western civilization. In the detail, it was always hell for most involved.

Because of the nature of the conflict between liberal democracy and the essential, seldom practiced need for dull sustainable fiscal discipline, the options we face now are severe and limited. Ferguson begins by allowing for human nature, but forgets it when he summarizes the available remedies. My list has one - default. As long as policy is decided in the public sphere through the tyranny of short terms and elections, every other remedy will be kicked down the road until but one is left. At that point, look to see an overhaul of the basics of accounting to redefine the names, labels, and line items in order to refit them on a balance sheet.