Niall Ferguson is travelling from publication to publication, spreading his message of fear and the end of the US empire, unless we do something to get our debt in check.
This time he shows up in Newsweek, in an attempt to explain how fiscal calamity will mean the end of US military might.
You know the drill: Without growth and sound finances, our gigantic global military endeavours will come unglued, resulting in chaos.
Even here he’s taking shots at his rival Paul Krugman. This is in the context of whether there’s enough global demand for our debt to keep on spending like we ahve.
Could that happen? I doubt it. For one thing, the Chinese keep grumbling that they have far too many Treasuries already. For another, a significant dollar depreciation seems more probable, since the United States is in the lucky position of being able to borrow in its own currency, which it reserves the right to print in any quantity the Federal Reserve chooses.
Now, who said the following? “My prediction is that politicians will eventually be tempted to resolve the [fiscal] crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt. And as that temptation becomes obvious, interest rates will soar.”
Seems pretty reasonable to me. The surprising thing is that this was none other than Paul Krugman, the high priest of Keynesianism, writing back in March 2003. A year and a half later he was comparing the U.S. deficit with Argentina’s (at a time when it was 4.5 per cent of GDP). Has the economic situation really changed so drastically that now the same Krugman believes it was “deficits that saved us,” and wants to see an even larger deficit next year? Perhaps. But it might just be that the party in power has changed.
History strongly supports the proposition that major financial crises are followed by major fiscal crises. “On average,” write Carmen Reinhart and Kenneth Rogoff in their new book, This Time Is Different, “government debt rises by 86 per cent during the three years following a banking crisis.” In the wake of these debt explosions, one of two things can happen: either a default, usually when the debt is in a foreign currency, or a bout of high inflation that catches the creditors out. The history of all the great European empires is replete with such episodes. Indeed, serial default and high inflation have tended to be the surest symptoms of imperial decline.
Stepping back, Ferguson argues we won’t be so lucky, so as to follow the Japanese model of a permanently high debt-to-GDP model. As he notes, over their multiple lost decades, the govrnment has been able to tap over-saving households and other institutions. But we’ve got no such luck. Everyone’s basically tapped except China and, well, it’s sad that that’s our only hope.
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