ferguson debt crisis: niall is not a river in egypt

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Historical Perspectives on Current Predicaments

Niall Ferguson, Harvard University

Peterson Institute for International Economics, Washington DC

May

13,

2010

Pacific Asset Management, Portfolio Strategy and Asset Management Solutions, Simplify Your Life (877) 637-2767



With the power to scare governments

into emergency action




Such crises are nothing new—they’re

as old as the bond market

Source: Larry NealPacific Asset Management, Portfolio Strategy and Asset Management Solutions, Simplify Your Life (877) 637-2767



War and revolution are the traditional

causes of crisis

French

Seven Years' War,

American War ofIndependence, 1775-83

RevolutionaryWars, 1792-1815

-

Source: Larry NealPacific Asset Management, Portfolio Strategy and Asset Management Solutions, Simplify Your Life (877) 637-2767



A pattern consistently to be found for

more than a century

Source: Alan TaylorPacific Asset Management, Portfolio Strategy and Asset Management Solutions, Simplify Your Life (877) 637-2767



Unlike lightning, they tend to strike the

same places twice




Latin America, Central, Eastern and

Southern Europe, and the Middle East




But advanced economies

are not exempt

Source: Reinhart and Rogoff (2009)Pacific Asset Management, Portfolio Strategy and Asset Management Solutions, Simplify Your Life (877) 637-2767



Source: Reinhart and Rogoff (2009)Pacific Asset Management, Portfolio Strategy and Asset Management Solutions, Simplify Your Life (877) 637-2767



Source: BIS




Source: BISPacific Asset Management, Portfolio Strategy and Asset Management Solutions, Simplify Your Life (877) 637-2767



Source: IMFPacific Asset Management, Portfolio Strategy and Asset Management Solutions, Simplify Your Life (877) 637-2767



‐

Source: BIS

federal revenues in 2040: 22.3% of GDP




•

– Low growth

–

• Political

weakness – Excessive expenditure and insufficient taxation are

politically determined

• Irrationa exu erance – Investors keep forgetting to learn from history




Source: NBER/GFDPacific Asset Management, Portfolio Strategy and Asset Management Solutions, Simplify Your Life (877) 637-2767



Sovereign debt: A history of hopes

dashed by outcomes

Source: Lindert and MortonPacific Asset Management, Portfolio Strategy and Asset Management Solutions, Simplify Your Life (877) 637-2767



1 A higher growth rate of GDP

2 A

lower

interest

rate

on

the

public

debt3 A bailout, meaning either a current transfer payment

4 Fiscal pain, meaning an increase in taxes and/or a cut

in public spending5 Increased recourse to seigniorage (revenues from

monetary issuance) by the central bank

‐,

the original terms of the debt contract, including

repudiation, standstill, moratorium, restructuring, .

Source: Buiter (2010)Pacific Asset Management, Portfolio Strategy and Asset Management Solutions, Simplify Your Life (877) 637-2767



• •

between – Only Britain 1815‐1914

– States with monetary

sovereignty

reduced debt burden

exclusively through

– States with own‐

currency debt

,

interest rates and higher

growth

• e au ers

– States with limited

– And Britain had the

advantage of the

industrial revolution

– States with foreign

currency debt




Source: MussonPacific Asset Management, Portfolio Strategy and Asset Management Solutions, Simplify Your Life (877) 637-2767



‐

Source: BuiterPacific Asset Management, Portfolio Strategy and Asset Management Solutions, Simplify Your Life (877) 637-2767



Source: GFDPacific Asset Management, Portfolio Strategy and Asset Management Solutions, Simplify Your Life (877) 637-2767



•

war size debt burdens?

government debt

–

– Default on commitments to politically weak

– Condemn bond investors to negative real interest

rates




•

crises of public finance? ,

spending is usually the first casualty

– ,

creditors can arise

–

currency status can be lost to a rising rival




Source: White House




Source: Goldman Sachs




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ferguson debt crisis: niall is not a river in egypt

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