This is something I have alluded to a number of times here, the idea of a first-world debt restructuring, so it’s interesting to have Niall Ferguson weigh in:
So I guess the unanswerable question is, what could you do to solve this problem?
Well I’ll tell you what you have to do—you actually have to cancel the debt. There are historical precedents for this.
Excessive debt burdens in the past tended to be public sector debts. What we’ve got now is an exceptional level of private debt. There’s never been an economy in history that’s had so much private debt. Britain and America today lead the world in the indebtedness of the household sector and the banking sector and the corporate sector. But debt is debt; it doesn’t even matter if it’s household debt or government. Once it gets to a certain level, there is a problem.
In the past, when excessive debt burdens were accumulated by government, they tended to do one of two things: either they defaulted—this is the Argentine solution—where you say, “Ah, I’m sorry, I’m afraid we’re not going to be able to meet the interest payments this month, and never again will we make the interest payments.”
The other scenario is inflation, where the real debt burden is eroded because the money that it’s denominated in loses value.
I don’t think we’re really going to be out of the woods here until something of that sort happens to the huge debt burdens of the U.S. economy. Either these debts will have to be fundamentally written off in some way, or inflation will have to reduce the real burden.