Ferguson: Cancel U.S. Debt

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.

More here.

Related posts:

  1. Debt is the New Equity. Discuss.
  2. Public Debt, Then and Now
  3. Tracking Global Leverage: External Debt to GDP
  4. Debt-Free Business: Japan vs U.S.
  5. A Trillion in Debt Market Space Freed Up? Not So Fast

Comments

  1. angel9913 says:

    Sure, why not !

    And while at it, keep that AAA sovereign rating too… :-)

  2. rdd says:

    In the land of the blind, the one-eyed man is king. Astonishingly, many of the other economies in the world are worse off than us!

    There are some geopolitical things out there that need to be considered. The countries that we owe lots of money to are typically totalaitarian states with the exception of Japan. They currently rely on exports of oil, minerals, and finished goods to the US to keep their economies running. The rulers of those countries also know that high unemployment in their countries can cause an involuntary regime change (with or without heads rolling). As a result, they are more constrained that the Western Democracies in how they handle their internal economies. it will be several years at least before they can tell the US to piss off.

    It is basically two sets of drug addicts enabling each other. What the US needs to do is to wean ourselves off of debt-based consumption and imported oil during that period.

  3. trader says:

    Niall has a very good point. I personally think that the US is likely to restructure its debt eventually. If you look at what is going on in Washington now, you see that the willingness to pay is not that high. There are people calling for an outright default now and what will happen if rates go up and funding gets more expensive? At that time the voices that call for a restructuring will get a lot louder. This is likely to happen at a time when US cannot borrow much more money cheaply or at any price. Of course, entitlements will be cut (as there will be no way to fund them). This will be the great reset. The likely consequences will be that the $ will lose its status as a reserve currency and we are likely to see currency controls. Can that be only 3-5 years from now? That would be my guess but may take more time. We'll see.