British economic historian Niall Ferguson recently made a speech on Fiscal Crises and Imperial Collapse which has absolutely no connection to the Ivory Coast or lifestyle design, but was great, so I’m going to comment on it anyway.
Ferguson says that today governments have world war size debts, without having had a world war, and lists what governments with world war size debts historically have NOT done:
- Slash expenditures and entitlements
- Reduce marginal tax rate on income and corporate profits to stimulate growth
- Raise taxes on consumption to reduce deficits
- Grow their way out without defaulting or depreciating their currencies
If politicians in general are analysed the same way as Ivory Coast’s president Laurent Gbagbo, ie they’ll do what it takes to stay in power, the above makes perfect sense as all the points are likely vote-losers.
Ferguson goes on to list what governments with huge debts USUALLY do:
- Oblige central banks and commerical banks to hold government debt
- Restrict overseas investments by firms and citizens (capital controls)
- Default on commitments to politically weak groups and foreign creditors
- Condemn bond investors to negative real interest rates
Of these only the third is really contributing to solve the problem, and the fourth is a consequence of inflation. Ferguson says that many assume that that governments will inflate away debt, but says it is harder than we think, because there are fewer naive investors now than in 1945, mentioning his grandmother losing money on British war bonds. Seeing the risk of deflation or default, Ferguson says, markets will ahead of time drive up borrowing costs, which can and has historically, lead to a nasty scenario with high real interest rates and deflation, forcing massive spending cuts and the fall of empires.
So, if Ferguson is right, it would mean deflation is more likely than inflation.
So far I have not taken any loans to invest in the Ivory Coast, but I am considering it, and having a loan when there is inflation is great – having one when there is deflation is clearly less great.
In other news a team of scientist have created the first artificial cell. Well, human kind, that was a nice 100,000 year streak!