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
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With the power to scare governments
into emergency action
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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
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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
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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
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Unlike lightning, they tend to strike the
same places twice
Source: Alan TaylorPacific Asset Management, Portfolio Strategy and Asset Management Solutions, Simplify Your Life (877) 637-2767
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Latin America, Central, Eastern and
Southern Europe, and the Middle East
Source: Alan TaylorPacific Asset Management, Portfolio Strategy and Asset Management Solutions, Simplify Your Life (877) 637-2767
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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
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Source: Reinhart and Rogoff (2009)Pacific Asset Management, Portfolio Strategy and Asset Management Solutions, Simplify Your Life (877) 637-2767
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Source: BIS
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Source: BIS
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Source: BISPacific Asset Management, Portfolio Strategy and Asset Management Solutions, Simplify Your Life (877) 637-2767
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Source: IMFPacific Asset Management, Portfolio Strategy and Asset Management Solutions, Simplify Your Life (877) 637-2767
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‐
Source: BIS
federal revenues in 2040: 22.3% of GDP
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•
– Low growth
–
• Political
weakness – Excessive expenditure and insufficient taxation are
politically determined
• Irrationa exu erance – Investors keep forgetting to learn from history
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Source: NBER/GFDPacific Asset Management, Portfolio Strategy and Asset Management Solutions, Simplify Your Life (877) 637-2767
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Source: NBER/GFDPacific Asset Management, Portfolio Strategy and Asset Management Solutions, Simplify Your Life (877) 637-2767
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Source: NBER/GFDPacific Asset Management, Portfolio Strategy and Asset Management Solutions, Simplify Your Life (877) 637-2767
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Source: NBER/GFDPacific Asset Management, Portfolio Strategy and Asset Management Solutions, Simplify Your Life (877) 637-2767
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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
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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
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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
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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
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• •
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
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Source: MussonPacific Asset Management, Portfolio Strategy and Asset Management Solutions, Simplify Your Life (877) 637-2767
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‐
Source: BuiterPacific Asset Management, Portfolio Strategy and Asset Management Solutions, Simplify Your Life (877) 637-2767
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Source: GFDPacific Asset Management, Portfolio Strategy and Asset Management Solutions, Simplify Your Life (877) 637-2767
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•
war size debt burdens?
government debt
–
– Default on commitments to politically weak
– Condemn bond investors to negative real interest
rates
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•
crises of public finance? ,
spending is usually the first casualty
– ,
creditors can arise
–
currency status can be lost to a rising rival
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Source: White House
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Source: Goldman Sachs
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’
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© Niall Ferguson 2010Pacific Asset Management, Portfolio Strategy and Asset Management Solutions, Simplify Your Life (877) 637-2767