Ten months ago (on May 13, 2022) Niall Ferguson gave the annual Niarchos Lecture in Washington, D.C.  Titled ‘Fiscal Crises and Imperial Collapses: Historical Perspective on Current Predicaments’, the presentation is 22 conventionally printed pages long – reading time 30 minutes.  While on one hand it may appear this paper is out of date, in fact I don’t think it is, and think it well worth reading.  There is little doubt that if there was perception that countries on both sides of the Atlantic were in a debt crisis in May, 2010, that situation must be exacerbated today.  At page 10 of his paper Ferguson sets out the six theoretical ways a country can get out of debt crisis.  They are:

·        raising the country growth rate;

·        lowering the interest rate on country borrowings;

·        getting bailed out by someone else;

·        suffer fiscal pain where taxes are raised, public spending is cut, and debt is paid off;

·        money is printed; and,

·        defaulting.

Ferguson then comments that with respect to the U.S. the first three of these six options are unlikely, leaving fiscal pain, inflation (money printing) or default as practical options.  Of these, Fergusson says history shows only one instance (Britian after 1815) where incurring fiscal pain got things back on side – leaving money printing and default.

Fergusson goes on to address an issue I continually raise in these commentaries being: (1) how long can the world’s largest debtor go on being the world’s strongest power?, (2) how hard will it be for the U.S. to inflate its debt away as it did after 1945, and (3) what are the geopolitical consequences of public finance crises.  With respect to the latter issue Ferguson says that history shows that in periods of fiscal stabilization:

·        discretionary military expenditure is always the first casualty;

·        where externally held debt is defaulted, there can be conflict with one’s creditors, which seems to me to cause potential issues when viewed together with reductions in discretionary military expenditures; and,

·        where there is radical currency depreciation one’s reserve currency status can be lost.

I have said many times in these commentaries that I see the U.S. between a very hard rock and a very hard place given its (1) what I think is a permanent loss of manufacturing jobs, (2) extraordinary cumulative and continuing net trade deficits, (3) high unemployment rates which I believe to be at least in part structural in nature; and (4) position as a major creditor to many of its trading partners.