fiscal crises & imperial collapses - ferguson 5.13.2010
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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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We are witnessing a debt explosion in
the developed
world
Source: IMF
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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 Neal
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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 Neal
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A pattern consistently to be found for
more than
a century
Source: Alan Taylor
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Unlike lightning, they tend to strike the
same places
twice
Source: Alan Taylor
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Latin America, Central, Eastern and
Southern Europe,
and
the
Middle
East
Source: Alan Taylor
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But advanced economies
are not
exempt
Source: Reinhart and Rogoff (2009)
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Source: Reinhart and Rogoff (2009)
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Source: BIS
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Source: BIS
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Source: BIS
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Source: IMF
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‐
Source: BIS
federal revenues in 2040: 22.3% of GDP
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•
– Measured by
debt
to
GDP
or
to
revenue
or
to
exports
• Excessive interest payments
– Measured by
debt
service
to
GDP
or
to
tax
revenue
• Excessive reliance on foreign capital
– Measured by
debt
to
exports
or
net
international
investment position
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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/GFD
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Source: NBER/GFD
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Source: NBER/GFD
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Source: NBER/GFD
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Sovereign debt: A history of hopes
dashed by
outcomes
Source: Lindert and Morton
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Sovereign debt: A history of hopes
dashed by
outcomes
Source: Lindert and Morton
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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
spending
5 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)
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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
spending
5 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)
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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: Musson
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‐
Source: Buiter
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Source: GFD
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• *
war size
debt
burdens?
– Reduce marginal tax rates on income and
– Raise taxes on consumption to reduce deficits
depreciating their currencies
*One exception:
Britain
1815
‐1913
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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 2010