Friday, October 8, 2010

Ferguson Lecture

Anyone stopping in should go see this lecture from Niall Ferguson. He is a top-notch economic historian, especially of financial topics. It is very unsettling, especially for those living in the U.S. and UK.


  1. Ferguson is an accomplished scare monger.

    He actually tries to make people think that the UK and US are comparable to Greece. Therefore he shows either a profound lack of understanding of different monetary arrangements or he is a dangerous liar.

  2. We couldn't disagree more. Did you go through the whole thing and get to the part where he pointed out that UK and US have the option of inflating their way out of debt, unlike the Eurozone countries? He also shows how the UK did this to get rid of their post-WWII debt.

  3. His term "inflating their way out of debt" is quite telling in itself. Refusing, as a country, to be held hostage by private bond markets and invoke austerity on your citizens is considered poor form in the eyes of Ferguson. Thats what he calls inflation. I call it refusing to be extorted and using your powers as the issuer of currency to take careof your citizens and not just appease the bond vigilantes who dont "work" or "produce" anything for a living.

    Again, using post WWII, when we were on a fixed exchange rate currency regime is apples to oranges and his insistence on comparing today to such an arrangement is folly. There is NOTHING SIMILAR in our current arrangements and our post WWII arrangements. The only thing similar is we are still called USA and they are called United Kingdom.

    He has compared the US and UK to Greece in the past so my criticism stands.

  4. I'm concerned that you consider a country's government being held to its obligations to be extortion. Inflating your way out of debt has long-term consequences in that it will hamper the country's ability to borrow in the future (although I can see an upside here).

    I'm curious how you think the exchange rate regime matters here. Can you elaborate a bit?

  5. Is there ever a concern that the US govt cant meet its bond obligations?

    As long as the debt is denominated in US$ they will ALWAYS be able to make the payment.

    When we were on the gold standard, yes, things were different, but now, when the only thing currency is exchangeable for is itself, there is no default possibility (involuntary default that is).

    No one can come to the US govt with their currency/bond and demand that it be exchanged for gold, or anything else, something that the US govt might not have enough of. Thats why we left the gold standard in 1971, the French and others were threatening to exchange their dollars for gold, which we didnt have. SO when you arent obligated to exchange for something else all you do is promise dollars, which you can never run out of. Your exchange rate (relative to other currencies) will be affected but thats it. As Greenspan once said, we can always make the payments but we cant always guarantee what you will be able to buy with the money.

    The extortion is when a country like Greece cant get funding from the bond markets to manage its govt because the nebulous"bond markets" are expecting too high an interest rate. If Greece went back to issuing its own currency like Argentina did about a decade ago, they could tell the bond markets to take a flying leap. The US can tell the bond market that already. Ferguson wants us to think that bond ratings of US debt actually matter. They dont. Look over the last twenty years and see what happened to Japans interest rates when the bond markets threatened their ratings...................... not a thing.

  6. Of course, the US government, like any currency monopolist, can print money to make its obligations. Default specifically is never a concern. But costly inflation is still a (potentially large) worry.

    I don't agree that what you are discussing is extortion. Why would you lend your money to any entity that can't offer sufficient compensation for this risk?

    I see the cost here, of going back to printing their own currency, is one of stealth theft by inflation from their own citizens. This is plainly a violation of property rights and is a true crime.

  7. Extortion is a strong term but why should bond traders in New York have any say in what the Greek government does for its citizens? Why do THEY get to say when someone should retire and what pension they receive?

    If Greece issued their own currency they would NEVER have to "borrow" from any bond markets. You seem to be talking out of both sides of your mouth on this currency issuance issue. You want more currencies in the US but are satisfied to let the Greek nation stay beholden to foreign bond traders.

  8. Portfolio managers of any kind have no say. But they are supposed to be good stewards of client money. They would be violating their fiduciary duty, and professional ethics, if they invested in bonds that were too risky without sufficient expected return.

    I want more currency competition so that country governments will be more constrained, not so they can get away with printing money and expropriating their own citizens wealth.

  9. "They would be violating their fiduciary duty, and professional ethics, if they invested in bonds that were too risky without sufficient expected return."

    They already did that. The flaws of the EU monetary system (a defacto gold standard) were evident form the start to those who understand this kind of stuff (Mosler,Mitchell).

    In the Euro situation the expropriation of wealth is not coming from the Greek citizens to the Greek govt its coming from the Greek citizens to the German and French bankers. The current crisis is treating currency like its a zero sum game........... its not. The investors have no more "rights" to their returns than the citizens do to their jobs.

  10. First, do you expect bond portfolio managers to understand the economics of a currency union? It seems to be outside their expertise.

    Second, be careful not to conflate ex ante and ex port knowledge. Greece downed themselves with a menu of swaps and shady accounting. Corporations get prosecuted (or hammered in the market) for such things - why should Greece be any different? A borrower has duties to the lender, including being truthful.

    Investors do have a right to returns, but only in the confines of risky behavior. In other words, I understand, as a bond investor, that default is possible. But if you do illegal stuff that makes default more likely, then you are violating my property rights. We didn't agree (and can't) that it's okay for you to do illegal stuff. We did agree that your business is risky by nature, so loss is possible.

  11. Sorry for the dearth of responses the last few weeks, Ive been visiting other places.


    "But if you do illegal stuff that makes default more likely, then you are violating my property rights. We didn't agree (and can't) that it's okay for you to do illegal stuff. We did agree that your business is risky by nature, so loss is possible."

    is extremely dubious I think here's why. The laws they broke are mostly to do with treaties within the EU which everyone has broken because they were poorly designed and unrealistic to the real world needs. They broke no international law by running budget deficits above 3%. They did do some interesting accounting operations..... at the behest of Goldman Sachs, Lehman Bros and the like, who were also being paid out at higher rates when things turned bad.... hmmmmmm "no conflict of interest here to see............... run along now"
    The entire Euro system is flawed, much having to do with it being biased towards countries which run large current account surpluses.

    When will the world learn that for every surplus country there is an equal and opposite deficit country, and praising the surplusers while berating the deficiters is counter productive. This is much of our problem

  12. Greg,

    I agree that most countries were breaking those laws, but that doesn't mean no laws were broken. It just means that de facto the laws weren't enforced. It would be interesting to note when these shenanigans came to light, though, from the bondholders point of view.

    Also, GS was the main arranger for Greece's currency swaps back in 2001. But they couldn't force Greece's government to do anything that Greece didn't want to do. It was voluntary trade but it did allow Greece to put off settling up their debt for several years.

    I agree that the Euro system is flawed. I think it shouldn't exist, but I also think currency monopolies generally shouldn't exist.

    Finally, people don't understand trade generally, and I think that's part of the problem. Maybe even the crux of it. So we, as educators (and everyone can be one), need to focus on the idea of trade and the entire balance of payments, not just the current account.