Fiscal Crises and Imperial Collapses:

Historical Perspectives on Current Predicaments

NiallFerguson,HarvardUniversity
Niarchos Lecture
PetersonInstituteforInternationalEconomics,WashingtonDC
May13,2010
Wearewitnessingadebtexplosionin
thedevelopedworld
h d l d ld

Source:IMF
Withthepowertoscaregovernments
intoemergencyaction
Suchcrisesarenothingnewtheyre
asoldasthebondmarket
ld h b d k

Source:LarryNeal
Warandrevolutionarethetraditional
causesofcrisis
f

French
Revolutionary
American War of Wars, 1792-1815
Independence, 1775-
83
Seven Years' War,
1756 63
1756-63

Source:LarryNeal
Apatternconsistentlytobefoundfor
morethanacentury
h

Source:AlanTaylor
Unlikelightning,theytendtostrikethe
sameplacestwice
l

Source:AlanTaylor
 LatinAmerica,Central,Easternand
SouthernEurope,andtheMiddleEast
h d h ddl

Source:AlanTaylor
Butadvancedeconomies
arenotexempt

Source:ReinhartandRogoff (2009)
It happens to the best of us
Ithappenstothebestofus

Source:ReinhartandRogoff (2009)
Debt/GDP projections
Debt/GDPprojections

Source:BIS
Debt/GDP projections
Debt/GDPprojections

Source:BIS
PIGS
R
R
US
The metrics of doom 1
Themetricsofdoom1

Source:BIS
The metrics of doom 2
Themetricsofdoom2

Source:IMF
 Outpigging
Out piggingthePIGS
the PIGS

Memo:CBOextendedbaselinefortotal
Memo: CBO extended baseline for total
federalrevenuesin2040:22.3%ofGDP
Source:BIS
 What causes these crises?
Whatcausesthesecrises?
Excessivedebt
Excessive debt
MeasuredbydebttoGDPortorevenueorto
exports
Excessiveinterestpayments
MeasuredbydebtservicetoGDPortotax
revenue
Excessiverelianceonforeigncapital
Measuredbydebttoexportsornetinternational
investmentposition
 What causes these crises?
Whatcausesthesecrises?
Economicweakness
Economic weakness
Lowgrowth
Lowreturnsonprivatesectorinvestment
Low returns on private sector investment
Politicalweakness
Excessiveexpenditureandinsufficienttaxationare
politicallydetermined
Irrationalexuberance
l b
Investorskeepforgettingtolearnfromhistory
Some people
Somepeople

Source:NBER/GFD
 never learn
neverlearn

Source:NBER/GFD
No matter how often
Nomatterhowoften

Source:NBER/GFD
 it happens
ithappens

Source:NBER/GFD
Sovereigndebt:Ahistoryofhopes
d h db
dashedbyoutcomes

Source:Lindert andMorton
Sovereigndebt:Ahistoryofhopes
d h db
dashedbyoutcomes

Source:Lindert andMorton
What are the ways out of a debt crisis?
Whatarethewaysoutofadebtcrisis?
 In theory, 6 ways out
Intheory,6waysout
1 AhighergrowthrateofGDP
2 Alowerinterestrateonthepublicdebt
3 Abailout,meaningeitheracurrenttransferpayment
or a capital transfer from abroad
oracapitaltransferfromabroad
4 Fiscalpain,meaninganincreaseintaxesand/oracut
inpublicspending
5 Increasedrecoursetoseigniorage (revenuesfrom
monetaryissuance)bythecentralbank
6 Default,includingeveryformofnon
Default including every form of noncompliance
compliancewith
with
theoriginaltermsofthedebtcontract,including
repudiation,standstill,moratorium,restructuring,
rescheduling of interest or principal repayment etc
reschedulingofinterestorprincipalrepaymentetc.

Source:Buiter (2010)
 Usually, only 3 ways out
Usually,only3waysout
1 AhighergrowthrateofGDP
2 Alowerinterestrateonthepublicdebt
3 Abailout,meaningeitheracurrenttransferpayment
or a capital transfer from abroad
oracapitaltransferfromabroad
4 Fiscalpain,meaninganincreaseintaxesand/oracut
inpublicspending
5 Increasedrecoursetoseigniorage (revenuesfrom
monetaryissuance)bythecentralbank
6 Default,includingeveryformofnon
Default including every form of noncompliance
compliancewith
with
theoriginaltermsofthedebtcontract,including
repudiation,standstill,moratorium,restructuring,
rescheduling of interest or principal repayment etc
reschedulingofinterestorprincipalrepaymentetc.

Source:Buiter (2010)
 Cut, Print, or Default
Cut,Print,orDefault
Cutters
Cuttersarefewandfar
are few and far Printers
between Stateswithmonetary
OnlyBritain18151914 sovereignty
reduceddebtburden Stateswithown
exclusivelythrough currencydebt
budget surpluses lower
budgetsurpluses,lower Defaulters
D f lt
interestratesandhigher
growth Stateswithlimited
monetary sovereignty
monetarysovereignty
AndBritainhadthe
advantageofthe Stateswithforeign
industrialrevolution currencydebt
Two great Anglosphere debtreductions
TwogreatAnglosphere debt reductions

Source:Musson
Lessons of postwar
Lessonsofpost warhistory
history

Source:Buiter
Bondholders beware
Bondholdersbeware

Source:GFD
What are the implications?
Whataretheimplications?
What are the implications?
Whataretheimplications?
 Lessons of history (1)
Lessonsofhistory(1)
What
WhatdogovernmentsNOT
do governments NOT*dowithworld
do with world
warsizedebtburdens?
Slashexpenditureonentitlements
Slash expenditure on entitlements
Reducemarginaltaxratesonincomeand
corporate profits to stimulate growth
corporateprofitstostimulategrowth
Raisetaxesonconsumptiontoreducedeficits
Growtheirwayoutwithoutdefaultingor
Grow their way out with out defaulting or
depreciatingtheircurrencies

*Oneexception:Britain18151913
 Lessons of history (2)
Lessonsofhistory(2)
What
WhatdogovernmentsUSUALLYdowithworld
do governments USUALLY do with world
warsizedebtburdens?
Obligecentralbankandcommercialbankstohold
Oblige central bank and commercial banks to hold
governmentdebt
Restrictoverseasinvestmentbyfirmsandcitizens
Restrict overseas investment by firms and citizens
Defaultoncommitmentstopoliticallyweak
groups and foreign creditors
groupsandforeigncreditors
Condemnbondinvestorstonegativerealinterest
rates
 Lessons of history (3)
Lessonsofhistory(3)
What
Whatarethegeopoliticalconsequencesof
are the geopolitical consequences of
crisesofpublicfinance?
Infiscalstabilizations,discretionarymilitary
In fiscal stabilizations discretionary military
spendingisusuallythefirstcasualty
Incasesofdefaultonexternaldebt,conflictswith
In cases of default on external debt conflicts with
creditorscanarise
Incasesofcurrencydepreciation,reserve
In cases of currency depreciation, reserve
currencystatuscanbelosttoarisingrival
Source:WhiteHouse
Source:GoldmanSachs
Itssquiteashortridefromhere
It quite a short ride from here
 to here
tohere

NiallFerguson2010