Thursday, 6 August 2009

More decline and fall

Many of you will be as confused as me by the apparent economic upturn. What happened to all those trillions of derivatives in world markets that had to be devalued or written-off? What happened to our housing stock, which everyone agreed was over-valued by at least 30%? And since the government's bail-outs aren't even a fraction of our outstanding debt, isn't the risk of unsustainable debt secured on overvalued assets still as bad as it was last Autumn? Total debt hasn't shrunk at all - all we've done is swap private debt for government debt. It hasn't been deflated away, and we haven't defaulted to any great extent. And debt is debt.

Niall Ferguson has become something of a Vanity fair favourite since his 2006 piece drawing parallels between the US and Gibbon's description of the fall of Rome. More recently, in relation to debt, he suggests that there are only two ways of getting rid of it - inflation, or writing it off. And seriously suggests we consider the latter. A great global debt write-off? Maybe it's time to sell those bank shares ...

2 comments:

Budgie said...

There is no economic upturn. What's happening, as share prices start rising and house prices stabilise, is that people are beginning to factor in inflation. They know that Gordoom has continued to spend, spend, spend. And to finance that he is doing two things. He is devaluing the pound via expanding the money supply and using QE. He also continues to excessively borrow, which is literally unsustainable, relying on inflation to ameliorate it.

When the velocity of money increases again (as the credit strike eases) we will get inflation - possibly very high inflation. What happens in inflationary times? - there is a flight to assets. This is beginning now and it is being described as "green shoots", an upturn etc. It isn't.

Our underlying problems have not gone away though. They are economic and social. We, as a society, spend more than we earn; and we are wrecking the family, the bedrock of all stable societies. If we do not change our tune there will be another bust after this apparent upturn.

Anonymous said...

Don't take Ferguson seriously. He's not an academic any longer but a showbiz performer.

His major argument in his VF article is this: "The war in Iraq failed not because the policy was bad but because modern Americans are weak and unworthy. Therefore the failure of Iraq is not *my* fault but your fault. OTOH cheer up, America: at least Europeans are weak and cowardly and obese and uneducated."

There's a very good rebuttle of Ferguson's points and a discussion of current talk about Decline & Fall in the forthcoming "Classical Empires in Contemporary Culture" (ed. Ahuvia Kahane and Chiara Thumiger), Blackwell 2010.