printNiall Ferguson is right, “Most debt throughout history in fact is public debt.” What he doesn’t mention is that mini-monarchs, principalities, and ruling families did not posses a printing press. Moreover, absent the system of Fractional Reserve Banking, pyramiding debt was not as easy as it is nowadays.
As for Zakaria: is there anyone more inane and wishy-washy than he?
Here’s the exchange between the two:
ZAKARIA: As Barack Obama prepares to take office, he has no bigger challenge than fixing the economy.
On this program, I’ve talked to many esteemed economists, but few with keener insights than the Harvard historian, Niall Ferguson.
I spoke with Niall recently about the crisis, and also his fascinating new book with its grand title, “The Ascent of Money: A Financial History of the World.”
(BEGIN VIDEO)
ZAKARIA: Welcome, Niall Ferguson.
Niall, when you look at the history of financial times, troubles, how bad is the one we’re currently in?
NIALL FERGUSON, HARVARD UNIVERSITY AND AUTHOR, “THE ASCENT OF MONEY”: We are now in a financial crisis that bears comparison with the Great Depression. Nobody should have any doubt about that.
The difference is that we’re adopting very different monetary and fiscal policies to try to repress that crisis. That’s why I would call it a Great Repression.
But it is potentially as bad. We’re not out of the woods yet. And it seems to me that we’re looking not only at the biggest post-war recession, but potentially also at an extremely slow, long, lost decade. It’s something that nobody …
ZAKARIA: Sort of like Japan in the ’90s.
FERGUSON: That could be a good scenario. If you think of the Great Depression as the worst case scenario, we would be getting off lightly if we can get by with a decade of one percent per annum growth.
So at the moment, I’m really quite apprehensive that the process of deleveraging has far from run its course. There’s no floor in sight in the real estate market. And these things have a self-perpetuating quality. One of the lessons of history is that depressions tend to feed on themselves. There is, after all, a psychological dimension to this. Once people get really spooked, it’s very hard for the market to find its bottom.
And remember, stocks sold off between ’29 and ’33 by nearly 87 percent. So you have to have a sense of orders of magnitude here.
Financial crises happen infrequently on this kind of scale. And that’s why we need to have historical knowledge to have an understanding of their dynamics.
ZAKARIA: If you want to look at the nightmare scenario, the Japanese people forget — initially pretended they had no problem in the 1990s.
But two or three years into their crisis, they injected capital into the banks, they cut interest rates and they had massive fiscal stimulus — all the things that we’re doing. And it didn’t work.
FERGUSON: The most you can say is that they avoided a Great Depression. I mean, they ended up with very low, almost zero growth for a decade.
But, you know, that’s a better scenario than what happened in the 1930s. Let’s not forget that in the 1930s, the United States — and, for that matter, Germany — saw unemployment of 25 percent of the civilian work force. And output contracted by roughly a third, by roughly 30 percent.
So, if you compare a depression with a stagnation, you’re going to take the stagnation every time. That’s why I say, paradoxically, the Japanese scenario of a lost decade might be a good outcome compared with the Great Depression 2.0 scenario.
ZAKARIA: But the difference this time around is, there are other countries out there that are growing. What does that mean, that China and India will probably have some reasonable growth rates despite all this?
FERGUSON: Well, that’s the hope. But I’m not 100 percent convinced that this is going to work out.
Notice also that the stock markets of countries like China — not to mention India, Russia and Brazil, the BRICs — well, they’re dropping like bricks right now, with sell-offs far in excess of what we’ve seen in the United States.
So, I think there’s a question mark over whether China and these other rapidly industrializing countries can keep the world going. They’re still much smaller economies than the United States.
If the U.S. consumer goes on strike, then I don’t really see how the BRICs are going to substitute. They’re nowhere near big enough, and their consumers are nowhere near rich enough.
ZAKARIA: But wouldn’t you say that, in this scenario which you’re describing, which is very scary, the mistake would be to err on the side of caution? And, therefore, wouldn’t it make sense to have a very, very large stimulus program of some kind?
FERGUSON: What worries me, Fareed, is that each country is going about this in its own way, in an almost uncoordinated way, despite the G-20 summit in Washington.
It’s as if everybody is dusting down their copy of Keynes’ “General Theory” and embarking on a national stimulus package, just in the same way that each central bank is heading towards a zero percent interest rate, but at its own pace.
The thing that worries me is that we seem to be forgetting how globally integrated the world economy now is. Each national action has an international reaction, an international consequence. And…
ZAKARIA: Such as? Play that out.
Suppose we had a $1.5 trillion deficit. You are suggesting there’s a problem, because somebody has to buy this debt.
FERGUSON: Right.
Well, we’ve been confidently assuming that the rest of the world will continue to make its savings available to finance our current account deficit, which isn’t about to disappear overnight.
Even if it’s only a large federal deficit, a large government deficit, the money has to come from somewhere. And $1.5 trillion is serious money in anybody’s book. I mean, this is somewhere close to 10 percent of U.S. GDP.
Now, the savings are out there in the surplus countries right now. But if the Chinese decide they’d rather deploy their resources into growing their own consumption, I don’t see how they can simultaneously buy a trillion dollars of freshly printed 10-year Treasuries.
ZAKARIA: So what happens? Suppose we start running these deficits, the Chinese don’t want to buy U.S. debt. Our interest rates have to start going up dramatically.
FERGUSON: Oh, we could see a sell-off, exactly, in the bond market. The price of U.S. bonds could go down. We could then, therefore, see the yields go up. And suddenly, you’re looking not at a 3.5 percent rate on the 10-year, but something much higher.
The other problem is, of course, in the currency markets. We’re assuming that the dollar will be the international reserve currency for the rest of time. But that’s no way a historical lesson.
It seems to be clear from the experience of the British currency that reserve currencies are not forever. They’re not like diamonds. And at some point, questions are going to be asked about how far the American currency really is the most reliable currency.
ZAKARIA: What is the back story of what is going on now?
When people look back 50 years, 100 years from now, and they watch the United States in this extraordinarily vulnerable position because of all this debt — somewhat true of Western Europe as well, perhaps in some ways more true — and they watch China, with $2 trillion of surplus savings, with a budget surplus, growing still, for the most part, robustly, what will they say about the trajectory of these countries?
FERGUSON: I think they’ll look back and say, you know what? There was actually one country at the heart of the global economy in the early 21st century, and it was called Chimerica — China plus America. And these two economies were symbiotically linked. They were intertwined with one another.
China did the saving, America did the spending. China made its funds available through currency intervention, the United States took the money and piled on the debt.
And this worked pretty well for nearly a decade. It took us from the Asian crisis of ’97, ’98, right down to the American crisis that began in 2007.
The question that historians will grapple with — and this is the thing that fascinates me now — is whether or not Chimerica was able to survive this crisis. If China and America continue to interact economically, then it seems to me we’re in with quite a good chance of avoiding another Great Depression.
So the Chinese …
ZAKARIA: In a sense you mean, the Chinese have to save America in this crisis.
FERGUSON: Well, somebody has to finance all of this borrowing. And somebody has to make sure that there are still markets for Asian exports.
There is a reasonable argument for saying that the Chinese will continue to buy 10-year Treasuries and other dollar-denominated securities in order to maintain the global trade that goes on between China and the rest of the world.
But there is an alternative that they can choose. They can say market socialism in one country. We’re going to focus on our resources, our own consumption. We’re going to say good-bye to the world market and revert to being a rather introverted Middle Kingdom.
It’s happened before in history. It wouldn’t be the first time.
Now, if that happens, it’s the end of globalization. If Chimerica turns out, if you’ll forgive the pun, to be a chimera, then we really do risk being taken back to something like the 1930s. Because remember, the key to the Depression wasn’t just the banking crisis or the stock market crash in the United States. It was the breakdown of globalization as a result of protectionism and a collapse of international trade.
That’s what made the Depression so protracted and so deep.
And my worry is that we could inadvertently allow the same kind of thing to happen if there isn’t adequate coordination between Washington and between Beijing. That’s the key relationship that future historians will talk about.
ZAKARIA: All right. We’ll be back with some good news, maybe, with Niall Ferguson.
(COMMERCIAL BREAK)
ZAKARIA: And we are back with Niall Ferguson of Harvard University, and the author of “The Ascent of Money.”
Niall, take us through the past and shed some light on the present. So, right now we have this kind of financial collapse of confidence. Credit has dried up.
When has that happened before? And does it always have a serious impact on the economy?
FERGUSON: Well, I think it’s worth cheering ourselves up with the reflection that, in the very, very long run, financial history is a good news story. It’s a success story.
That’s why I called the book “The Ascent of Money.” It hasn’t just ascended to be the dominant subject of conversation in this country. It’s also ascended from extraordinary, simple beginnings to produce a system that integrates the world economy and facilitates all kinds of transactions.
It’s been a bumpy ride, though, because as you say, this isn’t the first major crisis that we’ve experienced.
You know, you can go right back to the early history of banking, go right back to the Italian city states of the Medieval and Renaissance period, and it’s striking how often financial crises came along and blew banks up back then. The immediate predecessors of the hugely successful Medici Bank went bust when, among others, the English king defaulted on his debts.
So, financial history has a kind of familiar, repetitive quality to it.
ZAKARIA: Now, in those days, am I right in thinking — I mean, really back over most of it — the big crises were often because governments, kings, bankrupted themselves by overspending because of wars?
FERGUSON: Right.
ZAKARIA: We are now overspending because of, in effect, citizens and consumers who over-consume. Is that…
FERGUSON: Most debt throughout history in fact is public debt until relatively recently. It was governments that could borrow on a really large scale, and ordinary citizens simply didn’t have the collateral to do that. I mean, consumer credit is really a 20th century phenomenon.
The only people who could put on substantial amounts of leverage before that were the aristocrats who had large estates and were effectively mini-monarchs.
ZAKARIA: And did they? Were there aristocrats and financiers that did the kind of thing that hedge funds do today?
FERGUSON: Oh, absolutely. I mean, the Duke of Buckingham is a particularly fine example of a 19th century tale of disaster in the leveraged real estate market.
The second Duke of Buckingham was a pretty high-living kind of character, who lived life to the full. And there was nothing that he wasn’t prepared to throw money at, from mistresses and other men’s wives, to the most extravagant furnishings that have ever been seen.
And I paid a visit to Stowe House, which was once the grandest private residence in all of England. It’s now a rather forlorn accommodation for a minor public school. But back then, this was a symbol of aristocratic living.
The trouble is, it was all financed by debt. Buckingham put on, in many ways, the mother of all mortgages. And there came a point in the 1840s with declining revenues from his agricultural estates, when the creditors called time.
And there was an absolutely humiliating scene when the entire contents of Stowe House were auctioned to the public. The Economist, the magazine which observed these sorts of things very closely, commented that this was a sign of a fundamental shift in the social order, to have a duke’s private possessions auctioned off because he’d gone bust.
You see, real estate can get you into trouble even if you have a hereditary title.
ZAKARIA: Now, are we going to look back on these times in that way? In other words, have the last 20 years been a kind of high point of finance and finance capitalism, and perhaps over the next 30 or 40 years we won’t see anything like this again, with hedge fund managers making $1 billion a year and birthday parties that cost $3 and $4 million?
FERGUSON: Well, think of it in terms of a planet — Planet Finance that grew to be even larger than Planet Earth — when we had the notional amounts outstanding of derivatives by the end of 2006 somewhere in the region of $500 trillion, you know, more than 10 times the annual output of the entire world economy. Or think of it as an era — the Age of Leverage, a period in which it was easy for households and banks to borrow ever more money, until finally we maxed out.
And I think one of the lessons of history is that it doesn’t matter what form your debt takes, whether it’s public debt or private debt, whether your government has run up an enormous amount of external borrowing, or whether your households have taken on mortgages that they simply can’t service.
Sooner or later financial history tells us these debts have to go one way or the other. They can go through default. They can simply be canceled.
That happened, incidentally, in ancient times. It was called a jubilee. The debts got canceled, and it was pretty hard luck on the creditors when it happened.
The other way that they can be reduced is through inflation. And this has been a recurrent feature, as I try and show in “The Ascent of Money,” of financial history — times when suddenly the value of money itself collapses and, therefore, so too does the value of debts denominated in that money.
That happened to Germany twice in the 20th century. And we shouldn’t rule out the possibility that, at some point in this sequence of events, we get ourselves out of this intractable debt problem by letting the printing presses roll and letting the money supply finally generate an inflation in double digits or even treble digits.
ZAKARIA: All right. Give us a last thought that’s good news.
You say, in the end, at the end of the day, this is a good news story, and that’s why you call it “The Ascent of Money.”
So what’s the good news here?
FERGUSON: The core, the heartbeat of economic growth, if you like, is innovation — technological innovation, managerial innovation and financial innovation.
And one of the fascinating things that struck me as I worked on the 1930s and the 1970s, and looked even further back to the first great depression that struck in the late 19th century, when prices fell for more than two decades, is the fact that innovation can keep going even in the toughest times.
Even in the 1930s, American corporations were still making major advances in technology. This was a time when IBM was laying the foundations for the computer, a time when RCA was transforming broadcasting. This was a time of great innovation. General Electric was in its heyday.
In the same way, in the 1970s stagflation, new companies were formed. Microsoft was one of them, Apple was another.
Necessity, Fareed, is the mother of invention. And even in the toughest crisis, I have confidence that in the United States there will be innovators who set, as it were, the path for the next era of economic expansion.
And in that sense, we’ll see the ascent of money resume. And we’ll look back and say, well, we fell off a cliff then. But we picked ourselves up, and we climbed up the next mountain.