Niall Ferguson: Bring on the debt jubilee!

Historian Niall Ferguson says we're just going to have to raise our hands and say uncle. Excerpt from his Vanity Fair interview:

The reason [traditional anti-recessionary policies] won't work this time, and this is the key point, is that the whole U.S. economy became excessively leveraged in the last ten years. The debt burden, as a proportion of G.D.P., is in the region of 355 percent. So, debt is three and a half times the output of the economy. That's some kind of historic maximum, and those debts aren't going away.

So we've all been bingeing on money that we didn't have.

That we borrowed. And we borrowed it from abroad, ultimately. This has been financed by borrowing from petrol exporters, and borrowing from Asian central banks, and sovereign wealth funds. But yeah, whether it was the people who refinanced their mortgages and spent the money that they pocketed, or banks that juiced their returns by piling on the leverage, the whole system became excessively indebted. And notice: what is the policy response? You guessed it, more debt. And, now it's federal debt.

So you end up in a situation where you're curing a debt problem with more debt. Is that going to bring about a sustained recovery? I find that hard to believe.

So I guess the unanswerable question is, what could you do to solve this problem?

Well I'll tell you what you have to do--you actually have to cancel the debt. There are historical precedents for this.

Excessive debt burdens in the past tended to be public sector debts. What we've got now is an exceptional level of private debt. There's never been an economy in history that's had so much private debt. Britain and America today lead the world in the indebtedness of the household sector and the banking sector and the corporate sector. But debt is debt; it doesn't even matter if it's household debt or government. Once it gets to a certain level, there is a problem.

In the past, when excessive debt burdens were accumulated by government, they tended to do one of two things: either they defaulted--this is the Argentine solution--where you say, "Ah, I'm sorry, I'm afraid we're not going to be able to meet the interest payments this month, and never again will we make the interest payments."

The other scenario is inflation, where the real debt burden is eroded because the money that it's denominated in loses value.

I don't think we're really going to be out of the woods here until something of that sort happens to the huge debt burdens of the U.S. economy. Either these debts will have to be fundamentally written off in some way, or inflation will have to reduce the real burden.

Don't either of those scenarios spell the end of America as the world's unrivalled superpower?

Well, it certainly will be extremely painful. And that is why we have to look very closely at the attitude of the foreign creditors, because the U.S. owes the rest of the world a lot of money. Half the federal debt is held by foreigners. And if the U.S. either defaults on debt or allows the dollar to depreciate, the rest of the world is going to say, "Wait a second, you just screwed us." And that's, I think, the moment at which the United States experiences the British experience--when, in the dark days of the 60s and 70s, Britain fundamentally lost its credibility and ceased to be a financial great power. The I.M.F. had to come in, and the pound plunged to unheard-of depths.

Yes, but then Britain turned around and gave the world Kajagoogoo. So everything turned out well in the end.