Niall Ferguson: Reasons to Worry About All Our Debt





[Niall Ferguson is Laurence A. Tisch professor of history at Harvard University and the author of "Colossus: The Rise and Fall of the American Empire." His new book, "The War of the World," will be published in September.]

Think of the economy of the United States as a dinosaur — one of those huge herbivores whose bulk shook the ground. A brachiosaur. A brontosaur. A diplodocus. Like them, the U.S. economy is mind-bogglingly enormous — two and a half times as big as the next largest economy in the world and almost as large as that of the six other members of the Group of Seven combined. The catch is that it has to consume almost incessantly to sustain its great heft.

Contrary to what we used to believe, leviathans like the diplodocus were not exactly sloths. It is now thought that they had the strength to stand on their hind legs in order to reach food at the top of trees. They may even have been able to run rather than merely plod. But it seems reasonable to assume that their reaction times were slow; it was a very long way from the diplodocus's tail to its brain. If a predator sank its fangs into that tail, it might have taken the diplodocus a few moments to feel the pain.

The big question about the dinosaurs is, of course, What caused their extinction? Why were so many species unable to evolve in response to environmental changes? The most common explanation is that a very sudden event, like a meteor's impact, gave the dinosaurs too little time to evolve and provided smaller and more dynamic life forms with an opportunity to take over.

An analogous question for economists is whether the United States is capable of evolving out of its present excessive indebtedness. Or could the global economic environment change so drastically as to threaten, if not extinction, then at least decline relative to smaller, more dynamic economies?...

The most important lesson to be drawn from the history of debt is this: It's not the absolute size of your borrowings that matters. It's not even the relative size in relation to your income. The crux is whether the interest payments you have to make are more or less than you can afford to pay. And that, in turn, is a function of whether or not the rate can move, whether or not your income can change and whether or not inflation can help you or hurt you. On this basis, both subprime American mortgage-holders and a distinctly subprime administration may find the months ahead more painful than they anticipated.




The dinosaurs, we conjecture, succumbed to global climate change. The American beast — call it debtlodocus — faces a comparable economic challenge. The global economic climate seems to be changing. We hear no more talk of deflation; we hear a lot about rising rates.

For America's giant, dinosaurlike economy — with its small, wealthy head; its big, fat middle; and its long low-income tail — there is a tried-and-tested response to a change in the weather. Dollar depreciation and inflation have saved the debtlodocus before. The assumption seems to be that they will do the trick again.

Yet this time may be different. For sinking like a velociraptor's fangs into the tail of the debtlodocus are interest-rate hikes that may outpace and check any increase in inflation. And no one knows when and how violently the leviathan may react to this slowly discernible pain.

It is too soon to speak of extinction, of course. But one obvious inference to be drawn from the British experience of an indebted empire and a sliding currency, as well as from the history of the diplodocus, is that eternal life is not on offer.





comments powered by Disqus

Subscribe to our mailing list