The Urgent Problem of Debt

Liberal economists say the solution to sluggish growth and stagnating living standards in the West is simple: borrow and spend then spend some more. The Krugmans of this world are right when they say that bringing more people onto the state payroll would inject money into the economy and give everyone a lift. They're right in the same way that if you're stuck in a fireworks factory and you're cold, lighting a fire will warm you up for a bit.

The problem with economists is that they're terrible guides for the future. They didn't foresee securitised debt turning a US housing crash into a global depression because that had never happened before. Similarly they say sovereign debt is safe and benign, because throughout the modern era states have become richer and, by and large, haven't had a problem servicing today's obligations with tomorrow's taxes. Economists don't spot big shifts, game changers, because obviously these can't be modelled by extrapolating from past experience.

The first game changer affecting the impregnability of sovereign debt is the rise of the economies outside the US and EU. Billions of newly rich Indian, Chinese and Brazilian people are buying cars and eating meat. All our wealth ultimately comes from a table spread with the Earth's resources, these countries have just sat up and they have big spoons.

The second is the unprecedented transfer of power from governments to corporations. Big companies are getting bigger and they choose how much tax to pay, usually a token amount. As Western governments become ever more swamped by the demands of their ageing populations there will come a point when the safest investments become corporate bonds, not sovereign ones. When that happens it won't be a smooth steady rise in interest rates. The only attraction of gilts for investors is their safety; once that is in question money will stampede out of treasury coffers. But! You say: corporations rely on states to create the conditions in which to do business, therefore they would never let them fail. The premise is right, but is the conclusion? Let's ask history.

In 1789 France had the largest economy in Europe and the second largest in the world after China. It was a rich country but it had an impoverished state, largely because the crown had steadily exempted its richest subjects from the obligation to pay tax. The nobles had a great thing going and the consequences for them of the monarchy collapsing were dire. So they pulled together and did what they could to support Louis XVI – didn't they?