The question I have for the folks at PIMCO is what sort of haircut would you find acceptable?
Bill Gross’ partner at PIMCO, Mohammed El-Erian has a piece in the FT which should be read. It provokes thought, and most important, this is the voice of the bond kingdom. They are united in one thing, the debt they hold is made good. After all, that is how the game works, but I’d suggest the bond kingdom has some responsibility for the ocean of garbage debt the world has been flooded with over the past couple decades, thus a responsibility beyond recommendations on how to insure they’re paid.
Mr. El-Erain states, and he’s right, the Panic of 2008 created a sea change, and no one really yet understands what this means. He suggests:
Today, we should all be paying attention to a new theme: the simultaneous and significant deterioration in the public finances of many advanced economies. At present this is being viewed primarily – and excessively – through the narrow prism of Greece. Down the road, it will be recognised for what it is: a significant regime shift in advanced economies with consequential and long-lasting effects.
He then adds:
The shock to public finances is undermining the analytical relevance of conventional classifications. Consider the old notion of a big divide between advanced and emerging economies. A growing number of the former now have significantly poorer economic and financial prospects, and greater vulnerabilities, than a growing number of the latter.
These ideas are important for several reasons. First, this isn’t a situation that developed in the last two years. It has taken several decades to get here. Second, what Mr. El-Erian is describing is the process of corporate globalization, specifically, its impact on older industrial economies. The win-win-win notion of corporate globalization has always been the most vile of propaganda. 6.5 billion people on this planet cannot live like 300 million uber-consumptive Americans. It is physically impossible.
Over the past decades, growth in the “developing” world has in many instances been at the cost of the “developed” world. This fact has been literally papered-over with debt. The United States is the best and shiniest example of the creation of historic levels of pubic and private debt to obscure the impact of corporate globalization. Of course, it’s important to understand this corporate model was built atop a five-centuries old model of European/American global domination. If you have any sense of fairness, that situation could not be defended. You cannot, except at the point of a gun, ask the vast majority of people in the world to be economically subservient to the few.
Mr El-Erian points out it’s ridiculous to look at the global economy and suggest one size fits all. The old industrial nations of Europe, the US, and Japan do not need the kind of growth of China, India, Africa, or Brazil. At the same time, the model of modernity of the United States and to a lesser extent Europe is simply not transferable to the other six billion people on this planet. We all need to rethink how and for what our economies function.
Mr. El-Erian writes the world is birthing a new era:
We should expect (rather than be surprised by) damaging recognition lags in both the public and private sectors. Playbooks are not readily available when it comes to new systemic themes. This leads many to revert to backward-looking analytical models, the thrust of which is essentially to assume away the relevance of the new systemic phenomena.
I couldn’t be in more agreement. The question is what are these new “systemic phenomena. Mr. El-Erain then writes:
Here, history suggests that it is not easy for companies and governments to overcome the tyranny of backward-looking internal commitments.
Compare this to what Keynes wrote in his Treatise on Money:
I think it is desirable that the obligations arising out of past borrowing, of which National Debts are the most important, should, as time goes on, gradually command less and less of human effort and of the results of human effort; that progress should loosen the grip of the dead hand; that the dead hand should not be allowed to grasp the fruits of improvement long after the live body which once directed it has passed away.
Compare both with Thomas Jefferson’s thinking on the matter in a letter to James Madison:
The question Whether one generation of men has a right to bind another…is a question of such consequences as not only to merit decision, but place also, among the fundamental principles of every government…I set out on this ground which I suppose to be self evident, “_that the earth belongs in usufruct to the living_;” that the dead have neither powers nor rights over it.
The received opinion, (is) the public debts of one generation devolve on the next. …but between society and society, or generation and generation there is no municipal obligation, no umpire but the law of nature. We seem not to have perceived that, by the law of nature, one generation is to another as one independant nation to another.
But with respect to future debts; would it not be wise and just for that nation to declare in the constitution they are forming that neither the legislature, nor the nation itself can validly contract more debt, than they may pay within their own age, or within the term of 19 years? And that all future contracts shall be deemed void as to what shall remain unpaid at the end of 19 years from their date? This would put the lenders, and the borrowers also, on their guard. By reducing too the faculty of borrowing within its natural limits, it would bridle the spirit of war, to which too free a course has been procured by the inattention of money lenders to this law of nature, that succeeding generations are not responsible for the preceding.
It is quite incorrigible for one generation to bind the next with their debts. As Mr. El-Erian suggests, we are in a new era, it would be despicable via massive debt to chain it to the past. We need to destruct a great deal of this debt, and it must be done to free the future. The future must be allowed to find their own way. The dead hand of the past through gross negligence has lost moral, and, one can add, fiscal authority.
Finally, Voxeu has an argument(tx yves) for not just accepting the debt, but piling more on. The author writes:
In the UK between 1918 and 1932 debt increased from 121% of GNP to 191%. It was not until 1960 that debt returned to its 1918 level.
Proving once again, economists for the most part do not make good historians. Besides a few years in the 1920s, the British economy over most of that period was awful. You want to propose the first fifteen years
of post-WWII Britain as an economic model to aspire? No thanks! As far as how economies deal with debt, a much better model might be the Germans in the 1920s. Leaving aside the always popularly noted couple years of hyper-inflation, the debt crippled the economy for well over a decade and half, creating one of the greatest reactionary tragedies of human history. As Jefferson noted, national debt and war go hand in hand.
of post-WWII Britain as an economic model to aspire? No thanks! As far as how economies deal with debt, a much better model might be the Germans in the 1920s. Leaving aside the always popularly noted couple years of hyper-inflation, the debt crippled the economy for well over a decade and half, creating one of the greatest reactionary tragedies of human history. As Jefferson noted, national debt and war go hand in hand.We don’t need stagnation or war, we need to revitalize our economy, but it needs to be a vastly different model than the past fifty years.
So, what say you Mr. Gross and Mr. El-Erian? How about a little public service? Explain what sort of haircut you’d be willing to take to help right the ships of state on this sea of change we all are embarking.
Cross-posted from Archein: on debt and a new world