Countries don’t go bankrupt, said Walter Wriston, the legendary boss of what is now Citigroup Inc. After all, he reasoned, they “own” more than they “owe.”
They do have a habit of reneging on their loans, though, as Citi learned the hard way when Argentina and more than a dozen other nations defaulted in the 1980s.
Western governments are now poised to repeat that ignoble history, be it through outright default or inflating their debt away, says Philip Coggan in “Paper Promises,” a crisply written look at how the debt crisis may overturn the global economic order.
“The massive debts accumulated over the last 40 years can’t be paid in full, and they won’t be paid,” Coggan says. “The debt crises of Greece, Ireland and Portugal are just the start.”
With its aging populations and overstretched budgets, the West’s “Ponzi scheme is running out of suckers,” he says. Put that in your longer-term refinancing pipe and toke it.
Coggan, the Economist’s Buttonwood columnist, is too levelheaded to predict a financial Armageddon. He does foresee a tipping point as wrenching as the collapse of Lehman Brothers Holdings Inc., complete with plunging markets, plummeting industrial output and corporate bankruptcies. No wonder it has taken $1 trillion in cheap money from the European Central Bank to get lenders to buy Italian and Spanish debt.
Debtors have been with us ever since that nice Neanderthal forgot to return my forefather’s club. Economic history is rife with conflict between those who borrow and those who lend, as Coggan says. It’s a battle that pits debtors, who tend to see money as a medium of exchange, against creditors, who view it more as a store of value.
Victories in this war are measured in decades rather than months or years. Like a battlefield guide, Coggan takes us on a tour of paper promises, wending from John Law’s monetary experiments in France following the death of Louis XIV to Ben Bernanke’s quantitative easing. We’re reminded of Sir Isaac Newton’s role in the gold standard, Weimar’s wheelbarrow inflation, and the Bretton Woods conference in the mountains of New Hampshire.
Debtors got the upper hand over creditors after the Bretton Woods system gave up the ghost in 1971. With money untethered from gold, borrowing exploded.
The party couldn’t last forever, which helps explain the past 40 years of bubbles and busts. Now, with so many countries mired in debt all at once -- the U.S. alone owes more than $15 trillion and counting -- the time is ripe for the world’s biggest creditors, notably China, to fight back.
The developed world’s debtors are unlikely to pay in full, especially given their growing crowd of grandpa-boomers and cardiac-arresting medical bills. Coggan, flipping calmly through the options for Western societies, concludes that we face three possibilities: inflation, stagnation or default.
He calls these scenarios “the unholy trinity.” Which will prevail? To a degree, it doesn’t matter, he says: “The key point is that the debt is unlikely to be repaid in real terms.”
Once that happens, we could descend into a crisis to rival what happened in 2008, he says. If the past is any guide, the upshot could be “a fundamental reordering of the international economic system.”
Currency regimes are written by history’s winners, of course: Britain gave us the gold standard, while the U.S. called the shots at Bretton Woods. The next system will probably have an Asian flavor, Coggan says.
Though it may take a decade or more, “a new order will emerge,” he says. “And, like so many of the goods sold in Western supermarkets, it will be made in China.”
“Paper Promises” is explanatory rather than reportorial. It draws extensively on other books, including John Kenneth Galbraith’s “Money” and Carmen Reinhart and Kenneth Rogoff’s “This Time Is Different.” It doesn’t delve into China’s domestic debt bomb, and the section on the U.S. housing bubble will feel superfluous to crisis junkies.
That said, Coggan provides a valuable primer to anyone who still asks, as his father-in-law did, where all the money went during the meltdown of 2007 and ‘08. If you remain puzzled about that, perhaps I can sell you a credit-default swap on the Brooklyn Bridge.
“Paper Promises” is from PublicAffairs in the U.S. and from Allen Lane in the U.K. (294 pages, $27.99, 20 pounds). To buy this book in North America, click here.
(James Pressley writes for Muse, the arts and leisure section of Bloomberg News. The opinions expressed are his own.)