Right Data, Wrong Lesson

Maybe I’m a masochist, but I read Krugman’s blog every day. My reasoning for this is mostly that I place great importance on trying to understand the views of those who I disagree with. This isn’t simply about open-mindedness — although that plays a big part — but the only way to really win an argument is to understand the views of your opponent better than they do, and then explain to them why they are wrong.

I also hate how the political internet has evolved in two directions: self-congratulatory back-rubbing niches where everyone agrees with one another, and on the other hand flame wars where nobody tries to understand anyone else’s perspectives. Nothing breeds stupidity like polarisation.

Anyway, Prof. Krugman has an interesting graphic today:

I’ve been playing around with the IMF’s historical public debt database, which has long-term information on ratios of debt to GDP. And you really have to marvel, given that historical record, at the deficit panic now so widespread. Here’s debt as a percentage of GDP in Britain, back to 1830:

That uptick at the end — you’ll see it if you squint — is what’s driving the Cameron government’s insistence on slashing spending in a liquidity trap.

It’s also interesting to note — contrary to what you often hear — that at the time Keynes was writing, and calling for fiscal stimulus, Britain was substantially deeper in debt than Britain or the United States are now.

No doubt, Cameron’s deficit-reduction obsession is not sound. George Osborne might wax about Britain having the lowest CDS spreads in Europe, but that’s really the result of Britain having its own currency, not the result of austerity. That’s not to defend Labour’s record — they did waste a lot of money, and more than anything else that money was wasted on “liberal interventionism” in the middle east — a policy which Cameron doesn’t seem to have any problem continuing.

The point on this issue is that the UK’s infrastructure needs investment in a number of areas — roads are overcrowded, fibre optic broadband does not reach many areas, the youth faces a housing crisis, etc — and an economic contraction like this is probably the best time to do this spending, to reduce unemployment, and put money in workers’ pockets.

But that graph doesn’t really say much about this issue — the graph’s true meaning is a tale of imperial overstretch, a tale of debt acquired by a colonial power playing world policeman, and trying to maintain the status quo of the old world order.

Sound familiar?

Imperial Britain’s debt load hit its peak at the very point when its empire crumbled into the sand. This is not a co-incidence, and the good news for America is that once Britain ended its global role, growth soon returned, and Britain’s debt-to-GDP ratio fell back to a sustainable level.

Of course, Britain’s change of course happened in the context of a global conflict that ended with the use of nuclear weapons.

I hope American imperialism does not end within a similar context.

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10 thoughts on “Right Data, Wrong Lesson

    • It’s not technically debt.

      Of course if we did include it the debt figure would be significantly higher, but as I have demonstrated in the past both austerity and inflation are ineffective in terms of debt reduction. The only effective means are organic growth, and default.

      I figure most of the unfunded liabilities will be defaulted upon. An easy way to do this would be to engage in a new massive war, wherein many of those owed money unfortunately perish…

  1. Economics may be indeed a hollowed out discipline (as John N. Gray argued recently in a book review). They think their theories work as long as there are plentiful resources/ways to create new stuff and as long as the current system hasn’t been abused for too long. Then, on top of this rather wasteful process of creation driven by abundant energy (and/or systems not yet abused beyond what they can carry) they pretend they (economists) understand how things work, and pretend that they help things out and “smooth” the business cycle.

    I know you’re not a fan of Thomas Malthus but this video has been very enlightening to me: http://www.youtube.com/watch?feature=player_embedded&v=8WBiTnBwSWc

    As Martenson put it: he’d rather see arguments answering his arguments and not just saying “Malthus has been wrong 200 years ago, therefore he must be forever wrong in perpetuity, so let’s go to sleep because some genius somewhere will solve all problems in an instant”. Note that Martenson is not the apocalyptical-type, he mereley says that these things should be acknowledged and our ways should be changed in advance.

  2. Britain may be approaching 100% government debt to GDP, but isn’t the figure more like 500% if you add in consumer and corporate debt? I wonder how this compares, historically. I imagine the data would be hard to get (I’ve just done a quick internet search, but no luck).

  3. In this video: http://www.youtube.com/watch?v=5V3kpKzd-Yw

    - if you go to 56:35, Kyle Bass says that Switzerland is not a problem because UBS and Credit Suisse have subsidiaries that are the host countries’ responsibility. But then he says that UK is in trouble even though at the beginning of the video he said that UK recapitalized their banks. I wonder what’s the truth: is the UK banking system more like Switzerland’s or more like Iceland’s?

    • UK is a combination of Switzerland and Iceland, but bigger. I don’t actually agree with Kyle Bass that Switzerland does not have problems (UBS and CS have massive derivatives exposure to everything, and this will spill over to the real Swiss economy in a collapse/contractionary situation), but I do think the UK would be shaken by a global default cascade. In truth I think the UK’s figure, like Switzerland’s, is quite anomalous, because London is a global banking hub, and a lot of the debt that is domiciled there is not really British debt, and probably wouldn’t affect the physical UK economy in a collapse situation.

      Funnily though, none of these three countries have the biggest problems, because they all have sovereign currencies.

      France, for example, seems like a real problem, beholden to stern teutonic monetarism, and hugely indebted.

  4. Pingback: Deleveraging? « azizonomics

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