Jun

29

 What's more surprising, that the US deficit/GDP ratio is the best of this lot, or that Italy looks good next to Japan?

Roger Arnold adds:

If I recall properly, Japans sovereign debt to GDP is larger than any country has ever been able sustain without a collapse of their currency. The highest debt to GDP that a country has been able to work out of was the US post WW2 at about 140%.

It's interesting that every year or so, as we discuss here, the yen repatriation and associated carry trade unwinding is supposed to kill the dollar.

Buffet / Rogers et al jump on board and the media frenzy lasts about a week or so. None of them ever mention the dire situation Japan is in, which is compounded by their aging demographic and lack of an appropriate immigration policy to change it. And I think their personal savings rate has fallen to 8%, the lowest in Asia. Western Europe is in a similar-situation although their savings rates are still roughly-14%.

How does the dollar collapse in that environment? Where would the capital go? Why would the capital go? What benefit may be achieved by either area taking their savings home from the US?

Rhetorical questions. 

Stefan Jovanovich writes:

The War of the Spanish Succession - the first European World War - left Britain, France, Austria, Spain, Netherlands, Sweden, and Russia with debts that, compared to their governments' actual cash incomes, were far greater than those owed by Japan, the United States or any of the countries of Europe. At the height of the crisis, in 1719, the costs of debt service alone for the British crown were 60% of the government's income. Yet, somehow, the Brits, alone among all the other European nations, successfully refinanced their debt and began their journey towards Empire.

You can read an introduction to the story of their financial triumph, which paid for Marlborough, Nelson, and Wellington's victories. 

From Alex  Forshaw:

Inflation was very high after WW2 ended, correct? So the real value of America's debt would have been significantly reduced. Considering that inflation was a widespread phenomenon among recovering economies, America's currency did not suffer a relative collapse, but Americans holding government debt were screwed.

In this case, Japan's currency seems destined for a relative collapse. I believe that debt service costs the Japanese government about one-third of its income.

In the British instance, didn't a group of private bankers step forward and essentially assume lots of the crown's obligations, because it faced bankruptcy after the Glorious Revolution? (As I understand it, that was when the Bank of England was founded.)

Charles Sorkin writes: 

US Inflation fell precipitously immediately after the war. There was another spike in the late 50s, but there were also two periods of deflation in the immediate decade (or so) into the post-war period. For the most part, inflation was rather benign, by today's standards, until the late 1960s. 

Alex Forshaw writes: 

Hmm, I simply can't reconcile US debt/GDP falling from about 135% at the end of WWII to, what, 20% by 1960? How could economic growth have been that high? Yeah, taxes were high (top marginal rate was about 91% and top effective rate approx. 57%) and Eisenhower was extremely frugal, but Korea would have ratcheted up the national debt again. So I have a hard time getting those figures to add up without brief but intense bursts of inflation at some point in the 1945-60 time frame. 

Charles Sorkin writes:

US Inflation fell precipitously immediately after the war. There was another spike in the late 50s, but there were also two periods of deflation in the immediate decade (or so) into the post-war period. For the most part, inflation was rather benign, by today's standards, until the late 1960s.

Stefan Jovanovich comments:

I think Charles takes the point. There was also a brief spurt of energy price inflation with the start of the Korean War, but that was entirely the product of the Truman Administration's imposition of Jimmy Carter controls. When those were repealed (with the Republican's taking control of Congress), the gas lines disappeared and Exxon was offering to put a tiger in your tank and give you free dishware with every fill-up. The consensus forecast of most expert opinion in 1945 was that the country would experience a deflationary collapse. Sewell Avery, the Chairman of Montgomery Ward, decided to hold cash. The radicals at Sears (!) chose to expand. If Mr. Avery and others holding bonds were "screwed", as Alex puts it, it was not by any precipitous decline in the value of the dollar but by having failed to participate in what John Brooks described as Seven Fat Years.

As for the bankruptcy of the Glorious Revolution, that was entirely a function of the unwillingness of Parliament to pay the King's bills, not any crushing burden of debt. The Duke of Marlborough (hero of the War of Spanish Succession) started his career as a young go-fer to the Stuart crown; he - and most of the other smart money - changed sides when the Dutch indicated a willingness to make a white knight takeover bid.

"Bankruptcy" was the cover story; the real issue was the unwillingness of the city merchants to accept even a hint of the restoration of full civil rights to the Catholics. And so, for another hundred plus years, no one who wanted to hear the mass in Latin could attend Oxford or Cambridge. That did not, of course, prevent Marlborough's forces from being the allies of the Austrians (still among Europe's most fervent Catholics) against the comparatively agnostic French.

Alex Forshaw writes:

Hmm, I simply can't reconcile US debt/GDP falling from about 135% at the end of WWII to, what, 20% by 1960? How could economic growth have been that high? Yeah, taxes were high (top marginal rate was about 91% and top effective rate approx. 57%) and Eisenhower was extremely frugal, but Korea would have ratcheted up the national debt again. So I have a hard time getting those figures to add up without brief but intense bursts of inflation at some point in the 1945-60 time frame. 


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