Posts from — February 2010

Niall Ferguson’s most recent column in the Financial Times is surely not as controversial as his penmanship this past summer. However, the more recent column misses the mark in its accuracy. Mr. Ferguson portrays Greece as the start of a new round of sovereign contagion, much like the runs on investment banks in 2008. His prediction is that the round will finish at the doorsteps of the US, apparently swamped with public debt.

Comparing Greece is easiest when examining East Asian countries, Thailand, South Korea, Malaysia, which suffered severe GDP contracting events in the 1990’s. Those countries ran current account deficits much like Greece but worse, and I stress much worse, they borrowed heavily in foreign currency in short term durations.

Greece however has the luxury of borrowing in its own currency, the Euro. True, it has run a large current account deficit, but its main import partners are also in the European Union, with the same currency. This then makes the Greece situation far different from those countries which suffered horrible fates in years past.  Greece’s share of European Union GDP is a mere 2%, slightly more than the EU’s aggregate current account deficit and more than the interest currently paid by US taxpayers on net debt.

Ferguson laments that if Greece controlled its own currency, a simple devaluation could have saved the day. Perhaps. But this would only work if domestic private savings supported public deficits. If not, foreign capital, much like in times past, would have left the country in advance, readjusting the supply/demand for money in favor of domestic savors, all the while forcing a massive  negative shock to the domestic economy. In short, modern times are too complex for such a simple posit.

Ferguson then dismisses the current EU plans for saving Greece. While they are not in final form, the EU is acting to stem current fears. Perhaps in the future, the continent will behave more like Canada, where the provincial governments have strong autonomous rights, but also share a single currency. Or perhaps countries will cede power in more drastic terms, similarly as the United States currently do. But countries banning together should be celebrated, not dismissed.

And that brings us to our second to last point. Ferguson dismisses the role of government spending, mainly the US’s recent efforts, as they spell impending doom.  But most of the US stimulus and much of the European government spending has been in the form of “automatic stabilizers”: State Aid (where most of the several must balance their budgets), unemployment benefits, tax cuts, and the like. In short: funding that has preserved jobs or provided additional income so people could keep paying rents, mortgages, and bills, and not sinking the economy further into depression.

No one argues that in the long run, the public should spend more than it takes in. But linking or identifying a country in far better shape, given its support network, than countries in times’ past as the start of a sovereign contagion event is frankly inappropriate. These problems are incredibly complex and I would expect someone of Mr. Ferguson’s caliber to be offering solutions rather than doomsday scenarios.