How do you get rid of an out-of-control sovereign debt? We try to answer this in our briefing: What to do with the debt. But in the absence of a massive growth spurt that makes a country so rich as to render its debt irrelevant, there is really only one way – default.
A country can default for real by simply refusing to pay any more interest or capital back on its bonds. It can default by creating inflation and repaying those it owes in debased money. Or it can default on its successive governments’ political promises to voters by withdrawing any cradle-to-grave benefit promises its politicians might have come up with in the welfare arms races that pass for modern elections.
But whichever way you look at it, cutting deficits and then debts in a low-growth environment such as today’s means reneging on a promise to someone somewhere.
Governments mostly go for some mix of the last two types of default, with an emphasis on inflation, which is generally considered to let people down more gently. In Britain, for example, we are trying out a little austerity (mainly more by talking than doing) and monetising our debt (printing money to buy our own bonds).
It isn’t going particularly well so far (the deficit looks to be with us for some time to come), but that should probably be no surprise, given the scale of the problem.
Lead indicators for Britain's economy
Dr Tim Morgan of Tullett Prebon sums it up thus: “We have consumed too much, and invested too little. We have allowed inflated housing markets to act as huge and unproductive capital sinks. We have created welfare states that may not be affordable in the future. We have ramped up government spending on the assumption of perpetual growth. We have shackled business by imposing ever more meddlesome red tape and regulation.
“We have increased taxes to levels which stifle growth. We have pursued deregulation in the banking sector to a degree which strays beyond the ‘light touch’ into the frankly negligent... we have clocked up truly frightening levels of debt, both government and private” and we have let the British economy become almost entirely dependent on 'private borrowing and public spending'”.
You can lay the blame for this in all manner of places, but “economic outcomes do not result from the caprices of a malignant deity”. They follow from decisions and “British governments have made too many bad decisions” too often.
We all have our own ideas on what might make good ones (sticking with shrinking the state on the basis that our problem isn’t the effect of cutting public spending, but the fact that public spending was ever close to 50% of GDP in the first place, perhaps).
But the key question for MoneyWeek readers is how to invest during the long wait for them. Have a look at my interview with Sebastian Lyon of Troy Asset Management. His answer? Quality companies – bought at the right price – and gold.
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