Sometimes it’s Hard to Remember

A wise man once said that when your boat has capsized in a pond full of alligators, it’s hard to remember that the reason you’re there in the first place is to drain the swamp. A recent letter to the editor of the Economist newspaper (Reid Robinson, May 19, 2012) reminded me of this in an odd sort of way. Today, governments in Europe are desperate for a way out of a public debt mess that is threatening to swamp their banking system. Our neighbours to the immediate south seem unable to control a level of government spending that produces annual deficits of close to a trillion dollars. Drastic spending cuts and tax increases across the board seem to be the only way out unless economic growth increases significantly. One savior in all of this was supposed to be China. However, its GDP growth estimates have declined and it may not be as much of a white knight as we once thought. But, as Robinson notes, we really have been here before, and survived.

In the early days of the 19^th century, Britain looked to be on the verge of bankruptcy because of an unsupportable national debt. Commentators of the day pointed out that mathematically it was impossible for Britain to ever repay that debt, given its size relative to anticipated GDP growth. What they missed, though (because it hadn’t happened yet!) was the effect of the industrial revolution. It triggered enormous economic growth such that by the end of the 19^th century the debt was relatively insignificant compared to GDP.

One of the very scary aspects of today’s debt crisis is the fact that (as was the case in the 19^th century) it is not apparent how we are going to escape from the hole we have dug for ourselves by over leveraging the public sector. Will there be robust growth in China after all? Will the developed economies accept a new mix of reduced spending and revised fiscal policies? Will some altogether new technological breakthrough put us back on the track to public sector solvency? It’s easy to be a pessimist when the crippling effect of continuing deficits occupies the headlines. It’s hard to remember the amazing resiliency we have demonstrated over the centuries when faced with what appears to be the end of civilization as we know it. One of the lessons of the past is that when push comes to shove, we have survived. Maybe this time will be different, but I don’t think so. Something worth remembering when the alligators close in.