Last month I watched the celebrated US economist Paul Krugman explain to 2000 people in Las Vegas why debt doesn’t matter. Despite being at a business focused libertarian conference he convinced a sizeable chunk of his audience, by a show of hands, to his argument. He has clearly convinced the masters of the global economy too…
He bravely reassured the audience, whilst the US is projected to rapidly exceed a debt to GDP ratio of 100 per cent, that “there is no conclusive evidence or study that claims there is a cliff at 90 per cent.”
Krugman used Britain as his example in explaining to the crowd: “You should always keep an eye on debt, but it’s not necessarily a priority. The UK operated with a much higher debt to GDP ratio for most of the 20th century.”
The week’s news has been dominated by the dimming light of the world’s powerhouse economy in China, and the heroic acts of a Brit and three Americans in averting yet another terrorist atrocity in France. Those men have received the plaudits they deserve for bringing Ayoub El-Khazzani to justice, but the recessionary trends now manifesting are far more dangerous to the future of the west than ISIS or Islamic terrorism, they pose a genuine existential threat.
Krugman missed 2 key points in his analysis of Britain’s economy in the 20th century. The first is that the majority of our debt was run up fighting two world wars, battling for our very existence, the second is that this GDP to debt ratio was measured in the UK at a time when we held a vast global empire, that whilst not entirely reflected in our GDP, offered huge security in resources and assets to count against such debt.
From the start of the first World War, to the end of the 1950s, the UK operated with a debt to GDP ratio of over 90 per cent – this was entirely correlated to two world wars, and lead to the necessity to dismantle the British Empire and call in the IMF twice.
Britain’s surrender in Suez, under huge American pressure, would not have occurred had we not been so indebted to the United States, and unable to disagree with their terms. It is seen by many historians as the day Britain lost her Empire, and pre-eminent global position.
The UK did not fight a world war in 2008, nor does it have a global empire to draw upon, and if we don’t clear our debt (currently at 82 per cent of GDP) it will mark a new precedent in modern peace-time, and I have no doubt will lead to economic collapse when the next recession hits.
The same is true for the United States. There was a time when in the event of a recession great nations, indeed most nations, had a huge well of productivity and resource reserves to draw upon. In the modern era those resources are all mortgaged to the hilt. The culture of deficit and debt not only limited our ability to deal with the 2008 economic crisis, it caused it.
Despite being known for its austerity measures, many are not aware that the Conservative-led government since 2010 has been has been adding to our national debt, to the tune of over £100bn a year, taking the total debt to £1.5 trillion.
Upon taking office as Chancellor of the Exchequer George Osborne pledged to cut Britain’s debt and rebalance the economy, with a focus on productivity. Despite succeeding in bringing the UK economy to growth, he has failed on both counts. When he announced that Britain was standing tall again, the Bow Group warned that we could swiftly be cut off at the knees in the event of any major tremor in the markets.
In the US the situation is even worse, with annual deficits of over £1 trillion, a total national debt of £19tn and a debt to GDP ratio of 102 per cent.
For perspective, Greece’s debt was 100 per cent of GDP in 2006, before the last global economic crisis. It is now approaching 180 per cent, the nation is effectively bankrupt and has had to concede powers of government to the EU and European Central Bank.
Greece had accrued vast debt in entering the Eurozone and hosting the 2006 Olympic Games, it meant that going into the 2007/8 economic crisis the nation had almost no contingency, and in the event of a major recession effective bankruptcy was inevitable.
The position that Greece was in in 2006 is equivalent to the position the UK, US and much of the west finds itself in now. It should offer a stark reminder of what would happen to the rest of Western Civilisation if the 2008 crisis repeats itself.
No one, conservatives, liberals or socialists, are saying debt doesn’t matter in Greece. Socialists switch seamlessly from saying “debt doesn’t matter” to “cancel the debt”. If debt matters when it exceeds 150 per cent, why would the first 100 per cent of it not matter, and yet the last 50 per cent represent an urgent humanitarian crisis?
What Krugman, and most liberal economic approaches, fail to allow for in their blazé attitude to debt is another economic crisis. It is an utterly bizarre conclusion, as few would repeat Gordon Brown’s fatal mistake of arguing that we have moved beyond the system of boom and bust economics.
Krugman’s theory is like sitting down at the roulette tables without acknowledging the possibility of losing. Operating with 100 per cent of GDP is like going in on red every spin, thinking nothing else can come up. When you are operating at a debt ratio of 100 per cent what happens when black comes in? 100 turns to 200 overnight, and you are Greece.
That is how Britain lost an Empire in the 20th century, Osborne has done little to rebalance the economy and pay down the debt, if a recession hits again -and it will- we’ll lose our shirts.
Ben Harris-Quinney is Chairman of the @bowgroup . He tweets @B_HQ