There has been a surge in government debt in the US and other countries around the world. US government debt now accounts for over 120% of the country's GDP. This raises concerns about the potential for a debt crisis, both in the US and elsewhere. To gain insights into this issue, we talked to Jim Rogers, investor and author of Investment Biker, and Peter Westaway, former policy advisor at the Bank of England and author of European Market Narratives.
The transcript below has been abridged and edited for improved clarity. For the full version of the interview, please refer to our video podcast.
Hedder: How do you currently assess the state of the US government debt? Are there any specific indicators or trends that are particularly concerning to you from an investment standpoint,
Rogers: The whole thing is very concerning to me. The US is the largest debtor nation in the history of the world. That has never ended well. Many countries have been on top, but nobody's been on top for more than a hundred years or so. I'm an American, but this is a good time to be an old American, not to be a young American.
Hedder: Do you see parallels in Europe? How would you compare the situations in Europe versus the US?
Westaway: Yes and no. No, I don't think there are parallels in the sense that the US debt crisis is very specifically related to the rather strange system that they have in the US where there is this arbitrary debt ceiling that's put in place, which then periodically has to be renegotiated by politicians. With tricky political differences in the US at the moment, that makes it very difficult.
But I think there are parallels in that, as Jim said, the US has got historically very high debt. Same with Europe and the UK. Perhaps not surprising given that the debt that has been run up as a result of the pandemic, and the war in Ukraine has caused a lot of money to be spent. The big difference is that Europe and the UK have targets for deficits and perhaps targets for debt. So we don't have this cliff edge problem that we have in the US, but the fundamental problem of making difficult decisions about spending less or taxing more, they're common to both the US and to Europe.
Rogers: A hundred years ago in the 1920s, Britain was the richest, most powerful country in the world. There was no number two. 50 years later they were bankrupt. The IMF had to fly into London to bail them out. In only 50 years, they went from the single most powerful, richest country in the world, to completely bankrupt. They could not pay their bill. The US is now an extremely large debtor and it cannot go on forever. It never has.
Westaway: Just to add to that – what's interesting is that back then Sterling was the world's reserve currency. Now the US dollar is the world's reserve currency, and people sometimes argue that because the dollar is the world's reserve currency, the US has this exorbitant privilege that they can borrow it almost limitlessly. But I think one needs to be very careful about leaning on that argument too hard.
Hedder: How do you anticipate global markets reacting if the US were to face a sovereign debt crisis? Are there specific asset classes that could be disproportionately affected?
Rogers: When it happens, and it will happen, there will be a bear market. Assets, shares, stocks will go down in price. Probably many bonds will go up because people would be looking for a safe haven, and for a while they will think that some bonds are a safe haven. They are not, but people will think they are. Currencies will be in great turmoil, the US dollar will go down a lot. The US may even put on exchange controls.
Hedder: Peter, drawing from your experience then as a policy advisor, what are the key considerations for government officials and central banks when navigating a potential sovereign debt crisis like this?
Westaway: I think the key responsibility for government officials is to stop the sovereign debt crisis happening in the first place, not allowing debt to run up to the unsustainable levels that perhaps we are seeing. The key there is to set out a credible plan for fiscal policy to bring government spending and taxation into a position where it is in a sustainable configuration that might involve in the end setting targets for national debt.
For example, here in the UK, the government has a target to bring national debt down below 3%. In Europe, there's a debt target which mandates countries to bring their deficits to sustainable positions over a certain period. And these are all fine but we have seen in Europe during the sovereign debt crisis that these rules weren’t being followed in certain countries.
Hedder: What do you think is the most misunderstood aspect of this current debt situation?
Rogers: The politicians and the central bankers always say, don't worry, this time it is different. No, it's never different. This time is the same as it has always been.
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