Niall Ferguson

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CONSUELO MACK: This week on WealthTrack, an intellectual superman assesses the impact
of U.S. debt on the nation’s economy and its historic role as the number one power
in the world. Harvard and Oxford’s financial historian Niall Ferguson tackles the U.S.
debt dilemma next on Consuelo Mack WealthTrack.
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Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. Earlier this year, we
were privileged to sit down with Financial Thought Leader, British historian Niall Ferguson.
In March we broadcast part of the long conversation we had and focused on the seismic shift occurring
of economic power from west to east. Ferguson’s new book Civilization: The West And The Rest,
which will be released later this year, analyzes the 500 year evolution of the west’s economic,
political, cultural and military dominance, why it happened and why it is now changing,
as developing countries, led by China, are surging ahead to become global economic powers.
Ferguson is a huge admirer of the U.S. He is worried about its future. Our interview
began with his assessment of the U.S. economy and the threat to its health posed by several
issues including burgeoning government debt. This summer, as sovereign debt concerns in
Europe cast a dark cloud over global financial markets, Professor Ferguson’s remarks about
the burden of U.S debt take on particular relevance. According to the independent research
firm ISI Group, by next year the U.S. federal debt could be equal to the nation’s entire
economic output or GDP. As this chart shows, just a little more than 30 years ago, debt
to GDP was just over 30%. That puts the U.S. In the sorry company of the European nations
that so concern global investors – Greece, Italy, Ireland and Portugal.
Niall Ferguson is one of those rare individuals who has the intellectual fire power to tackle
broad sweeps of history. The titles of some of his books underscore his wide scope as
an historian: Colossus: The Rise and Fall of the American Empire; The War of the World:
20th Century Conflict and the Descent of the West; The Ascent of Money: A Financial History
Of The World. A professor of history at Harvard, and also at Harvard Business School, senior
research fellow at Oxford, author of numerous articles, columnist for the Financial Times
and Newsweek, Ferguson is also a television personality. He hosted a PBS documentary series
based on The Ascent of Money and has a forthcoming TV series based on his latest book, Civilization.
I began the interview by asking Ferguson about the state of the U.S. economy, post financial
crisis and after the waves of unprecedented government stimulus.
NIALL FERGUSON: I think we’re in that state where we’ve got ourselves out of the near
Great Depression. I mean, things were really bad, ’08, ’09, and I think, up until the
summer of 2009, there wasn’t much to distinguish our situation from that of the early 1930s.
It looked like being the Great Depression, and it was scary. From the summer of 2009,
we avoided that scenario, which is why I said it was a Slight Depression- because it was
a depression, but just not a great one.
But the trouble is, the reason that we didn’t have a Great Depression was that we threw
massive fiscal and monetary stimulus at the problem. And I think that was the right thing
to do. A Great Depression would have clearly been worse. But that stimulus has left us
with a hangover. And the hangover takes the form of an enormous overhang of public debt.
The debt-to-GDP ratio has doubled in less than a decade, mostly as a result of what
we did in response to the crisis. And there’s also been an enormous expansion of the Federal
Reserve’s balance sheet, which is the monetary basis of the entire monetary system.
CONSUELO MACK: It’s over a trillion dollars.
NIALL FERGUSON: Right. And so, you suddenly find yourself nursing a hangover, asking yourself,
how do we stabilize this explosion of public debt? I mean, at the moment, federal government
is on track to borrow another one-point-something trillion dollars. For the third year running,
there will be a deficit of around 10% of gross domestic product, which, in the past, we’d
have associated with a major war, even a World War.
And we also have this question, what is the Federal Reserve going to do if quantitative
easing mark two doesn’t deliver the promised results? Are we going to see the Fed buying
more and more bonds, QE3, QE4? And what is that going to do in terms of inflation? So
I would say, we can put the depression behind us. But now we’re dealing with this strange
and almost unprecedented hangover, because we’ve never really been in this situation
before. And the risks are really significant.
CONSUELO MACK: So, why are they so significant?
NIALL FERGUSON: In terms of gross domestic product, the share of the federal debt in
public hands as a percentage of GDP is on track to be close to 80%, and maybe even as
high as 100% in less than 10 years, if Congress continues to behave as it has in the recent
past.
Let me give you an example. Just before Christmas 2010, the Congressional Budget Office came
out and said, if we are to stabilize the debt-GDP ratio, to stabilize it, just to stop it growing,
than either we have to increase all federal taxes by 11%, or cut all federal entitlements
by more than 12%. Practically the next day, Congress and the White House agreed on another
$900 billion of borrowing over two years. So there’s a huge disconnect between what
has to be done. And this isn’t just from the Congressional Budget Office. The International
Monetary Fund says the same. So does the Organization for Economic Cooperation and Development.
I mean, there’s a complete array of advice to the U.S. government to do something to
stabilize the burgeoning debt. And the politicians continue to do exactly the opposite, and continue
to run these huge deficits. Now, I think there’s a risk there, which is extremely important
to understand, because we’ve seen already in Europe what can happen. When you…
CONSUELO MACK: We’ve seen in Europe what can happen. But of course, Europe now is cutting
spending. Not really withdrawing the easing yet. So why is that so alarming, what is happening
in Europe, to the U.S.?
NIALL FERGUSON: Yeah. So, what happened in some European countries-
CONSUELO MACK: Greece.
NIALL FERGUSON: Greece, Ireland, to some extent Portugal, possibly Spain, was that the financial
markets, the bond market, lost faith in the policies of governments. They started to say
to one another, in the trading floors, these guys have borrowed too much. And that can’t
end well, because they currently have deficits of up to 10% of GDP, even higher in the case
of Ireland. They have debt burdens that are either close to or above 100% of GDP. And
it looks incredible that they will be able to manage this without some kind of default
on their obligations, because they certainly can’t inflate away the debt, because they’re
part of a monetary union with the Germans. So, that was the scenario that kicked off
the sovereign debt crisis in Europe.
What happens in a sovereign debt crisis is that you lose credibility. And whereas, yesterday
you were able to borrow at 3.5% for 10 years, or maybe 4%, tomorrow, you suddenly have to
pay 7%. So you have a massive run-up in the borrowing costs, and that creates a kind of
death spiral. Because with every 100 basis points more on interest rates, your borrowing
costs go up. And therefore, you have to borrow more to pay more interest, and down you go.
That’s essentially what happened to Greece.
CONSUELO MACK: Right. But Niall, is that a fair comparison? I mean, we’re talking about
Greece and Ireland versus the United States. I mean, they’re almost like on two different
planets. Are we really in that much danger of our, you know, worldwide credibility, inability
of, you know, or the unwillingness of people to buy our debt? Are we even close to that?
NIALL FERGUSON: Well, obviously Greece and Ireland are small economies, and they have…
CONSUELO MACK: Yes. And they’re in the EU.
NIALL FERGUSON: …no monetary sovereignty, because they’re part of a monetary union.
So there, there are key differences. On the other hand, when you look at, for example,
the ratio of public debt to tax revenue, the federal government’s position’s actually
worse than that of any of the so-called PIGs. Worse than Greece. And that’s very interesting,
because it means that the United States, although it’s much bigger than these small European
countries, and although it has monetary sovereignty, it is still on the same planet, and it is
still bound by the same economic rules that say, at some point, there’s a ceiling. And
we don’t know where that ceiling is, but there is a point at which the government is
clearly borrowing too much, clearly owes too much. And at that point, investors are going
to ask for some kind of compensation for the risk.
The risk in the case of the United States is not so much default, although there are
some states- for example, California or Illinois- which may well default. But the risk from
the federal government is that it will inflate. That the Fed’s so-called quantitative easing
is just a euphemism for printing money, and the more bonds it buys, the more money it
issues, and ultimately, the bigger the risk of inflation. Already, investors are asking
for a higher premium, a risk premium against future inflation, than was the case before
QE2 was even announced.
So, here’s the key. The United States could suddenly find itself facing a significantly
higher risk premium, and therefore higher nominal rates, if investors decide that we’re
headed for higher inflation, or even just that we’re headed for higher growth. I mean,
the policy could work, in inverted commas, and the result could be higher yields. Now,
that sounds all a bit technical and nerdy, but what it translates into in the short run
is, for example, higher mortgage rates. So the housing market, which we’ve already
said is frail, takes another hit. And I think this is the endgame, in many ways, of these
two enormous stimulus packages, one fiscal and one monetary, that got us out of the Great
Depression.
Now, there’s a real problem. What do you do? Do you start doing what the United Kingdom
has done? Do you start really attacking public spending, really cutting, by as much as 30%,
in the case of some departments, public expenditure, and also increasing some taxes to try to narrow
that gap? Everyone agrees the United States has got to close this huge structural deficit,
which has got nothing to do with the recession. It’s got everything to do with the fact
that the federal government spends more than it raises in taxation. And we’re talking
by as much as 8% of GDP. Now, politically, that’s really hard.
CONSUELO MACK: So, those solutions are not in our political zeitgeist right now.
NIALL FERGUSON: Completely.
CONSUELO MACK: As you said, completely the opposite.
NIALL FERGUSON: Completely inconceivable that a politician could stand up and say, “I
propose to cut all entitlements by 10 or 11 or 12%. I propose to raise taxes by comparable
amounts.” That’s just political suicide. So here’s the situation we have. Everyone
agrees the United States has a fiscal problem, except the politicians who have to do something
about it. Which means- and you can see it in the numbers that the Congressional Budget
Office just published- that the U.S. will continue to borrow a trillion or thereabouts
year after year after year after year, and the debt will therefore keep growing, until
it’s about 100% of GDP within a decade. That seems like a very likely scenario, absent
a major change in the political culture. At some point, the market’s going to call time
on this process. That seems clear.
CONSUELO MACK: And certainly, the Tea Party movement is part of that. Whether or not it
actually ends up, you know, taking the kind of steps that you’re talking about. But
again, one of the things that you had mentioned to me earlier is that you think that the traditional
methods of dealing with budget deficits, which you just described- which is raising taxes,
cutting the budget- is not going to be sufficient in the case of the United States, because
our problems are so large. So, what is the solution? If those two traditional methods
are not going to work, what is going to work?
NIALL FERGUSON: Well, I think one of the important points to realize is that if you just try
and make these fiscal adjustments through the normal budgetary process, by raising taxes
or cutting spending, you can end up in a kind of self-defeating cleft stick, because the
action that you take in the name of austerity causes the economy to contract and makes the
fiscal numbers worse. I mean, there’s a risk that that could happen, even in Britain.
It’s certainly already happening in Ireland and in Greece. So, if the United States goes
down the austerity route, then I think it will be very painful. Is there an alternative,
other than for the inflation genie to be let out of the bottle? I think there is actually.
What’s interesting is that, it’s hardly being discussed.
The alternative is to think of the United States- or indeed, California or Illinois-
rather as one might think of an excessively leveraged company. What do you do when the
balance sheet looks this way, that there’s too much debt? Well, how about selling some
assets? What’s interesting is that, when you look at the United States, considering
we’re supposed to love the free market here, and be suspicious of big government, this
is a country where there’s hardly any serious discussion about privatization. Other countries,
including even China, have done much more, for example, to privatize their infrastructure,
their transport infrastructure. And the United States could easily do this.
CONSUELO MACK: Indiana did it, for instance, their toll roads.
NIALL FERGUSON: Indiana has done it. Chicago has one bridge. And that’s it. There are
a few public/private partnerships, but essentially the entire network of highways, state and
interstate, are in public hands. There is a huge proportion of land in the West of this
country which is owned by the federal government, which for some reason never got sold off to
settlers in the days of the great Western frontier. Not to mention, considerable numbers
of office buildings. And we’re not talking here about, you know, Yellowstone and Yosemite.
We’re not talking here about the Capitol and the White House. There are substantial
assets on the balance sheets of the states and the federal government that really ought
to be getting sold.
CONSUELO MACK: To whom? Who’s a ready buyer? China?
NIALL FERGUSON: Well, let me tell you my little story from “The Good, the Bad and the Ugly,”
my all-time favorite Western. There’s that great scene in “The Good, the Bad and the
Ugly,” when Clint Eastwood and Eli Waller think they’ve found the gold. They know
it’s in a grave, and they’ve found the cemetery. It’s just that the cemetery’s
a huge Civil War cemetery, with thousands of identical graves. And Clint Eastwood, Blondie,
looks at his gun, and he turns to Tuco, Eli Waller, and he says, “There are two kinds
of people in this world, my friend. There are those with loaded guns, and those who
dig.” That’s the world economy today. There are those with loaded guns, by which
I mean sovereign wealth funds, countries with large surpluses and international reserves…
CONSUELO MACK: China, Russia.
NIALL FERGUSON: China, Russia.
CONSUELO MACK: Norway.
NIALL FERGUSON: Norway. Singapore. And the list is actually quite long. Some of the Gulf
states. And there are those who dig. In other words, there are those countries that have
got themselves into a real debt crisis, a hole. And actually, the simplest way to get
out of that hole is not to dig, in terms of taxing and cutting spending. The simplest
way is to find the treasure and give it to Blondie. And that is really the solution to
the problem. We need to see significant sales of assets, like highways, to sovereign wealth
funds, including those in Asia. And I can almost see it in your face, Consuelo, the
kind of consternation that this idea rouses in Americans. What? America sell its treasures
to the wealthy Asians? Well, the answer is, yeah. Got any better ideas? If the alternative
is higher taxes or, you know, goodbye social security, or higher inflation, I think this
seems like a pretty rational way to go.
And frankly, I think, if America’s infrastructure- which, by the way, compared with the infrastructure
I see in China, is really D-grade- if it doesn’t get significant investment, this country has
a problem. The investment is not going to come from government, because government is
more or less bankrupt. The most likely place that we’re going to get the money to overhaul
this country’s transport system is in fact Asian sovereign wealth funds. So, I would
say bring it on. We need a new age of privatization. What I find baffling is that nobody in this
country, where the free market is supposed to be loved with almost religious zeal, nobody’s
talking about this.
CONSUELO MACK: Well, now you are.
NIALL FERGUSON: Yeah. I want to start a debate on this.
CONSUELO MACK: Raise some new questions on Wealth Track. We’re going to start this
campaign.
NIALL FERGUSON: I want to start the debate.
CONSUELO MACK: So, Niall, solutions then. I mean, you know, what is it that the U.S.
and the West can do? I don’t know, is Europe a hopeless case? I mean, seriously.
NIALL FERGUSON: Well, it’s much harder for Europe to sort itself out. The problems are
deeper, and the institutions are more dysfunctional. For the United States, I think the solutions
are pretty clear. One, we’ve already talked about. The United States has to set its fiscal
house in order, rather than just waiting for a financial crisis, a bond market crisis,
to do it, as it were, from outside. That’s the worst way of addressing your fiscal problem,
because it’s much, much harder once there’s a panic. So, I think some reform of public
finance with a 10-year time horizon to really get back into equilibrium, with asset sales
as one of the key steps that we really need to take much more seriously. I mean, privatization
needs to be number one on the agenda for a serious discussion about fiscal reform.
CONSUELO MACK: Which would make government smaller.
NIALL FERGUSON: We need to make government smaller.
CONSUELO MACK: Yeah.
NIALL FERGUSON: There’s no particular reason why government should be good at running infrastructure.
In fact, at this point, it’s positively bad at it, because it can’t invest. And
if you can’t invest in roads, guess what? They get potholes. So that’s part one. I
think part two has to do with education. Now, people talk a lot about educational reform,
but I’m not sure that they really get what has to happen. Part of the debate, understandably,
is about teachers. But I don’t really think that is the key. I think the key is the content,
and the mode of delivery of the stuff that gets taught in schools.
And whether you- just take history. I think the way history is taught in Western schools,
both sides of the Atlantic, is really terrible. The textbooks are stodgy and dull. The kids
leave school knowing pathetically little. They’re not engaged in the way that they
should be in understanding the great story, which I have been talking about, the rise
of the West, what it was all about. It’s really astonishing how little people leave
high school knowing. And that’s as much history as they generally do.
So I want to see a new generation of e-textbooks in schools, electronic textbooks that are
really engaging, that electrify the schoolchildren in the way that the most exciting computer
software can. And I want to see us telling much more persuasive stories about the way
the historical process is unfolding. Just to give you a simple example, it’s impossible,
I think, to understand the rise of the United States separately, as a story on its own,
of American exceptionalism. You have to understand it as part of the extraordinary explosion
of dynamism from Western Europe, not just across the Atlantic, but all around the world.
So I would like to see a revolution in the content and the mechanism of delivery of education
in our schools. I think it can apply to every subject. We’ve got to make school exciting.
I’m sure that would be as big, if not a bigger contribution, than a radical transformation
of the teaching profession.
CONSUELO MACK: That sounds like a radical proposal, number one, and one that is very
unlikely to happen.
NIALL FERGUSON: Well, what are the obstacles to it? Why is it that the most dynamic and
impressive students, increasingly that one sees in American universities, are not U.S.
citizens? Because we have a problem in our high schools.
CONSUELO MACK: Right.
NIALL FERGUSON: If we’re serious about the future of this country, that is where we have
to start. It’s too late. You can’t address it at the university level, because the problems
are ready well-established long before people apply to college.
CONSUELO MACK: No, elementary school. Right.
NIALL FERGUSON: Right. So we really need to get serious about that issue. And I can’t
think of any more important thing than to improve the quality of public education. And
it’s not just for the United States. This is a problem for Europe too. And it’s right
across the spectrum of subjects. If we want to have a successful 21st century and retain
even some of the preeminence that we associate with the West, that’s what we’ve got to
do.
CONSUELO MACK: From an investment point of view, I mean, obviously these changes that
you’re talking about, both political and economic, are incredibly significant. So,
let’s just deal with the here and now, the reality that we are faced with. So from an
investment point of view, you know, what do we do? I mean, how do we invest? Do we invest
in the growth of the rest? I mean, is that basically our best way, at least, you know,
to get some momentum going in portfolios, or--
NIALL FERGUSON: Well, you know, beware. There’s been a great run for emerging markets, right
through this financial crisis.
CONSUELO MACK: There has been.
NIALL FERGUSON: You did a lot better. If you’d bought Brazil in early 2007, or really almost
any South American economy, you did a lot better than if you sat tight in the United
States or in Europe. But there’s a danger there. There’s an old joke, which I’m
fond of, which is that they’re called emerging markets because they’re where emergencies
happen. And we’ve just seen, right across North Africa and the Middle East, what emergencies
are like. And these emergencies commonly happen when, for example, food prices double. One
of the unintended consequences, not only of the emerging markets boom, but also of massive
monetary stimulus by the Fed, has been a huge increase in commodity prices, right across
the board. Hardly any commodities have not gone up in price, by significant amounts,
since early 2009.
You know, thinking back to our earlier conversation about education, I’d rather invest in companies
that have really bright solutions to this education problem. Right now, the textbook
is a dying form. The future belongs to whoever comes up with the-- let me put it this way,
the educational equivalent of Facebook. You know, Facebook’s not about education. It’s
about dating. That’s really the point. But what we need is a software solution to the
problem of educating our kids, so that instead of just chatting inanely to one another on
Facebook, they learn stuff. The company that comes up with something that is as compelling
as Facebook, but actually delivers educational content, that’s the company I want to own.
CONSUELO MACK: Is there any company that you know that is doing that?
NIALL FERGUSON: Not yet.
CONSUELO MACK: That’s even close?
NIALL FERGUSON: Not yet.
CONSUELO MACK: Do you want to start one?
NIALL FERGUSON: There are some people out there… yeah, of course. Well, you know,
at the risk of, I think, topping my own book, I could certainly make a suggestion. But I
would rather at this point just make the proposal. We need much more of that kind of innovation,
that kind of company, than we’re currently seeing. I think the notion that the world
is going to be saved by social networking is a little naïve, frankly. I think the world
is going to be saved by good education. It is good education that will produce the kind
of people that come up with meaningful solutions to the problems of the 21st century. And we
need to invest in companies that actually produce that.
CONSUELO MACK: Niall Ferguson, with your new book, Civilization: The West and the Rest.
I look forward to reading it.
NIALL FERGUSON: Thanks very much.
CONSUELO MACK: We are looking forward to reading Niall’s book when it comes out later this
year. In the meantime, we would like to recommend a couple of other books for you to take on
your summer vacation.
The first one is a former pick of ours and a choice of Niall Ferguson’s as well. He
wrote a highly favorable review of it in the Financial Times in which he recommended it
to Fed Chairman Bernanke and his counterparts in Europe and China. It is Lords Of Finance
by Liaquat Ahamed, the winner of the 2009 Financial Times Book of the Year award. It
is about the mistakes central bankers made which led to the Great Depression. Given the
challenges facing central bankers today, you can understand why it is so relevant. A second
summer read is The Wizard of Lies, the story of Bernie Madoff’s $65 billion Ponzi scheme
by New York Times reporter, Diana Henriques. This meticulously reported book tells the
inside story of how Madoff pulled off the biggest Ponzi scheme in history and its consequences
for thousands of his victims.
Next week is pledge week for public television stations, so WealthTrack may not be available
on your public television affiliate. However if it is, you will have the pleasure of seeing
Great Investor Mark Headley again. The chairman of Matthews Asia Funds and a pioneer in Asian
investing will discuss the lessons he has learned about investing in Asia and he will
share some advice for individuals about international diversification in general.
In the meantime, please go to our website wealthtrack.com to see this program again
as a podcast or streaming video. And while you are there, check out WealthTrack Extra,
where you can find complete, extended interviews with other recent Financial Thought Leaders
and Great Investor guests. Thank you for taking the time to visit with us. Make the week ahead
a profitable and a productive one.
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