In response to an FT article on 23rd November by Martin Wolf, entitled ‘The wages of Brexit are bigger debts’
“Phillip Hammond, the chancellor of the exchequer, has responded to his situation sensibly. Yet nothing can disguise the reality that Brexit is likely to make a UK economy already blighted by low and stagnant productivity still weaker. Inevitably, he ignored the details of Brexit. Even he knows little more than the rest of us what is going to happen. But its baleful shadow hangs over the prospects. The UK is likely to be poorer than it would have been if it had not made the decision to exit the EU. The chancellor, the government and the country must live with the results, not least for deficits and debt” – Martin Wolf
You appear to have discovered the ‘D’ word Mr Wolf…’the wages of Brexit are bigger debts’. Suddenly ‘debt’ is worthy of mention…clearly it must be the wrong type of ‘debt’.
Paul Krugman and Larry Summers are also having ‘strange turns’ right now. After years of banging on about how debt doesn’t matter, and preaching the need for massive infrastructure spending, they’ve both come to the conclusion that Donald Trump’s plans for infrastructure spending…the ones that he hasn’t released yet…are the wrong type of infrastructure spending. Naturally, two guys who’ve never had a real job would know how to make infrastructure spending work far more effectively than a guy who’s spent 30 years in capital formation and building things.
But yes, debt is a huge problem Mr Wolf - more specifically the complex layers of leverage and derivatives that it consists of are a ticking time bomb. And as far as I can tell, none of the central bankers or the economists you put so much stock in understand the complexity or the danger of the situation…as evidenced by the fact that:
a) They very rarely, if ever, mention it, and if they do…
b) When and if they do, they talk about leverage and derivatives as if the net position is relevant - when in fact in a crisis it’s the gross position that counts. I.E.: when ‘A’ defaults to ‘B’, ‘ B’ is left with a gross liability to ‘C’, etc…and the dominoes move very quickly from there. Professor Summers could have acquired this knowledge over 15 years ago if he'd listened to Brooksley Born when she tried to warn him not to deregulate them. That turned out well didn't it.
But, you’re right Mr Wolf, debt is a problem…not because of Brexit, or Donald Trump, or Uncle Tom Cobbly. Debt is a problem because for the past twenty years we’ve had policy-makers who use models that bear very little relationship to the real world, have flooded the markets with casino chips, destroyed the pricing mechanism…and overall haven’t got the foggiest idea what they are doing.
Debt is not bad because it suddenly suits the narrative of people who are still sulking from two ‘wrong results’ at the ballot box. It’s bad because unless we resolve it, it will bring down the global financial system.