Sir, In his article “Lessons of history on public debt” (October 10), Martin Wolf asks: “What happens if a large high-income economy, burdened with high levels of debt and an overvalued, fixed exchange rate, attempts to lower the debt and regain competitiveness?”
Mr Wolf focuses the question on Italy and Spain but the key portion of the question (too much unserviceable debt) applies to much of the western world including the US and the UK.
Once the math is taken into account, the elegant, unpleasant, most assuredly politically incorrect, understandable answer, born out by history, and put forward by Ludwig von Mises, the Austrian school economist and classical liberal, in Human Action: A Treatise on Economics is simply this:
“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion, or later as a final or total catastrophe of the currency system involved.”
I suggest that much of today’s financial commentary regarding western nation debt resolution is analogous to discussions about who would be best to replace Edward Smith, English naval reserve officer and captain of the RMS Titanic – after it collided with the iceberg.
Given the stated policy of QE3 (apparently to infinity), according to von Mises, what lies ahead should be clear to most everyone.
Chris Kniel, Orinda, CA, US