#coggan

Debt is the main subject of this book, and Coggan thoroughly explores how it was developed throughout history up until the events of the recent crisis. One thing that I’d like to pick up on is the role of government debt. I myself have seen government debt as relatively risk-free, since I’ve always seen the governments as being able to depreciate their currency to pay their debts, and even though this can be considered a partial default it is still able to meet the debt obligation. Coggan instead argues that although defaults are rare in the developed world, they are by no means impossible, Greece is a good example. One problem that Eurozone countries have, not just Greece, is that depreciation isn’t an option available to them. Meaning for countries such as Greece, where there is lack of competitiveness (indicated by current account deficits that have been run for consecutive years), costs can only be lowered through austerity. This of course makes it harder to raise tax revenue due to increased unemployment and decreased labour wages, making it even harder to pay off debts. Even though the ECB has helped Greece out, even harsher austerity measures were imposed, I question when the cycle will end. Indeed it seems more prudent to me for Greece at this time to instead address supply side problems while the ECB gives financial aid. On the other hand this would mean increased spending, which for Greece has to be financed at a high rate, and I do not think the ECB would be willing to let that happen, since it represents the interests of creditor nations such as Germany, which would of course discourage further spending. Perhaps less drastic measures could be taken, at this point anything that helps restore confidence in the Greek government would help, although the options are few. For example, I do not think fiscal stimulus would be an option, neither is the less conventional monetary policy of QE (since the ECB cannot pick political favourites by choosing a specific country’s bonds). Even though I don’t agree with the policy of austerity, it seems to be the only option, it seems cruel in my mind, however, to see Greece suffer through a long period of stagnation. Greece is a candidate for default, the problem is, if it does, it could cause a domino effect. If Greece defaults, couldn’t Spain do the same? Or Italy? If one country defaults confidence in others may collapse, indeed it could spread like a contagion. If that does happen, then it may be a long time before creditors are willing to trust governments, which would have large repercussions on the nature of government spending to come.

One aspect that I found rather interesting is the discussion of the moralities behind debt. Throughout history, creditors have lent in the hopes that their debtors won’t default, and interest payments will lead to an increased income. Of course, debtors have always borrowed to facilitate investment or immediate consumption. It is very interesting then, that Coggan makes an effort to introduce the moralities behind this act. Making the distinction between productive (where the loan is used to invest, for example start a company) and consumptive (where loans are made for the sole purpose of purchasing goods now rather than later) loans, an idea introduced by Adam Smith. Arguing that productive loans are moral, while consumptive ones aren’t. He takes this idea further, in the modern world, how can one distinguish between the two? Consumptive loans will lead to the purchase of goods, which should encourage these firms to invest, leading to, of course a productive outcome. Should one act be considered more moral than the other? In my opinion, it is rather hard to draw these lines, the argument made by Adam Smith is one based on intention, unlike the second which is based on outcome. Being rather pragmatic myself, I believe that the answer should be based on the outcome, as even the best intention could lead to a detriment.

Yet another issue discussed is ‘odious debt’, if debt is incurred for the sole uses of a dictator, for example, should the people of said country bear the burden? It seems extremely immoral to do so, it is not the people that is at fault here, only the dictator himself. To this end the debt of some countries are being considered for cancellation or reduction, which seems to be the 'moral' thing to do. Yet this action in itself created the possibility of moral hazard, what makes one country eligible and not the next? Speaking of moral hazard, this book also brought the interesting idea of QE as a form of the 'Greenspan Put' forward, based on the fact that QE leads to increased speculation in the financial markets, thereby allowing the prices of shares and such to rise. This can therefore been seen as a form of helping banks out, when they need it. I for one, disagree with this notion, QE is a much subtler way of helping these institutes out, moreover, QE tapers, and is done in rounds. One cannot be certain that QE will be undertaken, and in what amount, which I think should lower the role of moral hazard quite a bit.

What interested me the most, and contrasted with Krugman the most is Coggan’s rather bleak prediction of our future. One way that is does this is through the use of demographics. The idea is that as the world becomes more developed, birth rates have decreased, while life expectancy has increased, this will inevitably lead to a decrease in workforce, therefore for the world to maintain the current level of production, productivity must make up for the gap, which to Coggan seems unlikely. Frankly, I have to agree, as there will be an increase in the older demographic, pension payments will increase portionally, while taxes decrease progressively, the now smaller proportion of workers will need to make up for this gap. The way that productivity has increased in the past was by ways of technology, however, this doesn’t seem to be a viable option at our current time. In the past advances such as the internet have allowed us to increase our productivity, but one has to wonder what is the next big innovation. Is there even one in the future? There are some who think that the technologies we have today are all derivative of what we have invented in the past, that there are no ‘new’ breakthroughs to be had, and although I do not hold myself to this view. It does seem to me that there are now fewer opportunities for radical innovations that will lead to drastic improvements to productivity, even if there are, perhaps in fields such as nanotechnology, I wonder how long it will take to implement, and to cause an effect on productivity, not to mention the effect on productivity it will ultimately have.

Coggan also spoke of peak oil theory, where the rate of oil extraction will decline in the near future leading to rising energy costs, which without further productivity increase will reduce the profit margin of firms while raising the cost of living for household. Coggan further argues that even if rate of oil extraction doesn’t decline the difficulty of extracting from these new deposits will lead to rising costs. Adding to this are the repercussions on transportation, and existing capital, with rising oil costs, air travel may once again become a method of travel for the rich, and with existing capital being increasingly expensive to run, they too may need to be made redundant. This will result in a worsening of productive capacity, and a long period of time will be needed in order to retool current capital or to invest in new capital altogether. I have a couple of criticisms of this argument, after doing some research into peak oil theory, I found many sources that the rate of oil production is not slowing down. In fact, there are sources that state the opposite, rate of oil production is actually speeding up, with that in mind, the price of oil should not be increasing due to this factor. As for the idea that new deposits will be harder to extract from thereby increasing cost, I have to agree, oil extraction companies no doubt extract from sources that are least costly, therefore remaining deposits will be ones that are more costly to extract from. The solution to this should be alternative fuel sources, which Coggan also mentioned, but he is rather pessimistic about the possibility of these alternative fuel sources replacing oil anytime soon. I would argue that there is already an increasing amount of alternative fuel being used, furthermore with the knowledge that the rate of oil extract is increasing, we have even more time to research and implement these alternative fuel sources.