US Government Debt Different - Finance Department - University of ...

90 Thoughts on Debt Sustainability: Supply and Demand Keynote RemarksSo let us all try to shed our predisposition to focus on the easy-tomeasuresupply of sovereign debt and open ourselves up to a modelthat looks at both supply and at the more elusive, and harder-tomeasure,concept of demand.Sovereigns that default and sovereigns that don’tUnder what conditions do sovereigns default? I will leave it to youto read Carmen Reinhart and Ken Rogoff’s book This Time is Different– Eight Centuries of Financial Folly (2009) – if you have notalready done so. While their focus is on the (high) levels of sovereignand total indebtedness that lead to sovereign defaults, they weremindful of the importance of the demand as indicated by the title oftheir preamble: “Some initial intuitions on financial fragility and thefickle nature of confidence.” But most of their book focuses on variousmeasures of internal and external debt to gross national product(GNP), tending to the view that levels of debt to GNP in excess of90 percent create much greater risks of default.So I will assume that this audience has read Reinhart and Rogoff toanswer the question - under what conditions do sovereigns default- and, now, turn to my second question: Under what conditions dosovereigns with very high debt levels not default?The experience of the United Kingdom in the 19th century providesa useful example of what it takes to survive very high debt levels. Tooutline the U.K. experience, I rely on James Macdonald’s account(chapter 8) in his wonderful book A Free Nation Deep in Debt –The Financial Roots of Democracy (2003), which I commend to you.(Both Macdonald’s book on fiscal policy, as well as David HackettFischer’s book on inflation The Great Wave: Price Revolutions and theRhythm of History (1996), provide wonderful complements to Reinhartand Rogoff).19th century UK: Prospering with almost 300 percent debt-to-GNPAt the end of the Napoleonic Wars, the U.K. had nominal debt toGNP of almost 300 percent. Not only did they avoid default, the