Devil take the hindmost
Edward Chancellor

Edward Chancellor author of an excellent book on financial bubbles Devil Take the Hindmost: A History of Financial Speculation wrote the following excellent presentation on the current sovereign debt crisis. He discusses the history of defaults, and how Governments can inflate instead of defaulting in certain circumstances.

The Global Financial Crisis has taken a heavy toll on
the public purse. In the developed world, government
indebtedness has soared to levels not seen since the end
of the Second World War. Economists point out that high
levels of public debt are associated with poor economic
growth and higher rates of inflation. There’s also the
danger that bondholders might take fright if fiscal
deficits in several countries were to continue unchecked.
According to this scenario, Greece is the harbinger of
a sovereign debt crisis that threatens to engulf several
leading economies.

This paper seeks to answer several questions: Why in the
past have governments defaulted on their debts? When
have deeply indebted countries kept faith with their
creditors? Under what conditions do governments opt
for inflation rather than default? And, in the light of our
historical findings, is Greece really the crest of a wave
of sovereign debt crises about to crash down upon the
developed world?

The problems of prediction

It’s true enough that the “history of government loans is
really a history of government defaults.”1 But there is
also a long history of false alarms about fiscal solvency.
Surveying the large national debt of mid-eighteenth
century England, the philosopher David Hume opined that
“when a government has mortgaged all its revenues… it
necessarily sinks into a state of languor, inactivity, and
impotence.”2 Public credit threatened to destroy the
nation, wrote Hume, who predicted an eventual state
bankruptcy.

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Reflections on the Sovereign Debt Crisis