In the 1990s, the FT banned its journalists from using the word ‘trillion’. Being such a stupidly large number, it was considered to mean nothing to your average reader. This, as Gillian Tett, the FT’s assistant editor and author of credit crunch bestseller, Fool’s Gold, pointed out at the Edinburgh Book Festival this week, made it hard to write about the state of the Japanese economy (she was Japan Bureau Chief at the time).
The extent of Japan’s debt crisis and then of the bail-outs meant that no other word would do. Now Tett has a similar language-related problem: the FT has banned today’s most overused financial shorthand – ‘green shoots’. On the plus side, it’s not a phrase Tett needs as much as she once needed the word ‘trillion’. Why? Because she doesn’t really see very many.
There was a point not long ago where Tett thought there was a real chance the financial system would totally implode, to the extent that “money would just stop coming out of the ATMs”. That risk, she accepts, is probably past, as is the “collective heart attack” the corporate sector suffered when Lehman Brothers collapsed. The problem now, she says, lies not so much with the financial sector but with global governments, which have made it clear they will act as the indefinite “backstop” to the financial system.
That’s good, in that markets need something to have faith in and clearly they can no longer have faith in things such as light touch regulation; credit ratings; Alan Greenspan’s ability to manage markets; or the idea that when it comes to financial products, complexity somehow lowers risk. But it’s also very bad in that acting as a new “pillar of faith” is a very, very expensive business. So much so that today, it’s not just in Japan that you can’t describe the scale of government overspending without using the word trillion.
Tett’s conclusion? There’s a chance that economic growth, along with higher taxes, public spending cuts and the odd bout of animal spirits, will somehow combine to help governments bring their debts down to sustainable levels. But it isn’t very likely.
For one thing, so far the recovery in the macro economic numbers is more a reflection of how awful things were last year than how good they are this year. For another, debt levels are, simply put, incredibly high. Note that UK government debt is likely to hit £1.4trn by 2014. Instead, she says, there is a strong chance we will see a government debt crisis in the West in the “next few years”.
That’s not to say that a lot of the people running the “smart money” aren’t buying gilts in Britain. They are. But they’re also buying derivative products to protect against the utter collapse of the gilt market. Something to bear in mind if the miserable state of the UK economy, along with volatile equity markets, is making you feel bullish on government bonds again.