Debt, Ugly Dogs and a New Dr. Doom

Citigroup’s new chief economist Willem Buiter pens an unusually dour forecast, amid soccer and marriage quips

Late last month, a bespectacled economist who enjoys fantasy novels and science fiction wrote a report about the trillions and trillions of dollars of debt weighing the world down. It is long, difficult, sporadically hilarious, thoroughly terrifying and, over the past few weeks, has become an essential read.

“The public finances in the majority of advanced industrial countries are in a worse state today than at any time since the industrial revolution,” writes 60-year-old Willem H. Buiter, who became Citigroup’s chief economist in January, “except for wartime episodes and their immediate aftermaths.”

Just after the bank published the report, the Financial Times called it “some serious, serious thinking.” The Sunday Times quoted from it a few days later; reports from South Africa and Australia followed; and MarketWatch wrote about it last Friday. This week, after the euro sunk to a four-year low and the president of the European Central Bank gave a interview about terrifying tension and contagion, The New York Times ended its story on European woes with not one but two of its quotes.

There was a time, quaintly, when the globe’s financial calamity was limited to horribly troubled banks and doomed financial giants. Now the problem is entire nations, including this one, whose fiscal shapes have deteriorated spectacularly. Buiter, mixing algebra with asides about soccer and marriage, and with a hint of distaste for the kind of giant that now employs him, gives a sense of how it got that way, and what happens next.

Besides science fiction, Buiter enjoys poetry, tennis, and thinking about the conundrum of gargantuan sovereign debts. He’s been doing it since he was a Yale student, writing his Ph.D. thesis under the Nobel Prize–winning economist James Tobin. Since then, he’s bounced between Cambridge, Princeton, Yale and the London School of Economics, where he taught most recently. On the side, when not writing his own FT blog, he has been a member of the Bank of England’s rate-setting Monetary Policy Committee.

Insofar as widespread appeal can be enjoyed by any macroeconomist who wears spectacles on the bridge of his nose while holding forth on permanent effective real interest rates on public debt, Buiter’s ideas are influential and often neon-colored. He can get dazzlingly irritable, especially when complaining about what he calls hogwash bailouts, Europe’s fumble and bumble or the heart-stopping ignorance of limp-minded lawyers and woolly social scientists. “Imagine one small spoonful of tea leaves in a teapot the size of an adult beer barrel,” he wrote about a British government white paper.

Not only did he mock his future employer last year, but he described it as an iconically blind behemoth. “Financial supermarkets lose focus and ultimately become Citigroup,” he wrote last April, “a conglomeration of worst-practice from across the financial spectrum.” When former Citi chairman Win Bischoff was hired to help lead a report on British financial institutions, he called it “the most ridiculous appointment since Caligula appointed his favorite horse a consul.” In his parting FT Web post, he warned that the shape and substance of his public output would mellow during his years at Citi. Still, he’d been an adviser to Goldman Sachs’ international wing for the preceding four years, and it didn’t keep him prim.

The April report, officially titled “Global Economics View: Sovereign Debt Problems in Advanced Industrial Countries,” is scholarly but caustic. He starts off by saying that a country that may look relatively strong today, this year’s best of breed, is the same animal “that yesterday was fit only for the World’s Ugliest Dog Contest.” Then there’s a chart that shows dozens of countries’ debts compared to their gross domestic product: The numbers are much easier to process when you can think about them as canines.

“There is no hiding place for anybody,” Buiter declared at a Council on Foreign Relations breakfast on a recent Friday, a few days after he’d given a similar talk at the David Hume Institute in Edinburgh. “And those of you of Greek descent,” he told the crowd, deadpan, “will be able to give lessons to the others on how to manage it.”

The paper gives good lessons, too. He complains that all the attention paid to countries like Greece is illogical when you consider that the American, British and Japanese fiscal positions are even less wieldy than the euro area’s. And those positions are getting worse, thanks to what he calls a bad game of hot potato: Households passed debt to creditors, who passed it to the state, who now pass it back to households.

In America, the public debt burden has risen almost relentlessly over the past 35 years, he says, though that spectacle doesn’t even have to do with the costs of an aging population, whose impact is yet to come. The fight over fiscal health will really get fun, he says, when the loud, intergenerational conflict over geriatric spending begins. (He does not refer explicitly to Citi’s $45 billion from TARP, though he does mention that the bank bailouts were “perceived by many as a perversion of the rule of law and of the social contract.”)

He gives six options for solutions. A country could simply default on its debt, for example, though it’s so destructive it almost only happens where there’s trauma or corruption. Countries can grow their way to safety, though that’s unrealistic for most besides India. They can also inflate themselves out of trouble—which is also unlikely, but least so, he says, in America.

What’s a lot more probable is a new era, maybe as long as a decade, of fiscal tightening around the world. For now, conservatives still rally furiously against tax increases, and liberals are loath to cut spending. “With the policy makers in denial, the fiscal situation is likely to deteriorate further, with the result that the magnitude of the permanent fiscal tightening that is required, when the markets eventually demand an immediate fiscal adjustment, will keep on rising.”

Buiter writes about all this without panicking. Even Portugal or Greece, he says, can pull itself onto a sustainable path with taxes and spending cuts that wouldn’t profoundly threaten standards of living.

The problem is not that we can’t save ourselves, though. It’s that we won’t.



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