Thursday, June 17, 2010

A Bit More From The Ferguson Speech

Two other interesting things in that speech The Ancient linked to. First, in response to a question getting at what measures can we look at to predict sovereign crises:
The thing to answer the first part of your question is really hard, is to find some kind of threshold in terms of debt to gross domestic product. Now that’s the measure that people always tend to cite but I spent a long time sitting in the Bank of England in the late 1990s running regressions on all the debt-GDP numbers I could get my hands on and there just was no pattern at all. In fact, I don’t think that is a significant measure of fiscal sustainability. What looks more promising is this interest payments as a share of revenue

This makes a lot of sense. Crises are acute. Therefore, the trouble arises when there is an acute difficulty in making a specific payment. Oftentimes, these things build up over time, but countries are usually assumed to be creditworthy until at some point it becomes clear they're not. This means that interest payments as a share of revenue does make sense.

Incidentally, it's also how FLG thinks most people deal with debt. Generally, people don't worry about how much they're borrowing only if they can maintain the payments to service it. Low interest rate environments screw up people's decisions on this type of stuff. When interest rates go up, then they're fucked. Same with governments.

Then on investment strategy he says to look to Asian, specifically India. FLG tries to spread his investments by share of world GDP anyway, so he's somewhat diversified. But this was interesting:
Finally, I guess one just has to ask oneself what’s going to happen in the world of dodgy paper currencies, of fiat monies, because you could quite easily get burned if ultimately we do get a crisis not just of the euro but of fiat currencies generally. And I keep thinking that maybe I should be valuing my portfolio not in terms of this or that currency but in terms of the barrel or the ounce—in terms of commodities like oil and gold.

Maybe one of the lessons of history is that periodically paper currency loses credibility so much that we have to revert to commodity standards, and I think that may well be happening. When you look at what’s happening in the gold market, it’s not so much fundamentals that are driving gold up from a $1,000 towards $2,000. It’s a fact that more and more people feel that they should hold gold as perhaps 10 percent of their portfolios. If everybody thinks that, if that becomes a standard investment strategy, then gold is going to go a lot further than its present price. So I’ve really re-thought my attitude towards gold almost on that momentum basis.

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