The Sovereign Debt Bubble with Luke Gromen - WBD646

Luke Gromen is the Founder and President of Forest for the Trees
(FFTT). In this interview, we discuss how governments can
navigate the first busting global debt bubble in 100 years. We
talk about historical precedents: namely the Weimar Republic in
the 1930s and Israel in the 1980s, and how governments may be
forced to allow for a compressed period of triple-digit
inflation.


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Israel in the mid-1980s faced an existential economic crisis.
After a decade of stagnation and rising government expenditure
fuelled by money printing, commercial banks started to buckle.
Further, the inflation rate was skyrocketing. In 1979 it had
reached 111%. By 1984 it had grown to 450%, with fears it could
exceed 1,000% by the end of 1985.


Despite the real risk that the sovereign debt bubble may soon
burst leading to unprecedented levels of inflation, those in the
west have become inured to a belief that very high rates of
inflation only happen in developing countries. And yet, the
experience of hyperinflation in an advanced democratic country
was felt much more recently than most people think. It is
important therefore to consider the lessons from Israel’s
inflationary crisis of the 1980s.


The policies enacted by Israel to mitigate the situation were
socially bruising. Markets were liberalised, government spending
was significantly cut, wages were controlled, the Shekel was
sharply devalued, and interest rates were raised to punitive
levels. The result was a recession in the 1990s with high
unemployment. But inflation was tamed. And Israel did not fail as
a state.


Nevertheless, the taming of inflation in Israel benefited from
various fortuitous factors: high levels of cheap immigrant
labour, the technology boom, and the peace process opening up new
markets. There aren’t any such obvious pressure-release valves
for the west. Furthermore, will those in the West feel as
culturally tied to their home nation to stick through such
periods of pain?


In essence, is Israel a useful case study, or a distracting
aside? We may hope it's the former. Otherwise, we may be entering
a period for which the precedent goes back to the 1920s Weimar
Republic. Or, even more worryingly, we may experience a crisis
for which there is no historical precedent. Prepare accordingly.