Sunday, August 7, 2011

This time is Different by Reinhart and Rogoff

This book’s full title is “This time is Different, Eight Centuries of Financial Folly”. The authors are Carmen M. Reinhart and Kenneth S. Rogoff. See interviews and a review of this book at Princeton University Press. See a better review of this book at Harvard Magazine.

One of the first things that these authors bring up is the trouble with bonds. Their remarks are especially true of government bonds. How governments have ended up buying their bonds debts off, if you could call it that, is by inflation. If you have inflation, the dollars government use to pay off a bond is worth less than the dollars they originally got by selling bonds.

The US debt after WWII was 120% of GDP. How US “paid” off their debt from the 2nd world war was a combination of economic growth and inflation. In the current situation of little economic growth and very little inflation, you got to wonder how the US will bring down their current debt except by some hard decisions on taxes and entitlements.

Interestingly, there are a few countries that never had a central government default. They are Australia, New Zealand, Canada, Denmark, Thailand and the US. Europe had a lot of serial defaulter governments in the past. And some are like England, which had its last default in the 16th century, haven’t defaulted lately. There were also no defaults of central governments between 2003 and 2008, but this is far from normal.

Countries, institutions and financial instruments have changed over time, but human nature does not. Financial crisis follow a rhythm of boom and bust though the ages. The recent financial crisis that originated in the US and spread across the globe is only the latest manifestation of this pattern.

The think is that highly indebted governments, banks or corporations can merrily roll along for an extended period of time and then bang – confidence collapses, leaders disappear and a crisis hits. The thing is that leverage (thin capital to assets) can be fragile and subject to crisis of confidence.

This book may not be everyone’s cup of tea. It can get quite technical. Most people might be better off hearing the author speak. However, for an academic paper, I found this book written quite clearly. Below, I have listed a few places where you can hear both Carmen Reinhart and Kenneth Rogoff speak.

See “The Anatomy of Financial Crises: A Global Perspective by Professor Carmen Reinhart” at John Hopkins lecture. See also Carmen Reinhart on Financial Crisis and Fiscal Policy at CATO Institute . See Interview with Kenneth Rogoff on "This time is different" at Jyske Global. Also see Ken Rogoff - Debts, Deficits and Global Financial Stability at INET Economics.

On my website is how to find this book on Amazon if you care to purchase it. See Reinhart and Rogoff. Also, this book review and other books I have reviewed are on my website at Book Reviews.

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