I've spent a lot of time at Financial Armageddon denigrating economists, especially the academic kind, for their unrealistic -- surrealistic? -- views on how the world works. However, there are a few exceptions, including Yale Professor Robert Shiller, who has a remarkable track record when it comes to identifying bubbles, and two professors I've made reference to in one way or another in a number of posts (e.g., "Reality Seeping Through the Cracks at CNBC?" "A Few Observations of My Own," "'Approaching a Solvency Crisis,'" "Jim Grant: Ringing the Bell at the Top?"). In "This Time Probably Isn't Different," The Economist's Free Exchange blog details their latest thoughts on the risks that lie ahead:
Carmen Reinhart and Kenneth Rogoff have been doing their best to place the global economy's latest financial and economic crisis in historical perspective, most notably in their recent book "This Time is Different: Eight Centuries of Financial Folly". Concerning the long view, the authors explain in a new NBER paper:
The economics profession has an unfortunate tendency to view recent experience in the narrow window provided by standard datasets. It is particularly distressing that so many cross-country analyses of financial crisis are based on debt and default data going back only to 1980, when the underlying cycles can be half centuries and more, not just thirty years.
For this latest paper, Ms Reinhart and Mr Rogoff content themselves to look back at just the last two centuries' worth of crises, using a dataset that covers seventy countries. Here's one picture of what that looks like:
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What you see here are levels of public debt, the share of countries facing default or debt restructuring, and the share of countries with inflation over 20%. I quite like this chart. What you see is a clear correlation between debt loads and defaults and restructurings. It would be an extraordinary aberration if a raft of debt defaults and work-outs didn't ultimately accompany the latest peak in levels of public debt.
The inflation picture is also interesting. We see four clear peaks in the share of countries with inflation rates over 20%. The first two are associated with the First and Second World War (recall that after the Second World War, America cut its debt load in half through inflation). The third corresponds to the late 1970s, when oil price increases and runaway wage-price spirals fueled inflation. And then there is a fourth in the early 1990s, associated with emerging market debt crises (Brazil experienced a hyperinflationary episode during this period, for instance).
It's a fascinating image. The authors are right: debt cycles do appear to be somewhat rare and about a half-century in duration. And the struggle to work out recurring debt tends to play out in consistent ways, with increases in default and the occasional bout of rapid inflation.
The other economist worth look at is Steve Keen in Australia - very good empirical economist with some good analysis of debt and related issues.
http://www.debtdeflation.com/blogs/
Posted by: Nexus | March 11, 2010 at 07:33 AM