"You'll be happy to know that stupidity is not hereditary. You acquired it all by yourselves."
--Margaret Garrison (Deadline U.S.A)
During the reporting of the Boston bombing, I heard one pundit state that we should consume media info using 'the 75% rule', meaning that media consumers should assume that only 75% of what is presented about a breaking story is actually true.
For many stories, it seems like 75% is far too generous.
Take, for example, reports surrounding the error in the Reinhart and Rogoff (RR) research about the relationship between sovereign debt and economic growth. A central finding of RR's work, work that we have considered a number of times on these pages, is that higher debt is associated with longer term economic growth. At some point, the debt becomes insurmountable and generally leads to default either directly or via inflation.
That these findings should be considered surprising suggests how far off the rails from basic economic understanding that we have travelled. Nevertheless, it took a multi-century empirical study of debt escalations and economic collapses by high profile researchers to bolster the legitimacy of basic ECON 101 findings in the eyes of some.
Last week three academics from UMass produced a working paper claiming significant errors in the analysis of two RR working papers from 2010. Note the term 'working paper,' meaning that all three of the works--the two RR papers and the UMass critique, should be considered to be works in progress and have not been published in any peer reviewed outlet to date.
That said, it does appear that some of the findings from the two RR working papers have spilled into some work that has been published. See, for example, Reinhart & Rogoff (2011) and Reinhart, Reinhart & Rogoff (2012).
Now, calling out researchers on their findings is a serious matter that cannot be dismissed. RR must answer to those charges and they have indicated that they will.
However, challenges w.r.t. the magnitude of RR's empirical results do not alter the underlying theoretical framework. Higher debt is associated with lower economic growth. As demonstrated here, RR results adjusted for the UMass observations do not alter the negative relationship between debt and growth--something that the UMass researchers, despite the title of their paper, do not seriously contest.
The disagreements between these academics will be resolved over time via the traditional back and forth process. That is the power of formal, written thought process for advancing the truth.
Unfortunately, the media do not follow such a process. As observed in this missive, the media have once again revealed their bias in the way they have treated this story. The sensationalistic headlines speak for themselves. For example:
LA Times: How an Excel error fueled panic over the national debt
Business Week: The Excel error that changed history
Responsible journalists would have a) waited for the full RR rejoinder, and/or b) considered the UMass claims in light of materially altering the implications of the original RR study before writing. Instead, many media outlets have engaged in slanting the UMass study in a manner that can easily be construed as agenda driven.
It is straightforward to conclude that many in the media do not like the idea that government spending and debt constrain growth, and that journalists are jumping at an opportunity to discredit the idea.
This morning I heard a 'financial expert' suggested that the UMass study gives government greater license to spend our way out of problems.
Rather than offering well thought perspective about the merits of such a suggestion, the media's recent efforts appear to endorse it.
References
Reinhart, C.M. & Rogoff, K.S. 2011. From financial crash to debt crisis. American Economic Review, 101: 1676-1706.
Reinhart, C.M., Reinhart, V.R., & Rogoff, K.S. 2012. Public debt overhangs: Advanced economy episodes since 1800. Journal of Economic Perspectives, 26(3): 69-86.
Showing posts sorted by relevance for query reinhart. Sort by date Show all posts
Showing posts sorted by relevance for query reinhart. Sort by date Show all posts
Friday, April 26, 2013
Tuesday, March 20, 2012
Financial Repression
"You're from Receiving, aren't you?"
--Brantley Foster (The Secret of My Success)
Carmen Reinhart (of This Time is Different fame) writes one of the more cogent pieces to appear on op-ed pages that I can recall. What separates this piece from typical op-ed drivel is linking assertions to tests of truth, using logic and/or empirical evidence.
Reinhart discusses the onset of policies being deployed by governments and central banks that help liquidate debt burdens and ease debt service. She terms these policies 'financial repression' because they are essentially taxes on bondholders and savers.
Financial repression is the consequence of massive buildup in debt around the globe. Reinhart's Fig 1 shows that central govt debt among developed nations is at its highest peacetime level ever--nearly 100% of GDP. Factor in private sector debt and unfunded liabilities and the degree of leverage is much higher.
The important thing to note is that the spike higher to record debt levels came in response to problems caused by already high debt levels. The credit crisis of 2007-2008 was 'fixed' by adding more debt to the system. This, of course, is classic Ponzi--both unsustainable and unstable.
Reinhart observes that large debt:GDP ratios have been reduced throughout history via some combination of: economic growth, austerity (spending cutbacks), debt default, inflation, and financial repression. She also notes that the last two options are only viable for debts denominated in domestic currency. Indeed, for those countries that do have control over their own printing press, inflation and financial repression have been the preferred avenues for coping with the debt overhangs since 2008.
A focal point of financial repression is central bank intervention that keeps nominal interest rates lower than market. All else equal, this reduces government interest expense and leads to deficit reduction. However, when central bank intervention results in negative real interest rates (as is now the case), then this action amounts to a transfer of wealth from creditors to debtors--in the present case from savers to governments.
As Reinhart notes, this is a tax that is largely invisible and discriminatory, thus it is likely to be politically palatable to policymakers and to the masses.
Reinhart also touches on the growing practice of 'monetizing debt,' although she does not term it that. Her Fig 2 indicates that sovereign (and GSE) debt is increasingly owned by government entities rather than by 'outside' market players. This "means markets for government bonds are increasingly populated by nonmarket players, calling into question the information content of bond prices relative to their underlying risk profile--a common feature of financially repressed systems."
Nice point. Financial repression also amounts to distortion of information. Market truths morph into...false signals that have a propaganda feel to them.
Not only do savers have their capital robbed from them during financial repression, but information that might help those people regain their footing is taken from them as well.
Reinhart think financial repression will be with us a long time. My sense is that the time period may last only until the chaos unleashed by financial repression drives systemic collapse.
--Brantley Foster (The Secret of My Success)
Carmen Reinhart (of This Time is Different fame) writes one of the more cogent pieces to appear on op-ed pages that I can recall. What separates this piece from typical op-ed drivel is linking assertions to tests of truth, using logic and/or empirical evidence.
Reinhart discusses the onset of policies being deployed by governments and central banks that help liquidate debt burdens and ease debt service. She terms these policies 'financial repression' because they are essentially taxes on bondholders and savers.
Financial repression is the consequence of massive buildup in debt around the globe. Reinhart's Fig 1 shows that central govt debt among developed nations is at its highest peacetime level ever--nearly 100% of GDP. Factor in private sector debt and unfunded liabilities and the degree of leverage is much higher.
The important thing to note is that the spike higher to record debt levels came in response to problems caused by already high debt levels. The credit crisis of 2007-2008 was 'fixed' by adding more debt to the system. This, of course, is classic Ponzi--both unsustainable and unstable.
Reinhart observes that large debt:GDP ratios have been reduced throughout history via some combination of: economic growth, austerity (spending cutbacks), debt default, inflation, and financial repression. She also notes that the last two options are only viable for debts denominated in domestic currency. Indeed, for those countries that do have control over their own printing press, inflation and financial repression have been the preferred avenues for coping with the debt overhangs since 2008.
A focal point of financial repression is central bank intervention that keeps nominal interest rates lower than market. All else equal, this reduces government interest expense and leads to deficit reduction. However, when central bank intervention results in negative real interest rates (as is now the case), then this action amounts to a transfer of wealth from creditors to debtors--in the present case from savers to governments.
As Reinhart notes, this is a tax that is largely invisible and discriminatory, thus it is likely to be politically palatable to policymakers and to the masses.
Reinhart also touches on the growing practice of 'monetizing debt,' although she does not term it that. Her Fig 2 indicates that sovereign (and GSE) debt is increasingly owned by government entities rather than by 'outside' market players. This "means markets for government bonds are increasingly populated by nonmarket players, calling into question the information content of bond prices relative to their underlying risk profile--a common feature of financially repressed systems."
Nice point. Financial repression also amounts to distortion of information. Market truths morph into...false signals that have a propaganda feel to them.
Not only do savers have their capital robbed from them during financial repression, but information that might help those people regain their footing is taken from them as well.
Reinhart think financial repression will be with us a long time. My sense is that the time period may last only until the chaos unleashed by financial repression drives systemic collapse.
Monday, February 15, 2010
This Time It's Different
"You stop sending me information, and you start getting me some."
--Gordon Gekko
Just finished Reinhart & Rogoff's (2009) book, This time is different: Eight centuries of financial folly. The authors are two econ profs, Carmen Reinhart at Maryland and Ken Rogoff at Harvard. The book is grabbing lots of press because a) it is a novel empirical study of over 200 financial crises of various types (debt defaults, banking crisies, currency collapses, inflations) that span about 800 yrs, and b) the prescient timing of its publication in the midst of our current financial crises--what they call The Second Great Contraction (the First Great Contraction is better known as the Great Depression).
The primary contribution of this book, as I see it, is the notion, reinforced by lots of data, that extreme levels of debt and leverage tilt finanical systems toward crisis.
However, I must admit that, unlike most of the scintillating reviews I've read about this book, I was a bit disappointed. For one thing, I think the title is misleading. The authors suggest that each of these crises corresponded w/ groupthink about the capacity of a country to navigate debt/leverage loads differently compared to the past. But this book is not a study of the collective mindset or social contexts that drove the extreme behavior that tipped situations toward crisis. Instead, it's a study of econometrics surrounding crisis points.
Banking crises represent a primary analytical category here, and the authors categorize the recent meltdown as mainly a banking crisis. However, they largely ignore multi-decade cumulative effects of activities in other categories, such as internal and external debt expansion and inflation, that may have played a role in tipping the system past the point of no return.
Moreover, I found their assessment of the causes of banking crises in general, and the current meltdown in particular, to be shallow and, frankly, typical of mainstream economists. Mobility of capital and regulatary failure, they argue, are primary drivers of banking crises. They largely ignore the question of where all the credit supply has come from over the past 200 yrs to spawn such leveraged states. And they do not consider the role of institutional factors (government sponsored banking insurance programs, interventions in housing markets, et al.) that signficantly distorted markets on their path to dislocation.
In short, they fail to seriously consider the notion that government intervention itself rests at the epicenter of these crises.
Not surprisingly, then, their solution is more regulatory oversight. An expanded role for the IMF and a set of crisis indicators that should be carefully monitored by bureaucrats are among their recommendations.
While Reinhart and Rogoff's (2009) data should elevate awareness of debt and leverage in finanical meltdowns, their superficial analysis of underlying causes limits the capacity of their work for driving meaningful change.
References
Reinhart, C.M. & Rogoff, K.S. 2009. This time is different: Eight centuries of financial folly. Princeton, NJ: Princeton University Press.
--Gordon Gekko
Just finished Reinhart & Rogoff's (2009) book, This time is different: Eight centuries of financial folly. The authors are two econ profs, Carmen Reinhart at Maryland and Ken Rogoff at Harvard. The book is grabbing lots of press because a) it is a novel empirical study of over 200 financial crises of various types (debt defaults, banking crisies, currency collapses, inflations) that span about 800 yrs, and b) the prescient timing of its publication in the midst of our current financial crises--what they call The Second Great Contraction (the First Great Contraction is better known as the Great Depression).
The primary contribution of this book, as I see it, is the notion, reinforced by lots of data, that extreme levels of debt and leverage tilt finanical systems toward crisis.
However, I must admit that, unlike most of the scintillating reviews I've read about this book, I was a bit disappointed. For one thing, I think the title is misleading. The authors suggest that each of these crises corresponded w/ groupthink about the capacity of a country to navigate debt/leverage loads differently compared to the past. But this book is not a study of the collective mindset or social contexts that drove the extreme behavior that tipped situations toward crisis. Instead, it's a study of econometrics surrounding crisis points.
Banking crises represent a primary analytical category here, and the authors categorize the recent meltdown as mainly a banking crisis. However, they largely ignore multi-decade cumulative effects of activities in other categories, such as internal and external debt expansion and inflation, that may have played a role in tipping the system past the point of no return.
Moreover, I found their assessment of the causes of banking crises in general, and the current meltdown in particular, to be shallow and, frankly, typical of mainstream economists. Mobility of capital and regulatary failure, they argue, are primary drivers of banking crises. They largely ignore the question of where all the credit supply has come from over the past 200 yrs to spawn such leveraged states. And they do not consider the role of institutional factors (government sponsored banking insurance programs, interventions in housing markets, et al.) that signficantly distorted markets on their path to dislocation.
In short, they fail to seriously consider the notion that government intervention itself rests at the epicenter of these crises.
Not surprisingly, then, their solution is more regulatory oversight. An expanded role for the IMF and a set of crisis indicators that should be carefully monitored by bureaucrats are among their recommendations.
While Reinhart and Rogoff's (2009) data should elevate awareness of debt and leverage in finanical meltdowns, their superficial analysis of underlying causes limits the capacity of their work for driving meaningful change.
References
Reinhart, C.M. & Rogoff, K.S. 2009. This time is different: Eight centuries of financial folly. Princeton, NJ: Princeton University Press.
Wednesday, June 8, 2011
Point of Know Return
Today I found a message floating
In the sea from you to me
You wrote that when you could see it
You cried with fear, the point was near
--Kansas
The below chart, taken from this article, shows total US debt among select countries. Total debt is broken down into categories of government, non-financial business, households, and financial institutions.
In 2009, total US debt amounted to nearly 3x GDP. Since then, government debt has probably gone up relative to other categories as we increasingly socialize risk.
According to the author, the pink line at 260% represents the all time record for debt repayment, accomplished by England between 1815 and 1900. Can't substantiate the source, but the notion that there is a level of debt that constitutes a point of no return is certainly consistent with the recent work of Reinhart of Rogoff (2009).
The author observes that these debt numbers do not include entitlement liabilities (e.g., Medicare, Social Security). Were these liabilities factored in, then total liabilities to GDP shoots to 6-7x or higher.
References
Reinhart, C.M. & Rogoff, K.W. 2009. This time is different: Eight centuries of financial folly. Princeton, NJ: Princeton University Press.
In the sea from you to me
You wrote that when you could see it
You cried with fear, the point was near
--Kansas
The below chart, taken from this article, shows total US debt among select countries. Total debt is broken down into categories of government, non-financial business, households, and financial institutions.
In 2009, total US debt amounted to nearly 3x GDP. Since then, government debt has probably gone up relative to other categories as we increasingly socialize risk.
According to the author, the pink line at 260% represents the all time record for debt repayment, accomplished by England between 1815 and 1900. Can't substantiate the source, but the notion that there is a level of debt that constitutes a point of no return is certainly consistent with the recent work of Reinhart of Rogoff (2009).
The author observes that these debt numbers do not include entitlement liabilities (e.g., Medicare, Social Security). Were these liabilities factored in, then total liabilities to GDP shoots to 6-7x or higher.
References
Reinhart, C.M. & Rogoff, K.W. 2009. This time is different: Eight centuries of financial folly. Princeton, NJ: Princeton University Press.
Monday, May 9, 2011
Antebellum
"Gonna come a time when we all gonna have to ante up. Ante up and kick in like men. LIKE MEN!"
--Sgt Major John Rawlins (Glory)
Rumors throughout the weekend that Greece might exit the EU. Nothing 'real' yet, but Greek debt spreads continue to widen...
The situation does present a reminder as to what has transpired over the past couple of years. Debt and leverage on private balance sheets has been shifted to the public sector. The debt has not gone away. It has been socialized.
Many people are waxing poetic about the improved balance sheets and strong cash positions of many corporations. But that improvement has come at the expense of the citizenry. As government takes on debt previously held by private companies and individuals, the spectre of higher taxes and a depreciating currency become realized.
The US is now lugging federal-level debt nearly equal to GDP. Reinhart & Rogoff (2009) found that debt:GDP of 90% is generally the point of no return. We passed that warning sign a while back.
Bulls argue that the off loading of risk to government is bullish for stocks. Perhaps that turns out to be the case.
Bears counter that risk has merely changed hands temporarily. Corporations will ultimately pay. Companies will be targets of future govt tax campaigns. Plus, citizens will have less disposable income to buy goods and services because they are on the hook for future govt debt liabilities as well.
While special interests sometimes benefit from political favor, the magnitude of our debt problem suggests that all will need to ante up.
References
Reinhart, C.M. & Rogoff, K.S. 2009. This time is different: Eight centuries of financial folly. Princeton, NJ: Princeton University Press.
--Sgt Major John Rawlins (Glory)
Rumors throughout the weekend that Greece might exit the EU. Nothing 'real' yet, but Greek debt spreads continue to widen...
The situation does present a reminder as to what has transpired over the past couple of years. Debt and leverage on private balance sheets has been shifted to the public sector. The debt has not gone away. It has been socialized.
Many people are waxing poetic about the improved balance sheets and strong cash positions of many corporations. But that improvement has come at the expense of the citizenry. As government takes on debt previously held by private companies and individuals, the spectre of higher taxes and a depreciating currency become realized.
The US is now lugging federal-level debt nearly equal to GDP. Reinhart & Rogoff (2009) found that debt:GDP of 90% is generally the point of no return. We passed that warning sign a while back.
Bulls argue that the off loading of risk to government is bullish for stocks. Perhaps that turns out to be the case.
Bears counter that risk has merely changed hands temporarily. Corporations will ultimately pay. Companies will be targets of future govt tax campaigns. Plus, citizens will have less disposable income to buy goods and services because they are on the hook for future govt debt liabilities as well.
While special interests sometimes benefit from political favor, the magnitude of our debt problem suggests that all will need to ante up.
References
Reinhart, C.M. & Rogoff, K.S. 2009. This time is different: Eight centuries of financial folly. Princeton, NJ: Princeton University Press.
Thursday, May 2, 2013
Reinhart Rogoff Redux
So put in your earplugs
Put on your eyeshades
You know where to put the cork
--The Who
Regarding the recent uproar over errors in Reinhart and Rogoff's research, RR have aggressively defended their findings. The 'spreadsheet errors' detected by the UMass group do not substantially alter the empirical findings. As this NYT graphic demonstrates, the relationship between economic growth and debt is negative regardless of which analysis is examined.
It is interesting that the media continues to paint RR as fiscal hawks. After reading RR's This time is different, I noted with disappointment that RR's analysis of their own results appeared shallow and avoided the issue of the role of government policy in financial crises. The notion of 'austerity,' which was a logical implication of their findings, went little discussed in the book.
Today, even while defending their work, RR claim that they are not fiscal hawks. In fact, they suggest, "No one should be arguing to stabilize debt, much less bring it down, until growth is more solidly entrenched - if there remains a choice, that is."
This is a stunning statement, really, in light of RR's own research to the contrary. It is suggestive of an institutional mindset that impairs capacity for interpreting one's own findings.
Caroline Baum observes that the recent uproar over the exact threshold where debt compromises growth misses the point. "Too much debt is bad." She explains, "You don't need a doctorate in economics to understand that you can't spend beyond your means forever, or that piling on debt because it's cheap to borrow isn't sound policy."
That we're seriously debating this point demonstrates just how far off the rails from basic economic understanding that we've traveled.
Put on your eyeshades
You know where to put the cork
--The Who
Regarding the recent uproar over errors in Reinhart and Rogoff's research, RR have aggressively defended their findings. The 'spreadsheet errors' detected by the UMass group do not substantially alter the empirical findings. As this NYT graphic demonstrates, the relationship between economic growth and debt is negative regardless of which analysis is examined.
It is interesting that the media continues to paint RR as fiscal hawks. After reading RR's This time is different, I noted with disappointment that RR's analysis of their own results appeared shallow and avoided the issue of the role of government policy in financial crises. The notion of 'austerity,' which was a logical implication of their findings, went little discussed in the book.
Today, even while defending their work, RR claim that they are not fiscal hawks. In fact, they suggest, "No one should be arguing to stabilize debt, much less bring it down, until growth is more solidly entrenched - if there remains a choice, that is."
This is a stunning statement, really, in light of RR's own research to the contrary. It is suggestive of an institutional mindset that impairs capacity for interpreting one's own findings.
Caroline Baum observes that the recent uproar over the exact threshold where debt compromises growth misses the point. "Too much debt is bad." She explains, "You don't need a doctorate in economics to understand that you can't spend beyond your means forever, or that piling on debt because it's cheap to borrow isn't sound policy."
That we're seriously debating this point demonstrates just how far off the rails from basic economic understanding that we've traveled.
Monday, May 24, 2010
Book Report
Last thing I remember I was running for the door
I had to find the passage back to the place I was before
'Relax,' said the nightman, 'We are programmed to receive.
'You can check out any time you like, but you can never leave.'
--Eagles
In addition to professional endeavors, a personal goal during my sabbatical was to read up on the capitalism (a.k.a. market economy) socialism (a.k.a. planned economy) dyad. I was particularly interested in what smart folks had to say about the middle ground between the two poles. This middle ground, often referred to as managed capitalism, mixed economy, or interventionism, is where every modern economy is positioned to some degree.
"How stable is this middle ground?" was my primary research question. "Is a mixed economy a 'steady state' sort of design, or is it prone to migration toward one of the poles?"
I plowed thru some seminal books plus an article or two--some by economists, others by social commentators. Bibliography below. While certainly not an exhaustive reading list, there were some noteworthy findings nonetheless:
The old Soviet Union, the current EU situation offer real life examples in this regard.
While the Road To Serfdom points toward socialism, the journey appears difficult to complete.
References
Chodorov, F. 1959. The rise and fall of society. New York: The Devin-Adair Company. (see also here and here)
Garrett, G. 1932. The bubble that broke the world. Boston: Little, Brown, & Company.
Garrett, G. 1953. The people's pottage. Caldwell, ID: The Caxton Printers, Ltd.
Hayek, F. 1944. The road to serfdom. Chicago: The University of Chicago. (see also here)
Hirshleifer, D. 2008. Psychological bias as a driver of financial regulation. European Financial Management, 14: 856-874.
Lane, R.W. 1954. Give me liberty. Caldwell, ID: The Caxton Printers, Ltd.
Marx, K. 1867. Das kapital, Vol. 1. Hamburg: O. Meissner. (see also here)
Marx, K.H. & Engels, F. 1848. Manifest of the Communisty Party. London: Burghard.
Mises, L. 1951. Socialism: An economic and sociological analysis. New Haven: Yale University Press. (see also here)
Reinhart, C.M. & Rogoff, K.S. 2009. This time is different: Eight centuries of financial folly. Princeton, NJ: Princeton University Press.
Rothbard, M.N. 1979. Conceived in liberty, Vol. 4. New York: Arlington House, Publishers.
Rothbard, M.N. 1996. Origins of the welfare state in America. Journal of Libertarian Studies, 12(2): 193-232.
Schumpeter, J.A. 1942. Capitalism, socialism, and democracy. New York: Harper & Brothers.
I had to find the passage back to the place I was before
'Relax,' said the nightman, 'We are programmed to receive.
'You can check out any time you like, but you can never leave.'
--Eagles
In addition to professional endeavors, a personal goal during my sabbatical was to read up on the capitalism (a.k.a. market economy) socialism (a.k.a. planned economy) dyad. I was particularly interested in what smart folks had to say about the middle ground between the two poles. This middle ground, often referred to as managed capitalism, mixed economy, or interventionism, is where every modern economy is positioned to some degree.
"How stable is this middle ground?" was my primary research question. "Is a mixed economy a 'steady state' sort of design, or is it prone to migration toward one of the poles?"
I plowed thru some seminal books plus an article or two--some by economists, others by social commentators. Bibliography below. While certainly not an exhaustive reading list, there were some noteworthy findings nonetheless:
- It was nearly unanimous that the middle ground is not a steady state position. The exception was Reinhart and Rogoff (2009) who seemed to believe that managed capitalism is the endgame. Hirshleifer (2008) offered an interesting counter argument against such regulatory regimes.
- Most felt that the gravitational pull was away from capitalism and toward socialism.
- Some felt that a socialist endgame was inevitable (e.g., Marx & Engels, 1848; Marx, 1862; Schumpeter, 1942). Even Garrett (1953) seemed pretty fatalistic.
- Others felt that, while the pull favored socialism, intervention by liberty minded people could reverse the trajectory toward capitalism (e.g., Chodorov, 1959; Hayek, 1944).
- Rothbard's (1979) work was the only one suggesting a primary pull toward free markets--using US colonial context for his analysis.
- Mises (1951, 1998) concluded that the economics of socialism were inferior to capitalism.
The old Soviet Union, the current EU situation offer real life examples in this regard.
While the Road To Serfdom points toward socialism, the journey appears difficult to complete.
References
Chodorov, F. 1959. The rise and fall of society. New York: The Devin-Adair Company. (see also here and here)
Garrett, G. 1932. The bubble that broke the world. Boston: Little, Brown, & Company.
Garrett, G. 1953. The people's pottage. Caldwell, ID: The Caxton Printers, Ltd.
Hayek, F. 1944. The road to serfdom. Chicago: The University of Chicago. (see also here)
Hirshleifer, D. 2008. Psychological bias as a driver of financial regulation. European Financial Management, 14: 856-874.
Lane, R.W. 1954. Give me liberty. Caldwell, ID: The Caxton Printers, Ltd.
Marx, K. 1867. Das kapital, Vol. 1. Hamburg: O. Meissner. (see also here)
Marx, K.H. & Engels, F. 1848. Manifest of the Communisty Party. London: Burghard.
Mises, L. 1951. Socialism: An economic and sociological analysis. New Haven: Yale University Press. (see also here)
Mises, L. 1998. Interventionism: An economic analysis. Irving-on-the-Hudson, NY: The Foundation for Economic Education, Inc. (see also here)
Reinhart, C.M. & Rogoff, K.S. 2009. This time is different: Eight centuries of financial folly. Princeton, NJ: Princeton University Press.
Rothbard, M.N. 1979. Conceived in liberty, Vol. 4. New York: Arlington House, Publishers.
Rothbard, M.N. 1996. Origins of the welfare state in America. Journal of Libertarian Studies, 12(2): 193-232.
Schumpeter, J.A. 1942. Capitalism, socialism, and democracy. New York: Harper & Brothers.
Tuesday, July 19, 2011
Old Age and Default
Send me a postcard
Drop me a line stating point of view
Indicate precisely what you mean to say
Yours sincerely wasting away
--The Beatles
Interesting discussion of the negative relationship between the age of a country's population and propensity for sovereign debt default. What many people don't understand about sovereign debt is that it is usually unsecured, meaning that there is no collateral for lenders to claim if the borrower defaults. This is unlike other debt instruments such as mortgages or corporate bonds which are typically backed by real assets.
As such, lending to countries is pretty much dependent on the creditor's assessment of the borrower's ability, or perhaps more importantly the borrower's willingness, to pay.
It is likely that old age reduces willingness to pay. Paying back debt might cut into entitlements that older segments of the population enjoy, such as State provided health care and retirement benefits. People may be less willing to forego those benefits in lieu of using those economic resources to pay back loans.
If the country is too leveraged, however, then the point may be moot. Socialistic systems require ever more economic resources to keep the wheels on the wagon. Credit will be cut off, either thru default or by bond market shut down.
This is the central message of Reinhart and Rogoff (2009).
Reference
Reinhart, C.M. & Rogoff, K.S. 2009. This time is different: Eight centuries of financial folly. Princeton, NJ: Princeton University Press.
Drop me a line stating point of view
Indicate precisely what you mean to say
Yours sincerely wasting away
--The Beatles
Interesting discussion of the negative relationship between the age of a country's population and propensity for sovereign debt default. What many people don't understand about sovereign debt is that it is usually unsecured, meaning that there is no collateral for lenders to claim if the borrower defaults. This is unlike other debt instruments such as mortgages or corporate bonds which are typically backed by real assets.
As such, lending to countries is pretty much dependent on the creditor's assessment of the borrower's ability, or perhaps more importantly the borrower's willingness, to pay.
It is likely that old age reduces willingness to pay. Paying back debt might cut into entitlements that older segments of the population enjoy, such as State provided health care and retirement benefits. People may be less willing to forego those benefits in lieu of using those economic resources to pay back loans.
If the country is too leveraged, however, then the point may be moot. Socialistic systems require ever more economic resources to keep the wheels on the wagon. Credit will be cut off, either thru default or by bond market shut down.
This is the central message of Reinhart and Rogoff (2009).
Reference
Reinhart, C.M. & Rogoff, K.S. 2009. This time is different: Eight centuries of financial folly. Princeton, NJ: Princeton University Press.
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