Thursday, May 2, 2013

Austerity is not the only answer to a debt problem By Kenneth Rogoff and Carmen Reinhart


No, but now apparently the dynamic duo is advocating sovereign DEFAULT... you can't even make this up.

New RR editorial out at FT here.

Excerpt below:
The recent debate about the global economy has taken a distressingly simplistic turn. Some now argue that just because one cannot definitely prove very high debt is bad for growth (though the weight of the results still say it is), then high debt is not a problem.
Looking beyond the recent public debate about the literature on debt  [Ed: HA!] – we have already discussed our results on debt and growth in that context – the debate needs to be reconnected to the facts.....
.....What, then, can be done? We must remember that the choice is not simply between tight-fisted austerity and freewheeling spending. Governments have used a wide range of options over the ages. It is time to return to the toolkit.
First and foremost, governments must be prepared to write down debts rather than continuing to absorb them. This principle applies to the senior debt of insolvent financial institutions, to peripheral eurozone debt and to mortgage debt in the US.
For Europe, in particular, any reasonable endgame will require a large transfer from Germany to the periphery. The sooner this implicit transfer becomes explicit, the sooner Europe will be able to find its way towards a stable growth path. 
Pure insanity.


10 comments:

PeterP said...

They are not advocating a sovereign default but that finally private creditors took some hit when debtors default. Now debtors default and creditors are made whole by the state (read: banks get their money back either way, either by squeezing creditors or thru back door bailouts). That is indeed stupid.

But I guess RR base it on their lack of understanding of sovereign currencies: they don't want the states to take over the liabilities of debtors for fear their debt gets too large, same old same old.

Roger Erickson said...

Especially when it's a "fiat" debt. i.e., a debt in semantics only

Every person goes into debt to themselves everytime they credit themselves with the effort to go to the 'fridge for a beer.

A human culture is no different. Just dumber.

paul meli said...

"Especially when it's a "fiat" debt. i.e., a debt in semantics only"

Yeah...loan yourself money at interest...define the "obligation" in real terms.

The figure out how you will acquire the interest from yourself to pay yourself.

Matt Franko said...

"Every person goes into debt to themselves everytime they credit themselves with the effort to go to the 'fridge for a beer..."

Consider that one stolen!

Peter,

I would think that for the sovereign bonds of the periphery mentioned here, if they plan on not redeeming the securities by the same terms indicated at issue, that would be some sort of default...

rsp,

Andrew said...

I think they are talking about sovereign debt AND that of other entities. Their writing could be more clear, but perhaps it reflects their thinking.

What is the downside of selective default? Why is it any different than increasing taxes on those same entities? I'm thinking I'm going to hear about morals and slippery slopes.

Ralph Musgrave said...

It’s not 100% clear what R&R mean by the phrase “write down debts” in their article. But if you look at those idiots’ previous publications is clear enough. In this 2011 article Rogoff advocated deliberately stoking inflation so as to cheat creditors. See:

http://www.project-syndicate.org/commentary/the-second-great-contraction

Next, they telling a fare faced lie when they say, “the ratios of debt to GDP are at historically high levels in countries, many rising above previous wartime peaks.”

As regards “wartime peaks” that’s not true of the UK post WWI, or WWII or the Napoleonic wars. It’s not true of the US post WWII. Its not true of France or Germany at the end of WWII. So which major countries are R&R talking about? They’ve probably scratched around and found a few heavily indebted desert islands in the Pacific with less than five families living on them.

That’s R&R “statistics” and spread sheets for you.


Adam1 said...

Warren's been on fire today. Here's his response to R&R...

http://moslereconomics.com/2013/05/02/rogoff-reinhart-answering-my-call-in-ft-austerity-is-not-the-only-answer-to-a-debt-problem/

Tom Hickey said...

Andrew I think they are talking about sovereign debt AND that of other entities. Their writing could be more clear, but perhaps it reflects their thinking.

I haven't looked at R-R's data to see whether they just use govt debt or total debt, so those that have report that R-R fails from the get-go by abstracting from total debt, in addition to other relevant conditions like currency sovereignty and borrowing in another's currency.

It's one of those cet. par. models that doesn't show anything because the other conditions are not constant and they don't filter out their consequences in the results, or even consider them.

paul meli said...

The evidence shows that austerity is not in the universe of answers to a debt problem.

Some claim that given enough time and enough wage deflation it would eventually work.

That's a mathematical exercise that should never be tested on living breathing human beings.

My idea of austerity is to cut off the oxygen supply of elites that think doing harm to the citizens is a reasonable policy option.

Tom Hickey said...

Austerity = wage reduction = increase of profit share. According to the theory, this is supposed to stimulate investment and therefore growth. No awareness of the role of effective demand in circular flow.