Reddit reviews This Time Is Different: Eight Centuries of Financial Folly
We found 15 Reddit comments about This Time Is Different: Eight Centuries of Financial Folly. Here are the top ones, ranked by their Reddit score.
Princeton University Press
Great question!
First, technically a government doesn't go bankrupt. Bankruptcy only applies to inviduals and companies within a country.
Greece may well default on their loans, i.e. not pay or they could undergo a loan restructuring where the principal is reduced or the terms altered.
Currently many people believe that Greece cannot repay it's obligations at the current settings as growth is fundamentally too low. The Greek government remarkably has to continue borrowing just to keep going. If it stopped the consequences would be highly unpredictable. The country could, conceivable just crumble but it probably wouldn't. The EU/US/China would step in at some point. But the pain would be serious. Massive unemployment, large scale emigration.
The best scenario is that Greece gets their debt restructured, the banks take some haircut and the Greek government manages to get going with reasonable taxation in place and less tex evasion.
Sovereign default is not an uncommon occurence. Check out the marvelous book This Time is Different for a list of the many, many times countries have defaulted. As it happens, the leader in Europe for the most defaults is Greece.
This is so fucking dumb just kill me. You can make reasonable arguments about how debt is bad and it how current policies are misguided, but don't be so fucking stupid to say to make vague references to some pre-assumed linearities in the hard sciences that often don't exist. Debt Does work differently at a national level and makes for some interesting dynamics, for a great empirical study on how different kinds of debt interact and how they have vastly different impacts, check out.
This Time It's different it shares the same probable end view as you anyways.
On to your weird physics appeal. Tons of things work differently on separate scales. Such as http://en.wikipedia.org/wiki/Maxwell%27s_equations
which has a macroscopic and microscopic sections. There's tons of examples of this.
edit: and don't for a second think I'm an "economist" I hardly have any respect for the current state the field is in, and do not share the same respect for the nobel prizes of economy(of which the bank of sweden awards and was not mentioned in the will of alfred nobel), as say I would for physics, chemistry, or medicine
First, the 90% figure you heard is from research done by Ken Rogoff and Carmen Reinhardt. They wrote a book called This Time is Different, which analyzes financial crises and government finances over several centuries. They also wrote a paper called Growth in a Time of Debt which analyzed correlations between economic growth and debt ratios. There is some debate on the 90% figure, including both the methodology and questions as to whether high levels of debt lead to decreased growth or decreased growth leads to high levels of debt, but the facts themselves are not disputed.
If the US were to run a surplus and pay off all of its debts, the first obvious conclusion is that there would be no long term US Treasury bills in existence. (Short term debt would probably continue to be used to smooth the collection of tax revenues against expenses). The first issue that would arise from this is holding reserves. According to the Basel Standards, which are international banking standards most developed countries adhere to, banks must hold certain safe assets in reserve on their balance sheet in proportion to the riskier assets, such as investments and loans, that they hold. Government securities are popular as reserve assets, as more stable governments, such as Germany, America and Canada, are deemed to be completely safe, yet unlike cash or equity, still earn a rate of return, however small. They are also immediately redeemable for cash, and tend to go up in value during financial crises, as investors seek to invest in safe assets, making them excellent assets to buffer against risk. Many pension funds and institutional investors also hold government securities, as this provides them with the same benefits. If government securities didn't exist, some other asset would need to be found that is deemed safe, or more institutions would need to hold assets in cash and forego the added interest income.
Another issue would be questions regarding the risk-free interest rate. As US government securities are deemed perfectly safe, investors will frequently make reference to a perfectly safe asset when deciding what the appropriate interest rate for riskier assets would be. Many financial formulas, such as the Capital Asset Pricing Model, make reference to the risk-free rate. However, if the US government continues to issue short term debt, this debt's interest rate could be used, or some other asset's interest rate could be used, to determine what a market risk-free rate should be.
Lastly, as the dollar is the world's reserve currency, and many international parties do business deals in dollars as they conclude that the value of the dollar will not significantly shift over short periods of time, a failure to issue Treasury bills may send investors seeking a new medium of exchange. The euro is seen as too questionable, the yen has far more significant issues than the dollar given Japan's deficits and anemic growth, and the Chinese government has far too many restrictions on the yuan for it to be a viable currency for international transactions.
Currently, the US government's ability to borrow in dollars and act as the world's reserve currency is a jealously guarded privilege, as other countries essentially pay us for the privilege of lending money to us. This Exorbitant Privilege and its effects on the global economy have been debated by economists for a long time. Some, such as the above linked book by Barry Eichengreen, see it as a massive benefit to the US, while others, such as Paul Krugman, see a world in which other countries, such as China, buy US debt to prop up the value of the dollar, thus diminishing the value of their own currency, and giving products manufactured in their country a significant price advantage. If the US stopped issuing debt, parties could no longer buy US debt on the open market, and drive up the value of the dollar. This would cause the value of dollar-denominated assets to fall, and could cause the relative value of US labor to fall, which could lead to a rise in manufacturing employment in the US, as American made goods become cheaper on the international market. This is a pretty hotly debated topic, so a lot of this is speculation. There is a lot of info out here, but a quick Google search yielded a couple articles from The Economist on this topic, and an article on Paul Krugman's stance on this. This is a whole separate issue in itself.
I think the main question though is why the US would want to stop issuing debt. Obviously it is unacceptable to run structural deficits the country is unable to close, and issuing debt should be a choice rather than a necessity. However, if rates of return are higher than rates of interest, a controlled debt issuing can be positive. For example Apple has $27,000,000,000 in debt. No one claims that they are on the verge of bankruptcy, mostly because they have $75,000,000,000 in assets. If you can borrow money at say 3%, and invest it in something, like developing iPads, that offers a rate of return of say 10%, your profit is 7% times the amount that you borrowed. This is known as leverage, and is covered by the Modigliani-Miller Theorem. It is interest rates and rates of return, not capital structure, that matter.
This is why analogies to how the US is like a household, and needs to manage its budget, are foolish. A household can rarely borrow at low interest rates, and rarely has significant investment opportunities, so taking on debt is usually a bad idea. But corporations and governments exist to undertake investment opportunities, and these frequently have high rates of return. The US government, in particular, not only has high demand for its debt, but issues debt in a medium, dollars, that it has sole control over producing. I'm not saying the US should always issue debt, just that it should issue debt carefully, and shouldn't always not issue debt. This is the problem with running a business or a government: it's a lot more complicated, and requires a lot more math, than people realize.
For further info on this, the books I cited above would be helpful. Paul Krugman's book Depression Economics is probably worth reading. Here is a corporate finance textbook that you can get for $5, as it's an older edition. Here is an economics textbook that you can get for $14. Lastly, The Economist is an excellent newspaper to follow these issues, as are The New York Times and the Wall Street Journal.
TL;DR: It's debatable. It would affect the value of the dollar, banking reserves, and many financial calculations. Debating it, however, requires more than understanding the economic impact, but also an understanding of corporate and governmental finance, and how this differs from household budgeting.
For the specifics (and a new book based on 800 years of data) on why Baker is SOOOO wrong (excessive debt NEVER solves anything, neither during booms, NOR busts), try these:
http://www.motherjones.com/kevin-drum/2009/09/800-years-financial-folly
http://www.ft.com/cms/s/2/b41626be-ab83-11de-9be4-00144feabdc0.html
And the book itself: http://www.amazon.com/This-Time-Different-Centuries-Financial/dp/0691142165
UPDATE: Here's Chapter One (Free online) PDF here
The only argument I can make is that much of this has happened before and the world did not end:
http://www.amazon.com/This-Time-Different-Centuries-Financial/dp/0691142165/ref=wl_it_dp_o?ie=UTF8&coliid=I21KKPZ8CTFWQO&colid=2PAC5SGHKXR27
>I think this time is fundamentally different.
That's what the financial folk thought about the bubble
http://www.amazon.com/This-Time-Different-Centuries-Financial/dp/0691142165
I have not read the Cash Nexus.
Regarding the Ascent of money, I am reminded of the discussion that went on here last week regarding Graeber's "Debt: The first 5000 Years."
A lot of the same criticisms can be applied to Ferguson's book, though I have not read Graeber. Reading the criticism reminded me of Ferguson's book. It is a good narrative history, but if you want a better monetary history, you are better served reading something like Reinhart and Rogoff.
> Debt is not bad at all.
Not true. Debt carries interest. Lots of debt means lots of interest must be paid. Interest payments come out of the government's budget. Debt can overwhelm a government's budget. This is currently happening in countries like Greece, Spain and Ireland, but there are lots of historical examples to point to. See Rogoff and Reinhart!.
Where do we stand today? The US government has $15.9 trillion in debt. Just paying the interest on that debt requires 6% of the federal budget. As the US government takes on more debt, it must devote an increasing portion of the federal budget to paying interest. If US debt doubled and all else remained constant, the US would have to spend 12% of the federal budget on interest payments. (In reality not everything else is constant.)
> there is no clear, simple effect.
One clear and simple effect of higher debts is that more money must be spent on interest payments. These extra outlays often lead to a decrease in the social safety net. We are seeing this in Europe.
Nations with central banks can print money to pay the added interest, but that causes problems too. It may be possible to argue that on balance government debt is good but it is not possible to argue that government debt is not bad at all.
>A move announced by central bankers on Wednesday to contain the European debt crisis resulted in euphoria in global stock markets, but it also prompted skeptics to wonder: will this time be different?
I would like to direct your attention to this book, which says that the answer is almost assuredly "no."
Other people have given good links, etc. But the basic explanation (of what happens when a country defaults on it's 'sovereign debt') is two-fold:
If you're really into it, I can't recommend highly enough reading 'this time is different', which covers this topic in great depth. It's an amazing book.
One other thing: for most countries, there are actually two different levels of default. the most obvious is simply reneging on debt - refusing to repay the money. The second is inflation (or put differently, printing money) - driving up the inflation enough that the debt is easy to repay. The latter obviously only works if you've borrowed in your own currency.
You could look at the whole history of the euro as an (apparently failed) way to prevent the shakier European countries from being able to use the second option. Since Greece doesn't have it's own currency, they can't do this; so they have to repay the bonds in 'real' currency or default. In reality they've essentially default - it's just masked as their creditors 'voluntarily' choosing to forgive 50% of their debt.
Then I'd suggest you read This Time is Different and The Worst Hard Time. There are quite a few parallels between the current crisis and the Great Depression.
Here's the price chart of gold. The crash you are referring to pales in comparison to trillions in wealth lost in pension funds, real estate values, and jobs when the Fed-inflated dot-com and real estate bubbles burst.
Fundamentally, you and I disagree on what the definition of 'money' is.
You think that money is a medium of exchange that doesn't need an asset peg, and it can be manipulated by pseudo-governmental agencies like the Fed and forced onto a population by the government. I think that money is an independent medium of exchange that needs an asset peg, which by definition limits its supply and prevents governments and the ultra-rich from confiscating the wealth of the population through inflation, as well as running massive deficits, which inevitably lead to wealth inequality and war.
You are forgetting that the US dollar and the US are relatively successful not because the Fed did such a good job. This is a very common misconception, and I urge you to do your research before you call sound money advocates "rubes". The 24k gold-plated turds you see on commercials are not bullion, and are meant to scam the scared and the uneducated.
The US dollar and the US are so successful precisely because the dollar was tied to gold, which attracted other nations (see Bretton Woods Agreement, 1944). The current fiat monetary system you seem so fond of only exists because the rest of the world needs US dollars due to their perceived (and temporary) safety, the same way some Eastern European countries needed Euros barely 2 years ago. This is how we can run perpetual deficits while our cities are crumbling. This current system, which is already showing signs of major structural damage, is only 41 years old, and it started NOT with the Federal Reserve Act of 1913, but with Nixon closing the gold window in 1971 when the French started to demand physical gold in exchange for boatloads of US dollars. If "Great Society" is not THE perfect example of why the governments HATE the fiscal discipline dictated by gold, I don't know what is.
Every system of trade based on fiat currency fails. Here's 800 years worth of proof.
Historically, according to This Time It's Different, it's right. Their book examined financial crises going back centuries and, at one point in the book they make the statement that a financial crisis occurs around 8-10 years after a major deregulation. In our case, it timed it fairly perfectly. I've been thinking about that for a while and I've gotten to wonder if, after deregulation, banking regulators just meander around, sorta confused about what to enforce. In any case, that's what seems to have happened, both in terms of being unsure as well as an Executive Branch position against regulation viewing it as 'red tape'.
they are all but dangerous. what a glenn beckish headline.
for a long time, and in their "famous" book and thesis, solely based on past debt ratios and growth, they observed that whenever a country's gross govt debt hits the 90-100% of gdp mark, growth stalls. that's all.
before americuh panics, one should consider that japan (with twice as much debt) and the european union (with same), are at a relatively worse place; and relatively matters a lot.
Great story. You can find stuff just like this in "This Time It's Different." Not the most interesting read, but it lays out pretty bare the consequences of unchecked leverage.