Tag Archives: Carmen Reinhart

10.29.2012 | Election Economics: Comparing Economic Recoveries

Illustrated by this graph from the Minneapolis Federal Reserve, sometimes one orange line can create a huge debate.

The thick orange line representing the US recovery from the December 2007-June 2009 recession reflects a tepid ascent next to curves that represent other post-WW II economic recoveries. Still though, Democrats say the numbers reflect progress while Republicans call them poor. How can we decide?

Looking at several academic papers, it gets ever more confusing. Some policy makers and scholars believe that the recovery is typical. Explaining that it takes a long time to bounce back from a recession connected to a financial crisis, they say the trajectory of this recovery is what we should expect. Disagreeing, other equally auspicious individuals use their data to prove that financially related deep recessions actually precede robust economic growth.

The disagreement takes us to the data. Should the US be compared to other culturally and institutionally different countries or should the data just focus on US economic history? Is is more valid to look at how how long it takes to return to pre-crisis output levels or how fast the economy grows during its recovery? Do we look at per capita or overall figures?

If you would select the first half of each question in the previous paragraph, then the recently announced 2% growth rate for the 3rd quarter of 2012 is progress. If, on the other hand, your preference is the second choice, you can say that current numbers should be better. And as you can see, Obama likes the former and Romney the latter.

A Final Fact: Just 2 definitions today.

A recession: Technically, a recession is a decline in real GDP for 2 successive quarters. The people who decide the dates of recessions, the NBER (National Bureau of Economic Research), say that they take into consideration additional variables including real income, employment and industrial production.
GDP: Most simply stated, the Gross Domestic Product is the total dollar value of the goods and services produced in a country during a specific time period.

Sources and Resources: Replete with data and ideas about financial crises, recessions, and recoveries, Kenneth Rogoff’s and Carmen Reinhart’s 2009 book and their paper, “This Time Is Different,” say that recoveries from systemic financial crises take a long time. Much more briefly, in his blog, John Taylor disagrees with the Rogoff/Reinhart approach as do Michael Bordo and Joseph Haubrich in this Cleveland Federal Reserve paper. Also, you might enjoy manipulating the interactive graphs from the Minneapolis Fed. Finally, here and here is the actually debate unfolding with Carmen Reinhart and Kenneth Rogoff on one side and John Taylor and Michael Bordo on the other.

Election Economics Topics:

Posted by: adminEcon
Tags: 2% GDP growth, Barack Obama, Carmen Reinhart, John B. Taylor, Kenneth Rogoff, Michael Bordo, Minneapolis Federal Reserve, Mitt Romney, NBER, recession, recovery, This Time It's Different, US economic growth
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10.13.2012 | Luxembourg Yogurt?

For this Greece update, some past and current information…

Soon after the euro was launched on January 1, 2002, a €76,000 bank heist near Athens became the first major euro robbery. Near Athens also, with the new currency launch, it took 3 staff members to figure out how a customer could pay for a cheese pie. And everywhere in Greece, the transition was slow because the Greek Economic Ministry had supplied only one sixth of all Greek businesses–50,000 out of 300,000–with euros.

Looking back further, since its independence in 1829 to 2006, Greece has had 5 defaults or debt re-schedulings that occupied a total of 50.6 years. In This Time It’s Different, economists Kenneth Rogoff and Carmen Reinhart say that few nations break out of a serial default pattern.

Fast forward to 2012.

Greek yogurt maker Fage is moving its headquarters from Greece to Luxembourg. Coke’s second largest bottler, Hellenic Coca-Cola (EEEK on the Greek Stock Exchange) is relocating its Greek headquarters to Switzerland and switching its primary stock listing to London. Both wanted a lower and more stable tax environment, greater access to financing, and less exposure to a Greek financial calamity. Predictably, other firms located in Greece have responded to the ongoing crisis with modified business behavior and contingency planning.

Meanwhile, overall Greek unemployment remains near 25%, close to 50% for youth aged 15-24, its debt is still more than 150% of GDP, and unless Greece gets its next bailout transfusion, its government will soon run out of money. Still the WSJ reports the odds of Greece leaving the euro zone are down.

Your prediction?

A final economic thought: In the euro zone, countries with different economic conditions lack the flexibility to respond to their own special needs. They share monetary policy and cannot target their fiscal policy (government spending, taxing and borrowing) to high or low unemployment and inflation.

Sources and Resources: Illustrating the extent of Greece’s dysfunction, this 2002 BBC article that specifically describes the introduction of the euro in every country was fascinating and if you do not have the Rogoff/Reinhart book, This Time It’s Different, this paper provides an excellent summary. For current information on Greece and the corporate exits, here and here are Greek newspaper articles, here is a European perspective, and here, the WSJ talks about how Citi analysts have lowered the chance of a “Grexit” from 90% to 60%.

Posted by: adminEcon
Tags: Carmen Reinhart, default, euro zone, euro zone bailout, Fage yogurt, Greece, Greek debt, Greek unemployment, Hellenic Coca-Cola, Kenneth Rogoff
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08.09.2011 | An Economic Lesson From Marie Antoinette’s Fashion Designer

Rose Bertin was the 18th century Alexander McQueen. As Marie Antoinette’s personal fashion guru, she designed massively skirted ornate gowns and 3-foot high poufy hair styles. More than clothing, though, her designs embodied power, presence and opulence.

In This Time It’s Different, economists Kenneth Rogoff and Carmen Reinhart quote Rose Bertin’s reminder that, “There is nothing new except what is forgotten.” (p. 275)

The Economic Lesson

According to Reinhart and Rogoff, our current financial plight is indeed “nothing new.”

Categories for financial crises (p. xxvi):

Sovereign debt defaults
Banking
Exchange rate
High Inflation

Typical pre-crisis warning signs (p. 223):

“asset price inflation” (U.S./housing)
“rising leverage” (U.S./borrowing)
“large sustained current account deficits” (U.S/more imports)
“a slowing trajectory of economic growth”

Typical post crisis “aftermath” (p. 224):

6 years for real housing prices to bottom
A 3 1/2 year duration for “equity price collapses”
Soaring government debt
Declining tax revenues
Rising sovereign debt interest rates

An Economic Question: Do you believe that government is the problem or the solution when considering a financial crisis?

Posted by: adminEcon
Tags: Carmen Reinhart, financial crises, Kenneth Rogoff, Rose Bertin, This Time It's Different
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06.09.2011 | Debt Deja Vu

Again, Greek debt was in the news. This time, though, the focus was other defaults. For as long as nations have existed, they have borrowed money and then been unable to repay it. The first report of Greece defaulting on her debt was during the fourth century B.C. At the time, 10 Greek municipalities could not repay what they owed to the Delos Temple. During the past 2 centuries, Greece defaulted five times: 1826, 1843, 1860, 1893, 1932.

Who else has defaulted? We could look at Mexico. In 1982, she could not meet her debt obligations, and then again in 1994. 4 years later, Venezuela, Russia and Ukraine were at the center of a debt crisis. Then, in 2002, it was Argentina.

Looking at more than 50 nations during several centuries, this paper from Kenneth Rogoff and Carmen Reinhart explains the default story. It also tells us that countries that have never defaulted include the U.S., Canada, New Zealand and Australia; the Scandinavian countries; Taiwan, and Singapore (p. 14). In another study, scholars say that since 1830, the world has undergone 8 “default waves” in which “bunches of countries” have been unable to repay what they borrowed (p. 4).

The message? The current European debt crisis is not unique.

The Economic Lesson

Sovereign debt is money borrowed by a sovereign government. Governments borrow money by selling “IOUs” to individuals, businesses, banks, and other governments. The IOUs are different types of government bonds.

When people refer to sovereign default, they mean the borrower is not adhering to the original IOU contract in some way. The borrower might not be paying interest that was agreed upon or the principal or may have moved the maturity dates to a later time.

An Economic Question: Why might Alexander Hamilton have said that a nation’s debt is a blessing as long as it is not excessive?

Posted by: adminEcon
Tags: bonds, Carmen Reinhart, default, Kenneth Rogoff, Mexico, sovereign debt, sovereign default
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