Econintersect: It seems like the critiques of the historical reviews of sovereign debt by Carmen Reinhart and Kenneth Rogoff (R&R) will never end. Australian economist Bill Mitchell has returned to the subject, this time with analysis of a draft dated 09 December 2012 entitled “Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten“.
Here is the abstract of the R&R paper reviewed by Mitchell:
Even after one of the most severe multi-year crisis on record in the advanced economies, the received wisdom in policy circles clings to the notion that high-income countries are completely different from their emerging market counterparts. The current phase of the official policy approach is predicated on the assumption that debt sustainability can be achieved through a mix of austerity, forbearance and growth. The claim is that advanced countries do not need to resort to the standard toolkit of emerging markets, including debt restructurings and conversions, higher inflation, capital controls and other forms of financial repression. As we document, this claim is at odds with the historical track record of most advanced economies, where debt restructuring or conversions, financial repression, and a tolerance for higher inflation or a combination of these were an integral part of the resolution of significant past debt overhangs.
Mitchell charges that R&R have “assumed the major issues away“. He accuses R&R of complicity in pushing ideology promulgated by
“the IMF, the OECD, the ECB, the politicians that were imposing austerity and hiding that fact that it would kill growth because that would have made it harder to impose“.
Mitchell goes on:
Underlying the latest R&R paper is the assertion that public debt levels have to be brought down before there can be a recovery and the only way this can be done is through default (“debt restructuring or conversions”), “financial repression” and inflation.
They use the term “debt overhangs”, which implies their is an edge (threshold) over which debt becomes unsustainable. This is what the scandalous Excel spreadsheet cheating paper alleged, that is, before the formulae were extended to the full sample available and their conclusions were no longer supported.
I agree with them that the European political and economic elites are in a “denial cycle” – where they claim that austerity will solve all their problems. I agree that there is no credible “optimistic medium-term scenario” for Europe based on the current policy mix. Permanent stagnation is more the outlook.
But where the paper is dishonest is that it seeks to generalise what is happening in the Eurozone to other advanced economies.
Mitchell points out that R&R state:
…delving deeper into the widespread default by both advanced and emerging European nations on World War I debts to the United States during the 1930s” is instructive for guiding our understanding of the current day.
Mitchell asks if there is relevance to monetary systems prior to 1971 to those since that year, when Nixon cut the last ties to the gold standard. It is one of the points he finds deficient in his analysis of the R&R work.
Here is a list of some of Mitchell’s concerns:
- There is no separation of data between gold standard monetary systems (pre-1971) and since.
- The R&R study lumps private and public debt together for analysis.
- They fail to separately analyze countries with sovereign currencies and those that do not (eg, Eurozone countries).
- Even if the correlations R&R espouse were valid they have not investigated cause and effect relationships but have implied it by assumption.
Mitchell claims that if the data is properly handled according to the prescriptions he outlined results would be different:
Once we separate their “historical sample” into groups that have similar monetary arrangements (oranges compared to oranges) their story collapses.
Editor’s note: The recognition of basic economic definitions is not only not identical for all economists, it is fundamentally divergent in some areas. Many of those divergent areas concern understanding and definitions about money.
Sources:
- Financial and Sovereign Debt Crises: Some Lessons Learned and Those Forgotten (Carmen M. Reinhart and Kenneth S. Rogoff, 09 December 2013)
- More worn out ideological prattle from R&R (Bill Mitchell, Billy Blog, 21 November 2013)
