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"This Time Is Different": Reinhart and Rogoff worry about future financial crises

Posted by: Peter Coy on September 25

Guest blog from Economics Editor Peter Coy

When you’ve studied “eight centuries of financial folly,” as international economists Carmen Reinhart and Kenneth Rogoff have, patterns begin to emerge. The most striking pattern they’ve found is that people never learn. We gullible humans make the same mistake time after time, which is believing that the laws of financial physics have been repealed for us.

Thus, Americans proclaim confidently that there’s no chance the U.S. will get caught in Japanese-style stagnation. Sure, deflation became entrenched in Japan starting after the stock-market crash that began in 1990. But this time is different, right?

Don’t be so sure. Reinhart says Americans seem to be unwittingly repeating the mistakes of the Japanese, including propping up “zombie” banks that aren’t healthy enough to make new loans and get the economy growing again. Americans kid themselves, she says, by saying, “These are not zombie loans. They’re just non-performing.”

Summarizes Reinhart: “We’re speaking Japanese without knowing it.”

(I love that quote.)

Reinhart and Rogoff spoke at a lunch for economics reporters at the Princeton Club in New York, where they discussed their comprehensive new book, “This Time Is Different: Eight Centuries of Financial Folly.”

To me, one of the most important findings of the book is that generations of economists, right up to the present, have misunderstood the causes of sovereign defaults (i.e., when a country fails to make payments on its foreign debt). It turns out, they say, that a country is much more likely to default on its foreign debt if it’s carrying a lot of domestic debt. No wonder: A country will try repaying its own citizens (who vote) before it worries too much about foreign creditors (who don’t vote and, in any case, tend to be stupidly forgiving).

OK, the importance of domestic debt may not sound too surprising. What’s surprising, rather, is that this factor was completely neglected in most economists’ work. One reason: Governments have not made data about the quantities of their domestic debt available to researchers. Reinhart and Rogoff compiled it and are planning to make it available to other scholars.

One footnote: The U.S. does not have foreign debt, in the way that Reinhart and Rogoff use the term. Instead, it has lots of domestic debt (like Treasuries) that happened to be owned by foreigners. To them, foreign debt is debt that is issued in a foreign jurisdiction, usually in that foreign nation’s currency.

The U.S. can still stick it to foreign creditors by inflating the dollar so much that foreign-held Treasury bonds become close to worthless. That is exactly what the Chinese are worried about lately.

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Reader Comments


September 25, 2009 07:09 PM

The best summation I have found that people don't learn is that people learn too well but only through recency and experience and hardly at all through time and study. They learn too well to avoid what they have experienced only to neglect the lessons of their parents and grandparents.

Ivan Kitov

September 26, 2009 04:42 AM

The idea that people do not learn is a pure invention of economists. This makes their profession important - a developed economy can be controlled by distinguished economic ideas then. If to presume that the economy is a self-developing system, which depend on factors beyond economic thought, then there is nothing to learn - just obey.
I would not put my money on the first idea, which proves itself to be wrong every time when something unpredicatable happens. It is better to check which factors (non dependent of the mainstream economic theory) actually drive developed economies.

Thanks to the authors. Japan is a very good example. Nothing from the economic theory works because the Japanese economy is driven by a simmple demographic factor - population has been decreasing since the 1990s. Labor force shrinks inducing deflation. Same will happen to the US in couple years - when the boomers will start leaving the labor force en mass.
The effect is discussed in an EABCN paper:


September 26, 2009 05:21 PM

among the fallacies in your comment, this one stood out to me:
"The idea that people do not learn is a pure invention of economists".

I doubt a student of history or psychology could say that with a straight face. Lord summed this up in a reasonable way. I would add that people learn a great many things from study and experience, depending on the specific individuals involved. And yet people do make many errors, and most of those errors have a great many precedents in human history. Truly learning, weighing, and applying the lessons of history is an immense feat that outweighs our individual capacities, and our ability to make use of collective knowledge appropriately is still immature.

Joe Cushing

September 26, 2009 07:43 PM

If I were Chinese I would stop loaning the the U.S. in Dollars. I would create foreign debt. Either that or insist on only inflation protected bonds.


September 26, 2009 08:01 PM


You forget that half the point of loaning the US dollars is to dump all the cash that comes from maintaining a currency peg against the dollar without strengthening their currency. Lending in yuan would be a significant strategic departure: one China won't be anxious to try until they feel they have unemployment under control.


September 26, 2009 11:36 PM

I would be very suprised if Sept2008 doesn't repeat on or after Sept2011, get ready to drink lot of koolaid till then..God bless america..

Mike Mandel

September 26, 2009 11:45 PM

I just wanted to add that I think the Reinhart/Rogoff book is going to be a classic. It's well worth the time of anyone who wants to understand financial crises.

Ivan Kitov

September 27, 2009 04:14 AM

This is a comment on a very specific issue and the context was clear ... "The most striking pattern they’ve found is that people never learn". So, I used this statement only as the narrow sense of not learning. Sorry for not doing it more clear and unambiguous. However, this statement on not learning can be interpret in various ways.

First, lets imagine that economists provide a comprehensive description of driving forces behind "eight centuries of financial folly" and other lay people never learn this scientifically proven theories. Imagine that the same statement is applied to airplanes. They crash at every opportunity and nobody learns from engineers how to build new ones, which would safely fly. Seemingly, this is the sense of the book, which is going to "be classic" for this reason. In other words, one should learn the book and then s/he will be ready to behave accordingly to avoid the next crisis. Or at least explain later why they fail again to predict the crisis.
Therefore, the audience is a bunch of idiots not aible to learn simple things from specialists.

Second possibility is that the same econonists have privitized the right to teach people by force on the basis that they write books. Because they can not privide any useful theory or prediction in those millions of pages they publish every year they claim that ... ordinary people never learn. In this narow sense I meant ... "The idea that people do not learn is a pure invention of economists". In other words, before say that we do not learn economic lessons the authors should prove that they can give them - in clear and unambiguous way. Quantitatively. In my view, they do not provide any justification of the ability to tea


September 27, 2009 05:59 AM

Economists seem to be great rationalisers - explaining everything after the fact, without understanding either history or politics, which are probably the disciplines best suited to studying what is happening.
I think history will judge the "Financial Crisis" as first and foremost a deliberate beat-up, used as a mechanism to draw Western governments into the the defence of the Western finance industry.
The forces at work are historic and demographic. Billions of people are now looking to develop a higher standard of living, spurred on by the information revolution. These people are looking to compete for limited resources. The likely intermediate result is a decline in the resources available for the current "haves" and an increase in the resources going to the "have nots". How the pain of declining resources is shared within the "have" societies is a political issue. If corruption reigns then the gap between rich and poor will continue to increase, with the poor increasngly starting to move backward. If democracy and freedom can be upheld the pain will be shared across society (and probably substanitally reduced) as those who are able to adapt and thrive in the changed environment (able for instance to make scarce resource go further) bring the rest of society along - just as capitalism has been working for the last couple of hundred years.
If those whose models of behaviour are failing (eg financial institutions) are supported by political interference then the result will be less for everyone.
I think it could be argued that we are in the midst of a revolution, but the "GFC" is really only a political sideshow. Small "c" capitalism, replete with creative destruction, is my pick for the best way cope.


September 27, 2009 04:20 PM

I am not that sympathetic to the Chinese because they intentionally undervalue their currency, making the trade playing field unlevel.


September 27, 2009 04:41 PM


What I think I'm getting from you is that it is easy to criticize past mistakes, but unjustified arrogance to claim to have overcome all the problems of ages in a particular field. Justifying that arrogance by belittling the intelligence of the average person is as common as it is foolish. I agree with most of that, and that the social science of economics is a little more prone to making that argument than other fields, but it's hardly unique.

My feeling is that you really can pull together a large collection of very similar problems within a very small niche of your field: any field. And a student of that anthology really can avoid making the same specific mistake as the subject of that anthology if they wish: at a greater risk of making a different mistake. That's what any engineering student learns: that design is a process of making reasonable trade-offs among determinable costs or risks. But in design a good rule of thumb is that perfection is unachievable and nothing is free.

Joe Cushing

September 28, 2009 03:42 AM

I didn't say they had to loan yuan, I just said, not dollars. Yes the currency peg would end but it should end. The currency peg is history's greatest bubble.


September 28, 2009 10:32 AM


my point is that whatever decision they make would have currency implications. The currency peg is a big bubble, but it was deliberate, and the reasons for it have not entirely gone away. Making any moves to cause an abrupt rise in the yuan would cause major dislocations in a country where the legitimacy of the government is based on continually improving standards of living. I think the Chinese are still hoping that consumer spending will rise enough to dampen the amount of overcapacity that will have to be simply cut. The Chinese are having the same problem everyone else is: efficiency in manufacturing is rising fast enough that it's hard to keep enough jobs around even with the level of wealth steadily rising.

Kasthuri N Ravilla

September 28, 2009 11:47 AM

Comparing American economy and Japanese economy is not correct; or any other economy for that matter. American economy is supported by US Dollar, which is NOT supported by American government, but propped up by Oil & Commodity producers (mainly middle east, Russia & most of the African nations) and export oriented economies like China, India, ASEAN, Brazil and other similar nations. In the absence of Gold standard, it a free ride for dollar (and Americans) and the above said economies are hell bent on supporting the dollar. It is NOT sustainable as it goes by and it is also a kind of bubble or a kind of chemical reaction. You never know when it is going to burst or when the color is going to change. When it happens, all these nations will lose heavily and the Americans are set to gain the maximum, with incredible inflation of American Dollar, which will work to America's advantage. Americans will get back their jobs; their manufacturing factories will start humming again. Someone said "learning from mistakes"? When and where did this happen ever?


September 28, 2009 01:08 PM

Kasthuri N Ravilla,

Informed people certainly do learn, but they also want different things, and sometimes the incentives are for short term benefits rather than long-term benefits. That is simply a way of saying that when decision-making is political, the decision-makers generally do what benefits them in the short-term rather than what benefits the whole in the long-term, or at least they make a compromise among those considerations.

Ivan Kitov

September 28, 2009 03:34 PM


I guess that you translate me well.
In essence, I do think that "this time is different", but not because economists are trying to repeat eternal discussion which school of thought is better without any reasonable measure. This time might be better if the broader scientific community could formulate simple requirements for economics.

In a sense, we are all customers of economic theory because it ifluences, in one way or another, the decisions made by economic and financial authorities. As the customers we should ask the economic profession to formulate a new (measurable) research plan, which should not be an axiomatic one, but based on observations. This plan has to define clear (for general public and experts in various fields) ideas and quantitative tools, which are necessary to answer the question why the theory has failed to describe 2007-2010.

Meanwhile, it would be helpful for economists to regain public trust. This current discussion on the difference between various (failed) approaches does not look like helpful. If they follow the route of the negation of the presence of educated audience waiting for reasonable answers, they will completely detach themselves from the scientific community and general public as well.

I am sure that the malice loop of intra-economic discussion will be never broken if the society allow them to ignore rules applied to all socially important activities.


September 28, 2009 05:16 PM

Ivan, what does it matter how much public trust the economists have? They have basically no power. Even the Fed, which hires a lot of economists, is a small player in the large scheme of things, with a balance sheet of around $1 trillion in normal times that are mostly parked in Treasuries, hence not affecting the economy much. Mostly they're just brought in after the fact for governments to idiotically rationalize their power grabs, as recent politicians have been doing by forcing banks to take their money and give them warrants of ownership. Even when economists like Romer or Summers sell out, they then go against most of what they said before in order to play along with their new masters, making their new pronouncements laughable. What matters is how we in the market recognize the mistakes of the recent system- for which I suggest you look at Warren Buffett's 2002 annual report where he predicted the derivatives mess and got out early- and create new practices and companies to avoid the same mistakes. Economists and the government are besides the point, leeches that just try to suck off as much as they can and that we'll soon kill off for good. For example, economists are mostly employed in academia and the Fed, both of which will be destroyed soon, by online education and private digital currencies. While some economic seers, such as Hayek, Bastiat, and Smith, have had a lot of great things to say, the current status of the profession as a whole is entirely besides the point.

Ivan Kitov

September 29, 2009 02:48 AM


I would not underestimate the spread economists and their higher positions in the society. Still they are in the first line explaining the current crisis everywhere. For example, we discuss the future of economics in a blog run by an economist, who wrote a post on a book in economics.
But I agree that their real influence is lower than claimed and have some quatitative reasons for that. My own model shows that a developed economy depends only on demography, i.e. on the change in population with age.
About public trust. I would estimate the fierce resistance of the economic profession to match clear measurable criteria of quality, as adopted in natural sciences, as the largest obstacle on the way to right solution of the problem. So to say, economics will be a "soft" science untill millions of people, including those in the profession, believe that it is a soft science.


February 1, 2010 05:19 PM

If all the economists were placed end to end, they would never reach a consensus.


March 17, 2010 02:02 PM

It probably helps to get some philosophy behind money and banking by reading a book like "The Ethics of money production" by Guido Hulsmann. (amazon : ).

Thank you for your interest. This blog is no longer active.



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