This Time is Different, by Carmen M. Reinhart and Kenneth S. Rogoff, is subtitled, Eight Centuries of Financial Folly. The book has been called “a masterpiece” and “…the best empirical investigation of financial crises ever published.” In this amazing book, the authors, two eminent economists, survey and chart 800 years of financial cycle booms and busts to determine patterns to these cycles and root causes.
This book is written for laypersons and academics alike, but the topic is not for the faint of heart. The text runs just short of 300 pages, many with graphs. Then there are 171 pages of data appendixes, notes, references and indices! No, I didn’t read all of those. I could barely get through the main text! Would I recommend this book to you? No! I read it so you don’t have to. You’re welcome.
Much of that text deals with the history of and causes of the various types of financial crises, be they sovereign defaults, runaway inflation, currency crashes, external events, banking crises, or asset bubbles. The book was published in 2009, so right at the end of the Great Recession, or what the authors call “The Second Great Contraction.” The first being The Great Depression of the 1930s.
In the end, despite the complexity of the topic, there are two main lessons of the book.
Lesson One: This Time is Not Different
The main message of the authors is reflected in the title of the book. No matter how different a particular financial crisis appears, we have been here before. There are remarkable similarities from history across many countries and across centuries. In other words, humans keep making the same mistakes, usually because we rationalize that the rules have changed. They haven’t. Countries, institutions and financial instruments change over time, but human nature does not.
The authors say that the most common and most expensive advice given before a financial crisis is, “this time is different.” Society convinces itself that the current boom, unlike all booms that have preceded it, is built on sound fundamentals, structural reforms, technological innovation and good policy. People convince themselves that “this time is different,” while it almost never is.
Lesson Two: The Problem with Debt
If there is one common theme to the vast range of crises the book discusses, it is that excessive debt poses greater risk than it seems during the boom. That debt can be accumulated by government, banks, corporations or individuals. The accumulation of debt leaves an economy vulnerable to crises of confidence. Booms fueled by debt provide a false sense of success that typically ends badly.
Again and again, countries, banks, firms and individuals take on excessive debt in good times without an awareness of the risks that follow when the inevitable recession hits. Government debt and government debt guarantees are the biggest problems because they can continue for long periods, accumulating huge amounts, without a market-induced correction. Once confidence is lost, refinancing can’t happen, lenders disappear, and a crisis hits.
Our Current Situation
This brings us to our current situation. Despite the longest economic expansion in U.S. history, the country has record deficits. The current thinking, conveniently, is that deficits don’t matter anymore. This notion was first raised by Vice President Dick Cheney in 2003, when he said, “Reagan proved that deficits don’t matter.” This attitude has a tradition of justifying abandoning fiscal conservatism when a government wants to provide handouts to a favored group.
Not only is this boom being fueled by massive borrowing, it is further juiced by record low interest rates. What will the Fed do when the inevitable recession comes? There won’t be much they can do, since every tool they have is currently being used to prolong the sugar high we’re on. Our President has said the U.S. can borrow all it wants, since the government can print more money to pay the debt off. That has been tried many times before, resulting in hyper-inflation and loss of confidence in the currency.
One of the lessons of the book is that, when an accident is waiting to happen, it eventually does. Predicting precisely when? That’s harder.
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