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Reinhart And Rogoff's Latest Paper Warns On Financial Repression

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http://www.theguardian.com/business/economics-blog/2013/nov/20/reinhart-rogoff-latest-paper-harvard-financial-repression

For Carmen Reinhart and Ken Rogoff, 2013 has been a year to forget. The big news in the world of academic economics was that a celebrated and hugely influential paper by the Harvard duo on the link between government debt and growth was wrong. The paper, cited regularly by supporters of austerity programmes, said countries where the national debt was higher than 90% of national output (GDP) could expect to see a marked drop off in growth. On examination, the data used by Reinhart and Rogoff showed there was no such link, with the pair's (many) critics saying that the line of causality lies in the opposite direction: low growth leads to high levels of debt rather than high debt leading to low growth.

R and R continue to churn out papers in their chosen field, the latest of which has just been published by the London-based Centre for Economic Policy Research. The study – Financial and sovereign debt crises: some lessons learned and those forgotten – is no less incendiary than their now infamous "Growth in a time of debt".

Why? Because Reinhart and Rogoff say that if history is any guide countries will not be able to return to more sustainable levels of public debt through a combination of austerity and growth. They cite Europe, where the assumption is that normality can be restored by a combination of belt-tightening, forbearance and rising output, as an example of Panglossian thinking.

"The claim is that advanced countries do not need to apply the standard toolkit used by emerging markets, including debt restructurings, higher inflation, capital controls and significant financial repression. Advanced countries do not resort to such gimmicks, policy makers say."

Historically, this is poppycock according to Reinhart and Rogoff. Rich countries, when faced with high levels of debt in the past have been more than happy to default, inflate away their debts or indulge in financial repression (capping interest rates or putting pressure on savers to lend to the government).

Clearly we don't have higher inflation and there is no attempt to restructure the debt via the printing press... Everything is fine and dandy....

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Bill Mitchell...

***Conclusion

Another memorable demonstration by R&R of how dangerous they actually are and how audacious they are. A major scandal, which many considered demonstrated research fraud, doesn’t phase them one bit.

But on the quality of research this paper gets 0/10 for quality and 10/10 for its perseverance in perpetuating the worn-out ideological prattle that the mainstream economists think is knowledge.***

http://bilbo.economicoutlook.net/blog/?p=26227

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Bill Mitchell...

***Conclusion

Another memorable demonstration by R&R of how dangerous they actually are and how audacious they are. A major scandal, which many considered demonstrated research fraud, doesn’t phase them one bit.

But on the quality of research this paper gets 0/10 for quality and 10/10 for its perseverance in perpetuating the worn-out ideological prattle that the mainstream economists think is knowledge.***

http://bilbo.economicoutlook.net/blog/?p=26227

There is zero default risk in Japan on its outstanding public debt liabilities.

This implies that printing your own currency isn't default, hmmm did the Weimar Germans find this a zero default risk?

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This implies that printing your own currency isn't default, hmmm did the Weimar Germans find this a zero default risk?

Printing your own currency isn't default, soft or hard. Any credit/debt investor has to take into account the risk of inflation eroding the value of their investment so losing purchasing power due to it is part and parcel of the risk of investing and not an event of default.

Weimar had debts in US dollars, so foreign currency liabilities. No one would compare this to a country with debt in its own currency. As such this isn't the same as Japan example, or UK or US.

As useless a pair as R&R are though, they do inadvertently raise some interesting points. Namely that the weaker members of the EU (so everyone except Germany) have basically turned themselves into emerging market nations that can only issue debt in a foreign currency, something even dodgy emerging markets avoid a lot of the time. As such not surprising they're adopting the same responses.

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