This time is different

“This Time Is Different” doesn’t simply explain what went wrong in our most recent crisis. The book also provides a roadmap of how things are likely to pan out in the years to come. Real-estate bubbles invariably give way to banking crises. Losses in the financial sector are followed by the sharp deterioration in government finances amid bailouts and decreased tax revenue. The decline in economic output that follows the bust is sharp, but the recovery tends to be slow and protracted. The situation is especially dire when the crisis is geographically widespread.

“This Time Is Different” is an important addition to the literature of financial history. It also issues a worrying economic forecast. Currently the markets are discounting a rapid and sustained recovery from the global economic meltdown. Around the world, governments are borrowing very large sums at very low rates—assuming that stimulus spending will generate future taxes to pay off the current debt binge. But Messrs. Reinhart and Rogoff’s work points in a rather different direction: toward the potential for future national debt crises and rising inflation. Of course, this time may be different. But don’t bet on it.

WSJ review. of “This time is Different“. Free PDF Download here too.

One quick comment from me on it after reading this:

As the figure broadly suggests for the period 1800 through 1940, (and as econometric testing corroborates), spikes in commodity prices are almost invariably followed by waves of new sovereign defaults.

The 2008 oil price spike has not led to any defaults yet, but based on historical records and current debt levels it doesn’t look all that unlikely, especially with oil prices heading higher again. The thing being done so far is to push indebted countries further into a debt compound spiral by raising public debt rather than default, but how long can that go on?

I did a quick calculation, and based on oil at $83 at barrel and 15 million barrels a day of oil consumption in the EU, (USA uses 19.40mpd) that equates to $454, 425, 000, 000 dollars being spent on oil by the EU each year. While some of the money is recycled back in, that’s also a massive drain on EU finances.


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