(2010-08-16) Lewis Rogoff Sovereign Debt

Nathan Lewis considers Ken Rogoff's This Time Its Different book about Sovereign Debt defaults.

This is what I mean by valuable raw material. For example, if you were studying the Great Depression, don't you think it would be important to know that 45% of all countries were in default on their debt, including Britain, the country which practically invented the government bond, and which apparently delayed or deferred some payments? That would go some ways to explain the sudden burst of tax-hiking around the world beginning with Britain and Germany in 1931, and leading to the U.S. in 1932 with the infamous Herbert Hoover tax hike (Great Depression).

The authors make a few generalizations about how countries end up defaulting on their debt, which is rather confused. But, if you remember that Ken Rogoff was formerly the IMF's chief economist, you would expect that. They seem to have difficulty distinguishing between a country that simply borrows too much money, and is unable to pay, and a country which borrows in a foreign currency and then suffers a currency event, typically a large drop in the value of the domestic currency.

Feb'2012 interview: The financial crisis has made many of Rogoff and Reinhart’s observations a central part of the debate about sovereign debt. Their finding that recoveries from debt-driven recessions are slower than recoveries from Business Cycle recessions is regularly cited. The two authors are also associated with the idea that when a state’s debts exceed 90 per cent of gross domestic product, they will reduce the economic potential of the country. I suggest that the US is still comfortably short of this level – but am swiftly corrected. If you count federal and state debts and, crucially, add in unfunded debts in the Social Security system, then Rogoff thinks that America’s debt levels are well over 120 per cent of GDP.