The Crash Course - Chris Martenson [41]
Here are a few of the important conclusions from Rogoff and Reinhart’s work:
A recent example of the “this time is different” syndrome is the false belief that domestic debt is a novel feature of the modern financial landscape. We also confirm that crises frequently emanate from the financial centers with transmission through interest rate shocks and commodity price collapses. Thus, the recent U.S. sub-prime financial crisis is hardly unique. Our data also documents other crises that often accompany default: including inflation, exchange rate crashes, banking crises, and currency debasements.
Their work reveals that throughout history, various countries have attempted to live beyond their means and inevitably failed to sustain it for very long. The response has nearly always been to try and squeeze past the difficulties by printing more money in the hopes that somehow things will work themselves out. But it has never quite worked out as hoped; “printing” has only served to deepen the severity of the economic and political pain. Yet it has been tried again and again, as if there’s some biologically irrelevant human gene that stimulates the desire to print money while suppressing the ability to learn from history.
The work of Rogoff and Reinhardt demonstrates that historically, some form of default always follows the condition of “too much debt,” and currency debasement (known as “money printing” in modern times) is the most common form that this default takes. Along with these defaults, banking crises, exchange-rate volatility, crashes, inflation, and political and social unrest often arise.
The most important finding from the Rogoff and Reinhart study is that periods of relative global financial tranquility have always been followed by waves of defaults and restructurings. Ebb and flow are a normal part of economic history. In this light, we might then view the last four decades of debt accumulation as the calm before the storm, rather than the last few steps of a long march toward a final and lasting equilibrium.
The important points to take away here are these: Country-level debt defaults are historically common and economically painful events that typically arise from the condition of too much debt, and the four most dangerous words in economic history are this time it’s different.
Too Much Debt
Now that we understand the differences between debts and liabilities, can tell good debt from bad debt, and know that debt has been growing far faster than national income (i.e., GDP), we’re ready to dive one layer deeper into the debt data as the final step toward assessing the severity and magnitude of the economic predicament.
The pure debt obligations of the U.S. government as of October 2010 stood at $13.7 trillion.3 But this is only the debt. Once we add in the liabilities of the U.S. government, chiefly Medicare and Social Security, we get a number somewhere between $100 trillion and $200 trillion dollars, depending on whether you use the Federal Reserve’s own estimates or those of Boston University economics professor Laurence J. Kotlikoff, respectively.4 As mentioned before, these liabilities can be changed at any time with the stroke of a congressional pen, but one thing to remember is that entitlements are a zero sum game. In other words, if the government decides to save money by slashing benefits, the result will be a lower standard of living for the recipients of those monies. The government will see budget savings, to be sure, but retirees will experience a reduction in cash flows and in their living standards. Savings in one place translate into losses elsewhere. That’s the essence of “zero sum.”
But it’s not just the federal government that has underfunded liabilities totaling in the trillions of dollars. States and municipalities are also deeply underwater on