The book is This Time Is Different by Carmen Reinhart and Kenneth Rogoff [Amazon link].
Couldn’t help but share some passages that sound like they could have been written about our present situation.
Highlights (taken verbatim)
It is notable that the nondefaulters, by and large, are all hugely successful growth stories. This begs the question “Do high growth rates help avert default, or does averting default beget high growth rates?” Certainly we see many examples in world history in which very rapidly growing countries ran into trouble when their growth slowed.
If old people hold most of a country’s debt, for example, why don’t young voters periodically rise up and vote to renege on the debt, starting anew with a lower tax for the young at the cost of less wealth for the elderly?
Although many now-advanced economies have graduated from a history of serial default on sovereign debt or very high inflation, so far graduation from banking crises has proven elusive. In effect, for the advanced economies during 1800–2008, the picture that emerges is one of serial banking crises.
…equity prices typically peak before the year of a banking crisis and decline for two to three years as the crisis approaches and, in the case of emerging markets, in the year following the crisis. The recovery is complete in the sense that three years after the crisis, real equity prices are on average higher than at the precrisis peak. However, postcrisis Japan offers a sobering counterexample to this pattern, because in that country equity prices only marginally recovered to a much lower peak than the precrisis level and have subsequently continued to drift lower.
What is perhaps surprising is how dramatic the rise in debt is. If the stock of debt is indexed to equal 100 at the time of the crisis (t), the average experience is one in which the real stock of debt rises to 186 three years after the crisis. That is to say, the real stock of debt nearly doubles. Such increases in government indebtedness are evident in emerging and advanced economies alike, and extremely high in both. Arguably, the true legacy of banking crises is greater public indebtedness—far over and beyond the direct headline costs of big bailout packages.
When a country experiences an adverse shock—due, say, to a sudden drop in productivity, a war, or political or social upheaval—naturally banks suffer. The rate of loan default goes up dramatically. Banks become vulnerable to large losses of confidence and withdrawals, and the rates of bank failure rise. Bank failures, in turn, lead to a decrease in credit creation. Healthy banks cannot easily cover the loan portfolios of failed banks, because lending, especially to small and medium-sized businesses, often involves specialized knowledge and relationships. Bank failures and loan pullbacks, in turn, deepen the recession, causing more loan defaults and bank failures, and so on.
First, inflation has long been the weapon of choice in sovereign defaults on domestic debt and, where possible, on international debt. Second, governments can be extremely creative in engineering defaults. Third, sovereigns have coercive power over their subjects that helps them orchestrate defaults on domestic debt “smoothly” that are not generally possible with international debt. Even in modern times, many countries have enforced severe penalties on those violating restrictions on capital accounts and currency. Fourth, governments engage in massive money expansion, in part because they can thereby gain a seignorage tax on real money balances (by inflating down the value of citizens’ currency and issuing more to meet demand).
(The reader will recall that fiat money is currency that has no intrinsic value and is demanded by the public in large part because the government has decreed that no other currency may be used in transactions.)
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