Friday, 3 May 2013

Rogoff the liar and Reinhart the idiot.

You’d think R&R would be eating humble pie at the moment. But not a bit of it. They’re fighting back with amongst other things a litany of lies and half truths in the Financial Times yesterday. Their article there was entitled “Austerity is not the only answer to a debt problem”.
Anyway, let’s look at their article in detail – should be fun. In fact the lies, half truths, mistakes and nonsense is so voluminous, that it’s taken me well over a thousand  words to deal with it all below.
Debts near wartime peaks?
In their second paragraph they claim that, “the ratios of debt to GDP are at historically high levels in countries, many rising above previus wartime peaks.”
That is a gross mis-representation.
The reality is that the debt in most major countries is nowhere near “wartime peaks”. Charts for  the US and UK are shown below.

Hat tip to The Atlantic for the second chart.

As to countries which are now in the Eurozone, national debt for such countries is a different kettle of fish as compared to the debt of a country which issues its own currency, but for what it’s worth, France’s post WWII debt to gdp ratio was 208% (see p.23 here). That compares with 89% now.
As to Germany in 1944, its ratio was 217%  P.24  source as above. And it’s now 80%.
As to Japan, its debt peaked at 200% at the end of WWII and is slightly above that level now (218%)
So which are the “many countries” referred to by R&R where debt is now above post war levels? A selection of desert islands in the Pacific, probably. But that’s Rogoff “statistics” and spread sheets for you.

The unfunded pensions scare story.
Next (still on their second paragraph) they trott out the scare story about “underfunded old-age security and pension programmes”. The implication here is presumably that those pension liabilities will add to the debt (although when writing propaganda it always pays not to be too specific about what you’re saying: i.e. propagandists often imply rather state clearly what they mean).
Well I have news for R&R: the UK state pensios scheme is not funded. It’s what’s known as “pay as you go” scheme. I.e. the cost of pensions in 2013 is paid for by taxpayers in 2013. And nothing wrong with that. Indeed, there are even private “pay as you go schemes”.
In short, assuming sufficient taxes are collected in the US in say 2030 to pay for pensions in 2030, there won’t be any increased deficit.

Due caution.
R&R then devote about 200 words to saying they are not against more borrowing, particularly in a recession, but that such borrowing should be done “with due caution”.
Well who could possibly be against “due caution”? That’s just waffle and hot air.

Borrowing for investment.
Next, in an attempt to argue that SOME borrowing is justified, they trott out the common misperception that: “Borrowing to finance productive infrastructure raises long-run potential growth…”.
Well actually if you pay for an investment out of income, rather than borrowing you get EXACTLY THE SAME improved “long-run potential growth”. I.e. the productiveness of an investment IS NOT a reason to borrow: it’s a reason to invest. Doh!
E.g. if you have well over £20,000 in the bank, and you want to invest in a new car or small truck costing £20,000 , why borrow? Only numbskull Rogoff and moron Reinhart would borrow in those circumstances.
In fact a Swiss academic (1) some years ago looked at exactly that question, namely whether a government should fund investment from income or from borrowing. The conclusion was that borrowing did not make sense.
The only reservation there is if government can borrow at a near zero rate, there’s probably no difference between paying for an investment out of income and out of borrowing. But in more normal times, the above Swiss paper is probably right.

R&R’s “consistency” lie.
Just after the above point about infrastructure, R&R claim they have “consistently argued” for such investment “since the outset of the crisis”. In fact, according to this Huffington article, they argued no such thing.

Interest rates may rise.
R&R then trott out the old canard that “interest rates can change rapidly”. Well sure they can. And for the economically illiterate that might seem to pose a problem for a heavily indebted country.
But the first flaw in that argument is that interest paid on EXISTING debt does not change one iota when spot rates rise. I.e. it’s only debt about to reach maturity and which may need to be rolled over the might cause a problem.
But is there actually a problem there? The answer is “no”: at least certainly not for a country that issues its own currency. I.e. Eurozone countries are wholly different. But (and wouldn’t you know it) R&R conflate monetarily soverign countries with non-monetary sovereigns.
At any rate, I’ll concentrate on countries which like the US, are monetarily sovereign, since R&R live there, and the US is presumably their main concern.
So . . . is a rising interest rate a problem for an indebted country? Well no: all it has to do is print money instead of borrow it (as pointed out by Keynes and Milton Friedman).
Of course the knee jerk response from R&R and other economicl illiterates will be that printing is inflationary. Well it’s not if the economy is not at capacity, i.e. if it’s in a recession.
David Hume over 200 years ago pointed out that a money supply increase is not inflationary except to the extent that it brings excess demand. It seems that R&R are not very well acquainted with Keynes, Milton Friedman or David Hume.

Let’s cheat our creditors!
R&R’s next daft suggestion is that debtor countries should “write down” their debts. It’s not 100% clear from the phrase “write down” what they mean. But in fact Rogoff spelled out quite clearly what he meant in 2011: he suggested inflating away debts.
So I’ll assume R&R mean that debtor countries simply defalut one way or another their debts.
Well the result of that is totally predictable: no one is going to lend to the country concerned for the next decade other than at a very high rate of interest.
Creditors were cheated by the inflation spike in the 1970s. The result has been a VERY SLOW long term decline in interest rates since then. Creditors have have long memories.

What R&R and every debt-phobe needs to learn.
1. National debt is a net financial ASSET of the private sector. That means it’s very different to some other financial assets. E.g. in the case of money created by commercial banks, for every dollar of money, there is a dollar of debt. That is, money created by commercial banks nets to nothing.
2. The bigger is the private sector’s holding of net financial assets, the more likely it is to go on a spending spree. In other words national debts are self limiting. Put another way, if you carry on expanding private sector net financial assets long enough, the point must come where the private sector starts to significiantly expand its spending, and the recession ends.
In fact the private sector may spend too much and exacerbate inflation: in which case governemnt will need to confiscate private sector net financial assets via extra tax. I.e. government can run a surplus. Ergo debts are not a problem.
That’s not to say it’s easy to guage the right amount of deficit or surplus, or to get the timing right. But the important point is that IN PRINCIPLE, national debts for countries that issue their own currencies just ain’t a problem.



1. Kellermann, K. (2007). Debt financing of public investment: On a popular  misinterpretation of “the golden rule of public sector borrowing”. European Journal of Political Economy, 23 (4): 1088-1104.


P.S. (4th May 2013). Jonathan Portes (director of the UK’s National Institute of Social and Economic Research) also tried to very R&R’s claim about current debt levels relative to post war levels. He found that the R&R claim seemed to be essentially false for the five countries for which Portes could find figures.

P.S. (6th May). Here is more evidence of Rogoff’s dishonesty. Looks like he has refused for three years to let anyone see his famous spreasheet: i.e. it was only very recently that he published it.

P.S.(22nd July, 2013). More evidence of Rogoff's dishonsty here.

P.S. (3rd Sept. 2013). Nice to see someone else pretty much in agreement with my above less than flattering take on Rogoff and Reinhart.

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