Thursday, 23 January 2014

Laurel and Hardy (aka Rogoff and Reinhart) are still at it.

R&R won’t give up. They’re still wittering on about debt: they’ve recently managed to get the IMF to publish an article of theirs which repeats the message they’ve pushed for some time, namely that civilisation as we know it is about to collapse as a result of national debts. Anyway, let’s examine their arguments.
Their first “argument” or “propaganda ploy” I should say is to use the phrase “debt overhang” instead of the word “debt”. That’s obviously designed to give an air of menace or foreboding.
But that’s easily countered: I’ll use the phrase “lovely debt” instead of the word “debt” on more than one occasion in the rest of this article, to make debt more appealing.
You’d think that dealing with arguments put by a Harvard professor it wouldn’t be necessary to engage in this sort of childish cr*p. But there you go.
With a view to scaring us witless about lovely debt, R&R’s next ploy is to point to numerous instances in history where countries have renaged on lovely debt, permanently or temporarily, and where debts have been wiped out by hyperinflation. Well the fact of being a human being can lead to numerous disasters, like being murdered or going bankrupt. Plus a proportion of the human race commit crimes for which they go to prison.
But personally I’m quite at ease with being a human being. I may get run over by a bus or have a heart attack later today, but that just doesn’t worry me.

Cherry picking the evidence.
Given that one of the flaws in the research behind R&R’s “This time is different” was that they cherry picked their so called “evidence”, you won’t be surprised to learn that they employ the same trick in this IMF article. That is, far and away the highest debt/GDP ratio in the US and UK in the 1900s occurred just after WWII. And that ratio declined dramatically over the next 20 years and all without hyperinflation, reneging on lovely debts, etc.
The only slight exception that was the UK government’s refusal to repay “post war credits” on the due date. But that was a small proportion of total government debt, plus that lovely debt was eventually repaid to those who wanted to cash in.
Moreover, and ironically, much the worst example of debt being wiped out by inflation in the West after WWII came in the 1970s. But that was a long time after the record high post WWII debt, and clearly had nothing to do with WWII.
Needless to say, R&R keep very quiet about that post WWII episode in their article.

Debtors can refuse to pay their debts – who’d er thunk it?
Next, I do like this sentence in R&R’s article:
“As Reinhart and Sbrancia (2011) show, a mix of financial repression and inflation can be a particularly potent way of reducing domestic-currency debt.”  So inflation and refusing to repay debts enables debtors to escape their debts? That’s pure genius.

R&R should study MMT.
If R&R studied Modern Monetary Theory they’d learn that there is little difference between public debt which pays a near zero rate of interest and base money (particularly short term debt).
And since there is little difference between the two it’s strange that R&R never complain about the amount of base money being excessive. The reason they never complain is that they’re clueless.
In fact national debts can be wiped out more or less at the flick of a switch and simply by monetising the whole lot. (Not that I’d advise monetising the whole national debt in the space of one year: that would be too dislocatory.)
As to any possible inflationary effects of the private sector having an excess stock of base money, that’s easily dealt with by confiscating some of the money (aka raising taxes and or cutting public spending). Of course any such raised taxes may pose POLITICAL problems. But from the purely technical or economic point of view, there are no problems there.
In fact Warren Mosler, a leading MMTer, set out some of the basics about the relationship between base money, inflation, interest rates etc in a little homily involving some parents, children and a form of fiat money that the family sets up, called “business cards”. The average teenager ought to be able to understand Warren’s homily, though whether Rogoff and Reinhart would understand it is debatable.

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