The real problem with Rogoff-Reinhart

I’ve stayed out of the R&R kerfuffle.  This is partly because I haven’t read their paper, partly because James Hamilton points out that the mistakes were fairly minor, and partly because Matt Yglesias points out that the real issue is causality, which R&R’s study doesn’t resolve.

While I’ve ignored the R&R study on public debt, I’ve had issues with their claim that financial crises tend to be followed by slow recoveries.  That’s probably true, but we need to be careful before assuming any causal relationship.  I’m inclined to think that most financial crises are caused by a sharp drop in expected GDP growth.  If the shock is nominal, as in the US in 1930s and in Argentina in the 1998-2001 period, then monetary stimulus can trigger fast RGDP growth.  If the shock is real (say Indonesia in 1998), then a slow recovery is almost inevitable.  Expectations of slow NGDP growth can easily trigger a financial crisis, so causation can go in either direction.  Indeed the EMH implies that a sharp fall in asset prices will accompany the early stages of a deep and prolonged and unexpected slump in GDP growth.  Unfortunately, the R&R study led to excessive pessimism about the prospects for monetary stimulus leading to a fast US recovery, and many pundits missed the fact that our case was more like the US in 1933 and Argentina in 2001, than Indonesia in 1998.

James Hamilton recently noted that Paul Krugman is (was?) a huge admirer of R&R’s research.  Here’s Krugman in 2010:

Regular readers will know that I’m a huge admirer of Ken’s work, both theoretical and empirical. Obstfeld and Rogoff is the definitive work on New Keynesian open-economy macro; Reinhart and Rogoff the definitive empirical history of financial crises and their aftermath. It was largely thanks to my study of Obstfeld-Rogoff that I realized, from the get-go, that many of the arguments we were hearing about how modern macro had proved Keynesianism wrong were just ignorant; it was largely thanks to my reading of Reinhart-Rogoff that I realized, early in the game, that this was going to be a prolonged slump rather than a V-shaped recovery.

Hamilton also noted that R&R have been far more accurate in their predictions of the eurozone debt crisis than Krugman, who pooh-poohed the notion of a widespread sovereign debt crisis in 2009.  I notice that Krugman has now begun using phrases like “garbage-in, garbage out” to describe the quality of Rogoff and Reinhart’s empirical research.  (OK, he doesn’t mention their name, but does anyone doubt which paper he is referring to.

PS.  Yes, I will eventually do a post without mentioning the Great White Whale.  But not just yet.

PPS.  I disagree with Hamilton and agree with Krugman on one point—US interest rates are likely to stay very low for longer than most people realize.


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74 Responses to “The real problem with Rogoff-Reinhart”

  1. Gravatar of foosion foosion
    30. April 2013 at 06:13

    Krugman has been a fan of R&R generally, but not their work on public debt. He has frequently criticized their results on that subject.

  2. Gravatar of Mike Sax Mike Sax
    30. April 2013 at 06:21

    Krugman can agree with R-R about financial crises and disagree with them about a supposed debt bomb. While you;re not saying he can’t in so many words it seems to me that the implication of Hamilton is that if Krugman praised them in the past-for something else-he can’t criticize them now-or maybe “not too harshly?

    On Euro debt the difference that Krugman always emphasizes is that the EU countries have given away their printing press so it’s not surpising that countries trouble like Greece, Spain, et. al are seen by the market as having no out thereby spiking interest rates.

    Krugman pointed out just yesterday that Italy’s interest rates have now come down. Why? Because Draghii credibly promised to do “what ever’s necessary” to save the euro.

    http://krugman.blogs.nytimes.com/2013/04/29/the-italian-miracle/

  3. Gravatar of J J
    30. April 2013 at 06:26

    I have the Obstfeld-Rogoff textbook, and there is a nice long Krugman quote on the back.

  4. Gravatar of Mike Sax Mike Sax
    30. April 2013 at 06:26

    The R-R error wasn’t small in it’s effect-that 90% of debt number has been cited as auhoritative again and again.

    “Johnny Isakson, a Republican from Georgia and always a gentleman, stood up to ask his question: “Do we need to act this year? Is it better to act quickly?”

    “Absolutely,” Rogoff said. “Not acting moves the risk closer,” he explained, because every year of not acting adds another year of debt accumulation. “You have very few levers at this point,” he warned us.

    http://diaryofarepublicanhater.blogspot.com/2013/04/r-rs-peers-arent-letting-them-get-away.html

    “Marcus also suggests that R-R’s peers aren’t letting them get away with much of anything these days. See this piece, with the great title of The Beneficial Side Effects of R-R’s Fall From Growth:

    The report:

    “With budget cuts blamed for a second straight year of recession, the EU’s top economics official Olli Rehn indicated over the weekend that more flexibility on tough economic targets was needed. His boss, European Commission President Jose Manuel Barroso, said on Monday that austerity had reached its natural limits of popular support.”

    “While I think this policy is fundamentally right, I think it has reached its limits,” he told a conference. “A policy to be successful not only has to be properly designed, it has to have the minimum of political and social support.”
    As Wolfgang Munchau recounts, it was not too long ago that the same Olli Rehn stated:

    “Carmen Reinhart and Kenneth Rogoff have coined the ’90 per cent rule’,” he said. “That is, countries with public debt exceeding 90 per cent of annual economic output grow more slowly. High debt levels can crowd out economic activity and entrepreneurial dynamism, and thus hamper growth. This conclusion is particularly relevant at a time when debt levels in Europe are now approaching the 90 per cent threshold, which the US has already passed.”

    This 90% rule was all compliments of an Excel error. It was not small in impact.

  5. Gravatar of marcus nunes marcus nunes
    30. April 2013 at 07:01

    Scott, you said:
    “Unfortunately, the R&R study led to excessive pessimism about the prospects for monetary stimulus leading to a fast US recovery, and many pundits missed the fact that our case was more like the US in 1933 and Argentina in 2001, than Indonesia in 1998.”
    That´s likely true:
    http://thefaintofheart.wordpress.com/2012/10/16/fire-back-on-the-big-lie-that-recoveries-following-financial-crises-induced-recessions-are-slow/

  6. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    30. April 2013 at 07:26

    ‘This 90% rule was all compliments of an Excel error.’

    I suggest you read James Hamilton and rethink your claim.

  7. Gravatar of TallDave TallDave
    30. April 2013 at 07:42

    I’ve said all along the whole R-R debate is a sideshow. You don’t reduce your national debt to grow faster, you do it to avoid a sovereign debt crisis.

    This is like arguing over whether the quality of violin play suffered when the Titanic was sinking.

    The pro-insolvency crowd wants to have this debate, because they’ve been going around claiming if austerity doesn’t lead to growth the policy failed (and then measuring an accounting identity to “prove” themselves right), even though that’s tangential to the main policy objective.

  8. Gravatar of Mike Sax Mike Sax
    30. April 2013 at 07:50

    I checked out Hamiltion. I think he totally minmizes what the mistake was. Listen that’s one issue but here he’s totally throwing up a red herring:

    “So how does any of that cause us to discount or dismiss the contributions of This Time Is Different? You tell me.”

    No one is trying to do that, certainly not Krugman who says that while the paper was sloppy the book remains a book of very high quality.

  9. Gravatar of Vivian Darkbloom Vivian Darkbloom
    30. April 2013 at 07:51

    Stevenson and Wolfers have a take on the public debt brouhaha that appears to be quite similar to James Hamilton’s:

    http://www.bloomberg.com/news/2013-04-28/refereeing-the-reinhart-rogoff-debate.html

    There was never anything magical about a 90 percent threshold and this seems to be borne out by the very nice chart reproduced in the above-referenced column.

    Stevenson and Wolfers appear to also come to the same conclusion as Sumner does on financial crises with respect to (the separate) issue of public debt levels: the direction of causality is not entirely clear.

    Scientists are still working on the chicken and egg paradox that appears to have first been identified by Aristotle. I suspect this one will not be solved any time soon, either. If I were to place a bet today, I’d put money on all of these working in both directions. It seems to be human nature, particularly for the media, and economists are not immune, to seek a single cause and a single causal direction for any particular phenomenon. That’s normally far too simplistic. And, that helps to explain how the non-existent “90 percent rule” got started.

  10. Gravatar of Two Views of R&R Two Views of R&R
    30. April 2013 at 07:56

    […] reminded of Truman’s request for a one-armed economist. (HT2 Scott Sumner and James […]

  11. Gravatar of ssumner ssumner
    30. April 2013 at 08:06

    Mike Sax, Isn’t it kind of silly to post comments on things you know nothing about? If you can refute Hamilton, do so.

    If it’s “not surprising” that the eurocrisis happened, why did Krugman say it was unlikely to happen a few years back?

  12. Gravatar of Don Geddis Don Geddis
    30. April 2013 at 08:26

    @TallDave: “You don’t reduce your national debt to grow faster, you do it to avoid a sovereign debt crisis.

    How does a fiat currency ever have an insolvency debt crisis. (Aside from purely by choice, of course; a debtor can always just choose not to pay, but that isn’t a “crisis”.)

    No matter how much they owe, if the debt is denominated in their own currency, they can always print whatever they need to pay it. So surely “avoiding insolvency” can’t be the real point of the policy. That goal is trivial.

  13. Gravatar of JJriverrun JJriverrun
    30. April 2013 at 09:03

    ssumner,
    “It’s important to make a distinction between the R-R book “This time is different” and the paper. The paper got undeserved credibility from the book; now the book may be devalued by the paper. But they’re quite different.

    The book had a sound empirical strategy: it focused only on extreme events, then described what happened around those events. Because of the severity of the shock, it was reasonable to infer that whatever happened around crises was in fact crisis-related, so problems of causation were sidestepped.”

    http://krugman.blogs.nytimes.com/2013/04/17/further-further-thoughts-on-death-by-excel/

    Nothing to see here. Please write less about PK.

  14. Gravatar of Tom Brown Tom Brown
    30. April 2013 at 09:08

    @Don Geddis, thanks. That’s pretty much what I was going to write in response to TallDave, but you saved me the trouble. :)

  15. Gravatar of kebko kebko
    30. April 2013 at 09:10

    I’m curious. Do you think rates will stay low because the Fed will signal tight money as soon as their economic targets are in sight, or do you think that unemployment is going to stay above 6.5%, or am I totally off with both of these options?

  16. Gravatar of TallDave TallDave
    30. April 2013 at 09:38

    How does a fiat currency ever have an insolvency debt crisis.

    See Zimbabwe, or Weimar Germany. If you’re monetizing your debt to a large degree, you’re insolvent.

  17. Gravatar of Tom Brown Tom Brown
    30. April 2013 at 09:41

    @ssumner, I read the Hamilton piece, and your piece, and Mike Sax… and it looks like Mike did read the Hamilton piece as well (in his 2nd comment). I think you’re dismissing Sax’s point a little to flippantly: Hamilton IS saying “how can you say R&R’s book is bad based on the error in their paper!” … When nobody’s saying that actually (thus Sax’s “red herring” comment).

    Also I don’t see Hamilton’s point in minimizing R&R’s error. R&R may never have claimed there was causality concerning their erroneous “90% rule” in their paper… but it appears they did say it in testimony before congress.

  18. Gravatar of ssumner ssumner
    30. April 2013 at 11:01

    JJRiverrun, My main objection is to the book, not the paper, so obviously I don’t agree with you. I stand by everything I said in this post.

    kebko, I think rates will stay low because the Wicksellian equilibrium 10 year real rate has been falling for 30 years, and I see no sign of anything that would reverse that pattern. Markets set real rates. Add in 2% inflation, and you get very low nominal rates.

    Tom, Hamilton showed that the error had only small impact on their empirical findings. Do you deny that? Where is Hamilton wrong?

    You said;

    “Hamilton IS saying “how can you say R&R’s book is bad based on the error in their paper!””

    Can you produce the exact quotation?

    I believe R&R have said causation goes both ways, which is obviously just their personal opinion. Nothing to get excited about.

  19. Gravatar of Jim Glass Jim Glass
    30. April 2013 at 11:38

    How does a fiat currency ever have an insolvency debt crisis. (Aside from purely by choice, of course; a debtor can always just choose not to pay, but that isn’t a “crisis”.)

    Tell that to the Russians of 1998 who defaulted on their own fiat-currency denominated debt. They weren’t having a financial crisis, eh?

    No matter how much they owe, if the debt is denominated in their own currency, they can always print whatever they need to pay it. So surely “avoiding insolvency” can’t be the real point of the policy. That goal is trivial.

    And no matter how much a country with a commodity-backed currency owes, it can always pay what it owes by just increasing tax revenue. For example, Greeks pay must less in tax than the people in many other nations. So the govt could just have chosen to collect more taxes. Or the govt can choose to change the exchange rate to devalue its currency (exactly as a fiat currency gov that inflates its currency to pay its debt would do).

    So surely “avoiding insolvency” can’t be the real point of policy, ever. That goal is trivial. QED.

    Although, the Greeks may tell you that the repercussions of increasing tax revenue sometimes are not so trivial.

    And the Russian can tell you that the repercussions of collapsing the value of one’s currency — such as mobs marching with rope, pitchforks and torches on the capital to topple the govt and lynch the politicians (perhaps literally) — can be a good deal less trivial than the consequences of defaulting on one’s creditors.

    This naifish claim that “with a fiat currency default can’t be forced, it is always a choice” is totally sophomoric. With any kind of currency, default is always a choice in just the same way, as the option that is less bad than others. That’s why nations with fiat currencies default in the real world, even though somehow this is supposed to be impossible Russia’s no the only one. And this has been pointed out so often, starting by R&R in their book but since then by many many others, that to not realize it by now isn’t mere college sophomoric it is high school sophomoric.

    The MMTers and others who make this claim make a really, really basic logical error. They assume that because default results from a “choice” the problem of avoiding it is, in the word above “trivial”. But many choices are the result of very non-trivial difficulties.

    The MMTers would say that since Butch and Sundance didn’t *have* to jump off that high cliff into the raging river below to their deaths, because they always had the *choice* to do otherwise, it follows that avoiding the need to jump off that cliff “could not have been the real point of their policy”. Achieving that was always “trivial”. All they had to do was simply choose to go deal with that posse.

  20. Gravatar of Roxy Roxy
    30. April 2013 at 12:10

    ssumner, do you think it’s some kind of gotcha that Krugman admires some of Rogoff’s other work? I don’t get it.

    I’m beginning to wonder if you actually read Hamilton’s post.

    The whole point of his post was to argue that the error in the R&R paper does nothing to undermine the basic findings from the R&R book. A claim which, as far as I know, no one has ever made. Yes, a red herring, as Mike Sax points out.

    Your condescending and insulting remark to Mike Sax: “Isn’t it kind of silly to post comments on things you know nothing about? If you can refute Hamilton, do so.”

    Refute a red herring? How does one do that? Or maybe I don’t know what I’m talking about either — in which case I’m sure you’ll let me know.

  21. Gravatar of Tom Brown Tom Brown
    30. April 2013 at 12:11

    @TallDave,

    “See Zimbabwe, or Weimar Germany. If you’re monetizing your debt to a large degree, you’re insolvent.”

    Both are examples of hyperinflation. Hyperinflation is a full blown rejection of the sovereign currency. And despite what Peter Schiff has been screeching about for the last five years (and has been proven wrong about over and over and over), that’s not even close to what’s happening in the US, Japan, etc.

    Zimbabwe experienced a collapse of its tax system and a preponderance of foreign denominated debt. Weimar Germany’s crushing debt followed a major exogenous shock (regime change) and more devastatingly was also denominated in a foreign currency.

    The US debt is denominated is US currency. The Japanese debt is denominated in Japanese currency.

  22. Gravatar of Tom Brown Tom Brown
    30. April 2013 at 12:18

    @Jim Glass: Russia in the 1990s experienced a collapse of their tax system like Zimbabwe. When the sovereign loses the ability to tax, the currency is finished. The users of Russian currency rejected that currency, as well they should have, since it was not being utilized to further private sector prosperity. Again, that’s not the case in the US, Japan, etc.

  23. Gravatar of ChargerCarl ChargerCarl
    30. April 2013 at 12:24

    “why did Krugman say it was unlikely to happen a few years back?”

    That’s easy, he underestimated the ineptitude of the ECB.

  24. Gravatar of Mike Sax Mike Sax
    30. April 2013 at 12:36

    “Mike Sax, Isn’t it kind of silly to post comments on things you know nothing about? If you can refute Hamilton, do so”

    Scott it’s funny that you always say Krugman takes cheap shots. Considering the cheap shots you routinely throw my way when I discuss things in good faith. You haven’t shown anything that I “don’t know anything about.”

    Krugman has repeatedly said that it’s different for Euro coutnries that can’t make their own monetary policy. He did it again yesterday in the piece about how Italy’s interest rates have gone down-which typical for you in your cherrypicking you ignored. My guess is it’s because you have no answer for it.

    When you don’t like a point you always hide behind that. I think any openminded person can’t say that I’m a blooming ignoramus. Because you are not saying this in good faith such pettiness doesn’t in anyway bother me. If it were true it would be pretty low class to point it in an attempt to bully me publicly. Just understand something Scott. You don’t intimidate me and you can’t shame me. If you don’t want to haev an honest discussion why don’t you admit it.

    What I did say that can’t be denied is Hamilton is either lying or ignorant when he claims that Krugman or anyone else said that the errors in his work meant that his book is worthless.

    So there you are. I’ve just refuted him. If you can deny this why don’t you do so?

  25. Gravatar of Mike Sax Mike Sax
    30. April 2013 at 12:38

    Overall Scott, when you act this trifling I can only assume I hit a nerve. However, you can’t chide Krugman for being uncharitable as you show this quality in spades.

  26. Gravatar of Tom Brown Tom Brown
    30. April 2013 at 12:51

    @ssumner, you write “Can you produce the exact quotation?”

    How about Hamilton’s last sentence, for one:

    “So how does any of that cause us to discount or dismiss the contributions of This Time Is Different? You tell me.”

    Huh? Who’s complaining about their book, “This Time Is Different?” The complaint has always been with their subsequent paper!

    In fact, it’s not just the last line, Hamilton spends over 50% of his post discussing their book.

  27. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    30. April 2013 at 13:26

    Mike Sax wrote;

    ‘This 90% rule was all compliments of an Excel error.’

    To which I told him to read Hamilton and rethink his claim.

    Now we get from Mike;

    ‘I checked out Hamiltion. I think he totally minmizes what the mistake was. Listen that’s one issue but here he’s totally throwing up a red herring:

    ‘”So how does any of that cause us to discount or dismiss the contributions of This Time Is Different? You tell me.”’

    Probably because Mike knew I was going to actually cite what Hamilton said, which was;

    ‘Now let’s take a look at the details by which Herndon, Ash, and Pollin come to their numbers. First, they found a dumb error in Reinhart and Rogoff’s spreadsheet– Reinhart and Rogoff left the first 5 countries in the alphabet (Australia, Austria, Belgium, Canada, and Denmark) out of the set of cells selected for averaging. This is a numbskull error, but it turns out it would only have changed the estimate they reported by a few tenths of a percent.’

    So Mike, is Hamilton wrong about that?

  28. Gravatar of Tom Brown Tom Brown
    30. April 2013 at 14:47

    Hamilton quotes Krugman:

    “Belgium is politically weak because of the linguistic divide; Italy is politically weak because it’s Italy. If these countries can run up debts of more than 100 percent of GDP without being destroyed by bond vigilantes, so can we.”

    Hamilton is correct to point out that Krugman was wrong about Italy… however, Hamilton, then seems to imply that the the US might thus be, at some point (presumably if we don’t start reducing our debt), susceptible to “bond vigilantes.” In so doing he is conflating two very different types of nations: stable currency issuers, with debts denominated in their own currencies, and currency users, with debts essentially denominated in a foreign currency. The former need not fear bond vigilantes and insolvency, while the latter have to.

    Eurozone countries are strictly currency users, much like households, businesses, states and local governments. Plus Eurozone countries don’t have the benefit of a political union to fall back on: At least in the US, if a state (currency user) is a taker state (WV, MS, SC, NM, AZ etc.) it benefits from a net flow of Federal funds INTO its economy… while the net provider states (CO, MN, MA, NJ, VI, TX, etc.), on the other hand, continue to SUPPLY net Federal revenue. Eurozone countries that are in trouble can only hope for bank bailouts w/ severe austerity conditions.

  29. Gravatar of Two Views of R&R « How to Articles Two Views of R&R « How to Articles
    30. April 2013 at 14:54

    […] reminded of Truman’s request for a one-armed economist. (HT2 Scott Sumner and James […]

  30. Gravatar of Jim Glass Jim Glass
    30. April 2013 at 15:33

    @Jim Glass: Russia in the 1990s experienced a collapse of their tax system like Zimbabwe. When the sovereign loses the ability to tax, the currency is finished. The users of Russian currency rejected that currency, as well they should have…

    But its debt was denominated in its own fiat currency! Surely, whatever problems Russia had, it could simply have just printed the money it needed to avoid default on top of them all.

    “How does a fiat currency ever have an insolvency debt crisis. (Aside from purely by choice, of course; a debtor can always just choose not to pay, but that isn’t a “crisis”.) No matter how much they owe, if the debt is denominated in their own currency, they can always print whatever they need to pay it.”

    So why should any inability to collect taxes have caused them to default?? To quote the original claim, avoiding default in that situation is “trivial”, just print the money! What was wrong with that?

    The entire point of the claim that that a nation with debt denominated in its own fiat currency “can’t ever be forced into default” is that it doesn’t need tax revenue to service its debt, it can just print money to do it. Yet there they were, defaulting…

    (Moreover, a bonus question for the MMTers who make this claim over and over while also claiming fiat money gets its value from the fact that the citizenry are compelled to use it to pay their taxes with it: “The users of Russian currency rejected that currency, as well they should have…” The Russian govt never said to its citizenry, “you all don’t have to use rubles to pay your taxes any more”, so how could they reject using it? Is the value of fiat currency, and its use, determined by something else other than the (alleged) legal requirement to pay taxes with it? (The US Treasury has never actually required this, so the value of the dollar has been something of a mystery by this purported logic … but that’s another subject.)

  31. Gravatar of Michael Michael
    30. April 2013 at 16:01

    Jim Glass wrote:

    “But its debt was denominated in its own fiat currency! Surely, whatever problems Russia had, it could simply have just printed the money it needed to avoid default on top of them all.”

    Default is a choice.

  32. Gravatar of Tom Brown Tom Brown
    30. April 2013 at 16:21

    @Jim Glass,

    I’m not an MMTer and I disagree that the ONLY thing that gives a currency value is that the citizenry is compelled to pay their taxes with it. Ultimately the value of our money represents some amount of underlying productivity. And I never said “trivial.”

    Likewise, loss of monetary sovereignty (including foreign denominated debt) is a contributing factor to hyperinflation, but not the only one. Wars (especially losing wars and civil wars), regime changes, low levels of faith in government, rampant government corruption, an explosive political environment, a collapse of the domestic economy, and a breakdown in the government’s ability to tax are all contributing factors. However, it’s not necessarily the case that ALL these factors be present.

    These factors are not present in many countries with current high levels of public debt, including the US and Japan. I think it’s a mistake to claim that high levels of public debt ALONE causes hyperinflation or default (as we hear endlessly from folks like Peter Schiff, who seems to give his confident prediction of “hyperinflation this year for sure!! Put all your money in Gold before it’s too late!” … year after year, wrong every time).

    There’s no reason that the US, for example, given our current circumstances, would be forced to default. In our case, it would be purely a choice and a stupid one at that! When default becomes an attractive choice, I claim that several of the contributing factors on my list have become major problems, and one of the key ones OFTEN is foreign denominated debt or lack of monetary sovereignty.

    Likewise, monetary sovereignty ALONE is not a guarantee of being able to avoid default or hyperinflation, however, it is a major contributing factor to being able to avoid those fates.

  33. Gravatar of TallDave TallDave
    30. April 2013 at 18:08

    Tom Brown,

    Hyperinflation is a sovereign debt crisis.

    I don’t think anyone here is suggesting hyperinflation is in the near future for Japan or the U.S. (most of us don’t even expect high rates like insolvent euro countries are seeing) — as Sachs pointed out the problems are in the medium term, when interest will start to eclipse discretionary spending even as the welfare state balloons.

    Insolvency can’t be wished away with printing presses, ultimately you either pay back your debt with taxes or you start inflating faster than you’re borrowing. And then you can find out the Plank curve is steep — the same people saying “it can’t happen here” said it wouldn’t happen in Europe, either, and then suddenly it did.

  34. Gravatar of TallDave TallDave
    30. April 2013 at 18:19

    Likewise, loss of monetary sovereignty (including foreign denominated debt) is a contributing factor to hyperinflation, but not the only one.

    You’re a bit confused here, debt is obviously a sufficient condition by itself (else otherwise sound gov’t could simply stop collecting taxes by popular acclaim, without consequence); the fact hyperinflation usually arrives accompanied by other dysfunction is neither causative nor coincidental — spending more than you can ever pay back is a bad choice, too.

  35. Gravatar of TallDave TallDave
    30. April 2013 at 18:48

    Jim,

    Indeed, and easy to forget Russia’s debt crisis was a knock-on from the Asian financial crisis — Thailand had a sovereign debt crisis as well, as did Indonesia.

    They actually happen pretty often. They happen less often in currency issuers for the same reason AAA-rated bonds default less often than junk: it’s a lot easier to issue currency (or AAA bonds) if the markets are confident you’re not going to default (or technically default by inflating).

  36. Gravatar of Mike Sax Mike Sax
    30. April 2013 at 18:59

    Patrick Sullivan you wrote:

    Now we get from Mike;

    ‘I checked out Hamiltion. I think he totally minmizes what the mistake was. Listen that’s one issue but here he’s totally throwing up a red herring:

    ‘”So how does any of that cause us to discount or dismiss the contributions of This Time Is Different? You tell me.”’

    “Probably because Mike knew I was going to actually cite what Hamilton said, which was;”

    ‘Now let’s take a look at the details by which Herndon, Ash, and Pollin come to their numbers. First, they found a dumb error in Reinhart and Rogoff’s spreadsheet- Reinhart and Rogoff left the first 5 countries in the alphabet (Australia, Austria, Belgium, Canada, and Denmark) out of the set of cells selected for averaging. This is a numbskull error, but it turns out it would only have changed the estimate they reported by a few tenths of a percent.’

    “So Mike, is Hamilton wrong about that?”

    Patrick why am I pigeonholed into only being allowed to discuss this one facet of Henderson’s piece? Scott wrote about a lot more than just the Excel error. In my original comment I discussed a lot more than just the Excel error.

    If you want me to discuss the excel error and just how big or small it is fine.

    Why though can’t you discuss where Hamilton claims that people (ie Krugman) are condemning R-R’s book because he’s says their paper is very poor quality?

    Is Hamilton being honest here or not? Krugman has stated that he still likes the book so Hamilton is being dishonest-or he’s totally ignorant in which case he should keep quiet.

    So can you tell me where Krugman said that the book is to be condemned? If not why did Hamilton spend so much in the above link discussing how that mistakes of the paper shouldn’t be held against the book?

    I’m willing to discuss e if you’re willing to discuss this odd tact by Hamilton. How can I set store in anything he does when he has deliberatly been misleading about attacks on R-R’s book?

  37. Gravatar of Mike Sax Mike Sax
    30. April 2013 at 19:25

    As far as the Excel error basically Hamilton is trying to say that R-R are basiccally blameless. Despite all the many words Hamilton expended on it at the end of the day it was a material difference.

    Yet even Miles Kimball admits the errors were significant.

    “Ken Rogoff is an economist who has always been kind to me, and for whom I have deep respect. And I have no animus toward Carmen Reinhart. Nevertheless, I hope there has been a nightmarish quality to the last few days of what Quartz writer Matt Phillips called a “bone-crunching social media pile-on that Harvard economists Ken Rogoff and Carmen Reinhart received in recent days after some other researchers questioned their influential findings that high government debt is a drag on economic growth.” I say this because I know from my own experience as a researcher how powerfully the hint of such an embarrassment motivates economists and other researchers to sweat the details to get things right. Some errors will always slip through the cracks, but a researcher ought to live in mortal fear of a contretemps like that Reinhart and Rogoff have found themselves in this week.”

    “Reinhart and Rogoff have not only caused embarrassment for themselves, but also for all those who have in any way relied on their results. Those who made their case by overinterpreting the particular results that have now been discredited should be the most embarrassed. Quartz’s Tim Fernholz gives a rundown of politicians and other policy makers who relied heavily on Reinhart and Rogoff’s results in “How influential was the Reinhart and Rogoff study warning that high debt kills growth?”

    http://qz.com/76447/an-economists-mea-culpa-i-relied-on-rogoff-and-reinhart/

    If the error is so trivial how do you explain Miles’ mea culpa?

    Can you or will you just ignore the quote?

    Even though Hamilton and Scott and a few other R-R apologists will try to whitewash this most economists aren’t buying it. They have a big black eye and Henderson certainly won’t be able to save them.

  38. Gravatar of Tom Brown Tom Brown
    30. April 2013 at 20:00

    Mike, … you wrote:

    “Patrick why am I pigeonholed into only being allowed to discuss this one facet of Henderson’s piece?”

    “They have a big black eye and Henderson certainly won’t be able to save them.”

    Do you mean “Henderson” or “Hamilton?” Hahaha… you’ve been having trouble all day with this!

  39. Gravatar of Benjamin Cole Benjamin Cole
    30. April 2013 at 20:07

    Inflation and debt and interest rates?

    Cochrane at Stanford keeps gyrating about debt and the pending hyperinflation.

    Has he ever heard about Japan? Has anyone in the USA?

  40. Gravatar of Mike Sax Mike Sax
    30. April 2013 at 20:15

    Yeah, I don’t even know who Dave Henderson is but I keep talking about him.

  41. Gravatar of Mike Sax Mike Sax
    30. April 2013 at 20:16

    Sumner still ticked over Krugman

    http://diaryofarepublicanhater.blogspot.com/2013/04/r-r-apologists-and-sumner-still.html

  42. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    30. April 2013 at 22:11

    ‘Patrick why am I pigeonholed into only being allowed to discuss this one facet of Henderson’s piece? ‘

    You can discuss anything you like, but when you make a blatantly false statement like; ‘This 90% rule was all compliments of an Excel error.’, you’re asking to be corrected.

    ‘If you want me to discuss the excel error and just how big or small it is fine.’

    Do you suppose that’s why I asked you, ‘So Mike, is Hamilton wrong about that?’?

    And why did you not answer me, but instead pose as a martyr? When you finally get around to saying something about what Hamilton actually did write about the Excel error (in a later post!), all you can offer is;

    ‘As far as the Excel error basically Hamilton is trying to say that R-R are basiccally blameless.’

    Which is false, as Hamilton clearly said they’d made a ‘numbskull error’

    ‘Despite all the many words Hamilton expended on it at the end of the day it was a material difference.’

    And ‘the many words Hamilton expended’ were;

    ‘…it turns out it [the error] would only have changed the estimate they reported by a few tenths of a percent.’

    So, the dispute between you and Hamilton is whether ‘a few tenths of a percent’ is, or is not, ‘a material difference’.

    When I see someone go to the lengths you have gone to cover up this, I’m pretty sure that person knows he’s skating on thin ice.

  43. Gravatar of Tom Brown Tom Brown
    1. May 2013 at 00:13

    @TallDave,

    You write:

    “Insolvency can’t be wished away with printing presses, ultimately you either pay back your debt with taxes or you start inflating faster than you’re borrowing.”

    The former requires a working tax system and the latter sovereign control of your currency. Both on my list.

    “And then you can find out the Plank curve is steep “” the same people saying “it can’t happen here” said it wouldn’t happen in Europe, either, and then suddenly it did.””

    Again, Eurozone countries don’t have this monetary sovereignty, so it’s a strained comparison. And actually several people have been saying for years it was always a risk of happening there (because of the monetary union w/o political union) while ALSO saying that it was unlikely to happen here.

    Re: Russia: It’s default in 1998 met almost all of the conditions I laid out. In fact it experienced severe hyperinflation in the early 90s. Those events started YEARS before the default, with the loss of the Cold War and the dissolution of the Soviet Union, a tumultuous change of government, terrible political instability, being strapped with the massive foreign denominated debts of the former Soviet Union (Russia inherited them all). Later, they pegged their currency to the US dollar (a further erosion of monetary sovereignty), then they experienced the Asia crisis and the resulting collapse in some of their key export markets, upon which they were highly dependent (e.g. oil). It was FAR from just a monetary phenomena. They even had a severe problem with massive corruption which led to a loss in tax revenue (also both on my list). Here’s what the St. Louis Fed had to say about that:

    “Another weakness in the Russian economy was low tax collection, which caused the public sector deficit to remain high. The majority of tax revenues came from taxes that were shared between the regional and federal governments, which fostered competition among the different levels of government over the distribution. According to Shleifer and Treisman (2000), this kind of tax sharing can result in conflicting incentives for regional governments and lead them to help firms conceal part of their taxable profit from the federal government in order to reduce the firms’ total tax payments. In return, the firm would then make transfers to the accommodating regional government.”

    Here’s the source of that quote:

    http://research.stlouisfed.org/publications/review/02/11/ChiodoOwyang.pdf

    In summary, there was a massive amount of economic and political turmoil for most to the 90s: Many factors led to hyperinflation and eventual default. It’s an oversimplification to say it was a debt problem.

    Here’s another good writeup:

    http://pragcap.com/the-russian-default-what-happened

  44. Gravatar of Mike Sax Mike Sax
    1. May 2013 at 02:40

    Patrick the Excel error is a matter of interpretation-to figure it out you do analysis.

    However, Hamilton has said something demonstrably false. That Krugman is saying the book is no good because of the paper. That’s a very simple emprical point. So how does he have any credibilty?

    You can’t touch this with a 10 foot pole can you? Because it shows him deliberatly lying.

  45. Gravatar of Mike Sax Mike Sax
    1. May 2013 at 02:49

    And no one but you, Hamilton, and Scott thinks the error doesn’t matter. Most economists including Kimball do. It’s great that now R-R say there’s nothimg magical about 90$, thats not what they said in front of Congress and the EU’s Oli Rehn was using that number as justification.

    Maybe R-R and their apologists could have said that then-but they weren’t, they were talking about cutting the budget “for our children.”

  46. Gravatar of Mike Sax Mike Sax
    1. May 2013 at 02:57

    When I look at that Hamilton post again, it’s even worse. The title is all about the lie “The Contributions of R-R” which talks about the book when no one is impugning the book.

    Patrick you talking about going lengths meanwhile your whole point dissolves if you just acknowledge that the whole premise of this post is flawed.

  47. Gravatar of Mike Sax Mike Sax
    1. May 2013 at 03:00

    He spends the whole post praising a book that everyone including Krugman has praised roundly. Then he tries to say the paper is an significant thing and that anyway the error was so tiny. You think this rehabilitates R-R?

    No, all honest economists know it doesn’t. ONly a couple of ideologues are claiming otherwise because it questions their whole debt bomb hobby horse.

  48. Gravatar of Mike Sax Mike Sax
    1. May 2013 at 04:23

    Patrick in R-R’s original paper of 2010 they claimed that countries with a over 90% debt level had a mean 0.1% growth rate. This number was used to trumpet the idea that the sky falls with the magic number 90.

    Now they say there’s nothing magical about 90 but they weren’t correcting Oli Rehn and the GOP Congress back when this number was being used to jsutify austerity.

    Now we see that R-R left off a “couple” of countries-Denmakr, et al-that happen to be the ones to totally blow the curve. When you include these countries what actually grew rapidly after WWII-it’s a 2.2% rate.

    If you think the difference between 2.2% and -0.1% is minor then we differ on the word.

  49. Gravatar of Mike Sax Mike Sax
    1. May 2013 at 06:25

    Patrick a breakdown of the whole debate just for you

    Just a little rounding error?

    http://diaryofarepublicanhater.blogspot.com/2013/05/james-hamilton-r-r-only-guilty-of.html

  50. Gravatar of ssumner ssumner
    1. May 2013 at 07:19

    Roxy, You said;

    “ssumner, do you think it’s some kind of gotcha that Krugman admires some of Rogoff’s other work? I don’t get it.”

    No I don’t, and yes you don’t get it. I’d suggest reading Clive Crook’s new post on Krugman.

    Roxy, You said;

    “The whole point of his post was to argue that the error in the R&R paper does nothing to undermine the basic findings from the R&R book. A claim which, as far as I know, no one has ever made. Yes, a red herring, as Mike Sax points out.”

    No, that isn’t the point. The point was that the errors in the paper do little to undermine the conclusions of the paper and the book.

    Mike Sax, You said;

    “Krugman has repeatedly said that it’s different for Euro countries that can’t make their own monetary policy.”

    Which is exactly my point. So why predict no debt crisis in Italy?

    You said;

    “What I did say that can’t be denied is Hamilton is either lying or ignorant when he claims that Krugman or anyone else said that the errors in his work meant that his book is worthless.”

    Yeah, Hamilton would have been stupid, if he’d said that. And you are dodging the issue. What’s wrong with Hamilton’s defense of R&R’s paper? You haven’t given me one piece of evidence. If you can’t do so, why dump on Hamilton?

    You keep saying “so and so says this.” I don’t care about so and so. I care about your ideas. Why is Hamilton wrong? Which specific defense of R&R is factually inaccurate? Name one, or else I have no reason to pay attention to you. I can read so and so myself.

    Tom, In the context of the previous paragraph he’s clearly saying that the paper’s contribution to the book is intact. Hamilton’s defending both the book and the paper. Do you deny that?

  51. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    1. May 2013 at 07:32

    ‘Patrick the Excel error is a matter of interpretation-to figure it out you do analysis.’

    No one is so stupid as to actually believe that, Mike.

    ‘…it turns out it [the error] would only have changed the estimate they reported by a few tenths of a percent.’

    Is not about ‘interpretation’, it’s about arithmetic.

    Hamilton has written four or five posts on the R&R debate, you keep trying to conflate one of those with the others (and doing a pretty damn poor job of it). I’m a veteran of these kinds of misdirection arguments.

    I’ve debated people who are far more resourceful than you when it comes to sophistry. I could write a book… (actually, I am).

  52. Gravatar of Tom Brown Tom Brown
    1. May 2013 at 08:11

    “James Hamilton points out that the mistakes were fairly minor”

    Actually R&R thank HAP for pointing out a “significant mistake.”

    Last paragraph:

    http://www.nytimes.com/interactive/2013/04/17/business/17economix-response.html

  53. Gravatar of TallDave TallDave
    1. May 2013 at 08:21

    Tom Brown,

    I think you missed the point — inflating away your debt by printing money to pay it is a sovereign debt crisis. Creditors will generally see this as default and respond accordingly.

    Monetary sovereignty doesn’t matter nearly as much as you seem to think, all it really does is give insolvent countries a different way to default. If Greece could print its own money they might have a better shot at a smooth NGDP path, but they’d still either have to tax enough to pay their debts or face the consequences of trying to print their way out.

  54. Gravatar of Mike Sax Mike Sax
    1. May 2013 at 08:31

    Scott why is Hamilton defending the book at all as no one’s attacking it. That’s why I say he’s being misleading becaause he’s arguing against a point no one is making.

    Patrick as far as arithemtic here it is. I’ve written it above and you apparently glossed over it. One more time. In the 2010 paper R-R left out some countries that just happened to have high growh and high debt. Just a coincidence I’m sure that the examples that they didn’t want to talk about didn’t make the list.

    This according to Hamilton’s own chart reduced the mean of <90 coutnries from 2.2% to -0.1%. This erroneous mean of -0.1% was what drove all this alarmist over the 90% threshold.

    Are you claiming that the difference between 2.2% and -0.1% is small or just a few tenths of a percent?

  55. Gravatar of Tom Brown Tom Brown
    1. May 2013 at 11:17

    @TallDave,

    Sovereign currency issuers in general control their own interest rates. The US Treasury has never had an unsuccessful bond auction. The PDs are required to participate if they want to be PDs, and guess what? They want to be PDs! “Bond vigilantes” are non-existent here because they know they can’t compete with the Fed. Eurozone countries are a LOT different!

  56. Gravatar of Tom Brown Tom Brown
    1. May 2013 at 12:48

    @ssumner, I went back and re-read the preceding Hamilton paragraph, prepared to see where I made my error (granted I read it pretty fast the first time through)… and then I re-read your comment. No, I won’t deny he’s defending both the book and the paper. I’ll grant you that… but I guess the question is why? All the hub-ub has been about the paper?

    OK, that said, it seems as if Hamilton may have more invested in this than R&R do for some reason. Hamilton calls it a “tiny detail” of a “few tenths of a percent” whereas R&R call it a “significant mistake” and thank HAP for finding it and for their “helpful comments” which helped them to resolve several discrepancies in their work. Then they state that “clearly more research is needed on debt and growth.” Then the show how HAP’s result of a growth rate of 2.2% for countries w/ > 90% debt/GDP is actually much closer to their median result and to their later 2012 result of 2.4% (closer than the -0.1% mean they published at the time). R&R don’t dwell on their book and complain “but how does that invalidate our BOOK??” They rightly ignore that issue because it has nothing to do with the issue at hand.

    Overall, I’m getting a much more defensive tone from Hamilton in that piece than I am from R&R!!

    … but perhaps that’s just me!

  57. Gravatar of TallDave TallDave
    1. May 2013 at 13:59

    @Tom Brown,

    I think you’re a bit confused. Central banks have relatively little control over the real interest rates paid by the government, currency issuer or no — they can affect nominal rates, but real rates are based on risk assessments. If sovereign debt looks risky, borrowers will demand a risk premium, and the central bank cannot do anything about that.

    Treasury auctions haven’t ever failed because our debt has never been unsustainable. Your argument is that the fact Treasury auctions haven’t failed proves it doesn’t matter if our debt is unsustainable, but that’s clearly specious reasoning.

  58. Gravatar of Tom Brown Tom Brown
    1. May 2013 at 15:20

    @TallDave, you write “If sovereign debt looks risky, borrowers will demand a risk premium”

    I claim that one of the major things that makes sovereign debt “look risky” is not having monetary sovereignty! Granted there are other factors… but if you’re a “bond vigilante” going up against PIIGS or Cyprus, that’s a VERY different matter than fighting the Fed or the BOJ!

    I’ve been hearing for years from alarmists at ZeroHedge and Peter Schiff and Jim Rogers that “Today is the day!!! It’s all going to fall apart today! The bond vigilantes are at the door!” … and what has happened? They’ve been wrong every time. Will they eventually be right? Maybe, but I’m not holding my breath. Do so if you want.

  59. Gravatar of Tom Brown Tom Brown
    1. May 2013 at 15:46

    … and BTW, I include as an ingredient to “not having monetary sovereignty” having large foreign currency denominated debts… something the PIIGS have now (I don’t think you can claim that owing Euros is owning “your own currency”), and that Weimar, Hungary and Austria had following WWI, and that Hungary had after WWII, and that Argentina, Russia and Zimbabwe had in more recent decades.

    Screech owls like Schiff and Ron Paul overlook this fact again and again!

    Again, we do NOT have a foreign denominated debt.

    We are not experiencing any extraordinary social breakdowns (civil war, falling government, regime change, massive bribery and corruption, etc.).

    We are not lacking fundamental confidence in our currency or our nation (Schiff and company excluded).

    We are not experiencing a collapse of our economy.

    Can those things change? Sure! Bet on them if you want to. I personally think its a bad bet. I’ll change my mind when I start to see some real movement in a significant number of these factors, but the debt/GDP ratio by itself, at the order of magnitude that it’s at, it doesn’t worry me! I think at these levels it IS sustainable.

    I think the alarmists get this wrong over and over because:

    1.) Their “business model” depends on causing as much alarm as possible amongst their fans, be they financial types like Schiff or politicians like Paul.

    2.) They WAY oversimplify history and the current situation and don’t understand the basics of how our monetary system works. How many times has ZeroHedge or Schiff blathered on and on about the Fed’s “money printing.” ZeroHedge finally caught on a little bit and is now exploring other bat-sh*it crazy conspiracy theories, but I’m not sure Schiff has yet.

  60. Gravatar of Tom Brown Tom Brown
    1. May 2013 at 16:03

    … and another thing, people always forget that a large chunk of the US debt that’s out there is long to medium term debt locked in at an extremely low rate. If rates start to climb, it’s not like it climbs on all $16T at once! It starts to climb only on the new debt that’s issued!

    This is a fact that’s overlooked time and again by alarmists. Plus I think the idea is if it starts to climb, that’s often correlated with increased economic activity and growth, and thus more revenue is coming in, even if the tax code doesn’t change at all. Since our tax system is still in tact, that revenue will actually be collected and can be used to pay the higher rates of the marginal debt increases… plus, presumably, the deficit will also go down… more economic growth = few people collecting unemployment benefits, etc, so the amount of new bonds issued will also decrease. You’ll never hear any of this from alarmists, because again, it doesn’t fit their business model.

  61. Gravatar of ssumner ssumner
    2. May 2013 at 06:48

    Tom Brown, You said;

    “Actually R&R thank HAP for pointing out a “significant mistake.””

    Are you saying R&R disagree with Hamilton’s claim that their basic results hold up even after the correction? Then say so. I very much doubt that. A mistake can be significant, and still not effect the basic findings.

    As far as I know no one disagrees with the size of the data error (a few tenths of a percent), the only disagreement is on methodology, and on that issue Hamilton, R&R and I agree.

    I would have been embarrassed if I was R&R, and I would have thanked them for finding a significant mistake, even if I didn’t think it affected my results.

  62. Gravatar of TallDave TallDave
    2. May 2013 at 07:25

    Tom Brown,

    No, you have that backwards — creditors control the lending relationship. If your government seems shaky, they will not allow you to borrow money in your own currency.

    Again, you seem very confused about the role of a central bank. Creditors do not “fight” them, all they ask is whether they are going to be paid back. If the Fed monetizes a large portion of the debt, they are being paid in dollars that are worth less than ones they lent. They will respond by demanding higher rates. Simple as that.

    The only question is where that delineation lies. Schiff has been wrong to date, but he will not be wrong forever. The fact that we are not yet insolvent (despite some predictions we would be) does not mean we can never be insolvent. Your argument is with basic math.

  63. Gravatar of TallDave TallDave
    2. May 2013 at 07:29

    If rates start to climb, it’s not like it climbs on all $16T at once! It starts to climb only on the new debt that’s issued!

    Wrong. You may want to review the amount of US debt that is short-term. If rates rise significantly, the US will almost immediately be insolvent as the situation cascades out of control. As I said before, the Plank curve is very steep and gives little warning.

  64. Gravatar of Tom Brown Tom Brown
    2. May 2013 at 12:22

    @Scott,

    R&R don’t claim this, but point out that HAP made an “important correction” which lead to a “notable change” in the average growth rate for the over 90% debt group, which helped to “reconcile why one result is out of line with all the others results in our original paper as well as ones presented in our later research.”

    That original -0.1% appeared to be a dramatic knee in the curve, but upon the HAP correction, which R&R agree with, it brings it into line with their other and more recent results.

    That phantom knee in the curve is what austerians latched onto, along with assuming some sort of causality: debt > 90% leads to dramatically worse growth. The 90% figure became a threshold of sorts. Notions which R&R’s paper as a whole didn’t necessarily support, but notions, nonetheless, which R&R failed to dissuade the austerians of, even when asked in testimony before congress (see Sax’s R&R congressional quote above).

    Here’s more from R&R:

    “We are grateful to Herndon et al. for the careful attention to our original Growth in a Time of Debt AER paper and for pointing out an important correction to Figure 2 of that paper. …it leads to a notable change in the average growth rate for the over 90% debt group.”

    “Herndon, Ash and Pollin have written a useful paper, finding a significant mistake in one of our figures, and helped reconcile why one result is out of line with all the others results in our original paper as well as ones presented in our later research, not to mentions those they present in their helpful comment. Clearly more research is needed on debt and growth and we welcome all efforts, it is very exciting area.”

    So again, maybe it’s just me, but that reads a lot less defensive than Hamilton to me. After reading both carefully, I had the same impression that Mike Sax had. Perhaps Hamilton never took the phantom knee in the curve very seriously himself… it’s not clear from his post, and I don’t know his history with it.

    And BTW, in that same piece R&R point out that a difference on the order of 1% (actually, the difference appears to be on the order of at least 1.8% for the > 90% debt/GDP group) is nothing to sneeze at, especially over a 23 year time frame! (Apparently R&R’s error amounted to a much smaller amount of growth in the < 90% group, … something with which HAP agrees with them on on… is that the "few tenths" that Hamilton is referring to??)

    R&R do get defensive in the piece, saying that they think HAP wrongly accuses them of leaving out some data on purpose. They also disagree with HAP about the use of a particular weighting method. However, in the end they effectively state: yes, the HAP result, even w/ their preferred weighting, effectively bumps our erroneous -0.1% to 2.2% which is in line with our own later estimate of 2.4%.

    So, lets say we go w/ R&R's own 2012 estimate of 2.4% rather than their wrong -0.1%… that amounts to twenty five tenths of a percent difference. I normally don't think of twenty five as "a few" as Hamilton states. And again, R&R point out that compounded over 23 years, even 1% makes a tremendous difference. Here's R&R in their own words:

    "It is utterly misleading to speak of a 1% growth differential that lasts 10-25 years as small. If a country grows at 1% below trend for 23 years, output will be roughly 25% below trend at the end of the period, with massive cumulative effects."

    Perhaps Hamilton is assuming we're all familiar with R&R's later self updating of this number… it's not at all clear.

    The casual reader of Hamilton, who didn't bother to read R&R for themselves, and familiar with the much touted -0.1% result, may assume that HAP perhaps found a mistake which at most caused that to actually be 0.2% (three is a good substitute for "a few" to most people probably), and thus be left with the impression that "the knee in the curve is still there."

    So I guess I could turn the question around. Why rely on Hamilton's evaluation of the severity of the error when you could go right to the source and read R&R for themselves?

    BTW, this analysis by Arindrajit Dube tends to support causality running contrary to the way the austerians assumed (and wish) it was:

    http://www.nextnewdeal.net/rortybomb/guest-post-reinhartrogoff-and-growth-time-debt

  65. Gravatar of Tom Brown Tom Brown
    2. May 2013 at 12:35

    @TallDave,

    You write:

    “The only question is where that delineation lies. Schiff has been wrong to date, but he will not be wrong forever.”

    Brings to mind that saying about a broken clock…

    If you want to toss your lot in with Schiff, Rogers, Paul, Stockman, ZeroHedge, Glenn Beck and “Goldline” … be my guest!

  66. Gravatar of Tom Brown Tom Brown
    2. May 2013 at 13:20

    @TallDave

    Concerning rising interest rates, I thought this bit by Cullen Roche was interesting:

    “I think it’s an unwarranted concern. The current interest outlays are about 1.5% of GDP. The interest rate structure could quadruple and we’d be paying about 5% in GDP on interest. But there’s a weapon the US Tsy has that could combat this entire “problem” to begin with. They could just cut the duration of debt. So, for instance, if the debt level rises too much they’ll just stop issuing anything over 7 years in maturity. That’s where Japan is headed in my opinion. They have to cut their maturity levels at some point in order to reduce interest costs because they think it’s going to cause runaway inflation.”

  67. Gravatar of Tom Brown Tom Brown
    2. May 2013 at 15:50

    Ha! I didn’t know that R&R actually used the words “tipping point.” Thanks marcus…good catch!

    http://thefaintofheart.wordpress.com/2013/05/01/rr-defend-themselves-again/

    Well, I can almost see how their erroneous “knee in the curve” results might lead them to say that:

    http://m.static.newsvine.com/servista/imagesizer?file=steve-benen47149E19-49A9-7774-72B7-CA8426521B17.jpg&width=380

    The erroneous results do look rather dramatic when plotted next the the corrected data!

  68. Gravatar of Tom Brown Tom Brown
    3. May 2013 at 10:35

    @Tall Dave,

    “No, you have that backwards “” creditors control the lending relationship. If your government seems shaky, they will not allow you to borrow money in your own currency.”

    The Fed can set any price it wants for any maturity bond it wants. If a creditor (lets call him Mr. Schiff) has other ideas he can try to set a different price. Eventually the Fed will win because it has unlimited reserves at its disposal! Creditors, by nature, do not have unlimited resources (because they are currency USERS not currency ISSUERS) so they will always loose. Perhaps Mr. Schiff, somewhere deep down, actually knows this and that’s why he hasn’t tried it!

    Now usually the Fed is only concerned with precisely controlling the overnight rate. We have LOTS of data on that. Apparently NO ONE has ever forced the overnight rate to deviate from the Fed’s target rate. Why do you suppose that is? Could it be that no matter what currency user they’re “up against” the Fed looks in its pocket and sees… Oh yeah.. I have infinity $. No worries!

    Now from the point of view of the Treasury, it has some control too as I’ve already mentioned. Say the Fed is just setting the overnight rate as it usually does. Now expectations of inflation start to change so rates on 30 yr and 10 yr T-bonds start to rise. Oh NO! What can we do, we’re DOOMED!!!… or … the Treasury just stops issuing 10 yr and 30 yr bonds.

  69. Gravatar of Tom Brown Tom Brown
    3. May 2013 at 11:48

    @marcus, it took me a while to find it, but I finally located the source of at least one time R&R mentioned “tipping point”: Senator Coburn is the source:

    http://delong.typepad.com/sdj/2013/05/is-a-higher-borrowing-trajectory-warranted-or-not.html

    Wow!… just Wow! .. when you read Coburn’s account of that meeting it REALLY contrasts w/ their more recent statements and how they tried to walk back about what they said (verbally!) regarding the dire consequences of the 90% “tipping point” and their crystal clear cause and effect direction… to a large group of senators no less!

  70. Gravatar of Tom Brown Tom Brown
    3. May 2013 at 11:59

    It’s kind of funny now when you read it! Quick, act now! Stop locking in long term debt at miniscule rates… rates are sure to go up in the future, so don’t borrow with locked in low rates now!!! Hahahaha

  71. Gravatar of Max Max
    3. May 2013 at 12:39

    Tom, the Fed is supposed to set interest rates consistent with price stability. If it fulfills its mandate then it can effectively force a government default by raising (real) interest rates. Alternatively, if the Fed guarantees the government debt (either explicitly through monetization or implicitly), then it can lose control of the price level.

    The alarmists aren’t *completely* crazy. There is a danger, even if it is remote.

  72. Gravatar of Tom Brown Tom Brown
    3. May 2013 at 13:19

    @Max, I agree that the Fed’s hand can be forced by economic forces. So too with the Treasury. I’m not saying that deficit spending has NO constraints. What’s important is the underlying economic vitality of the nation… you just can’t give everybody money to sit and do nothing for very long w/o consequences. What I disagree with is the idea that the Fed is at the mercy of so-called bond vigilantes. Maybe Eurozone nations are, and states and local governments… but not the Fed or Japan or Canada or the UK, etc. Households don’t have a central bank at their disposal with a bottomless pocket. I.e. the MAIN difference is the former are currency users while the latter are currency issuers. Are there other important factors? Absolutely! But when we don’t have social/war/political/corruption/taxation/economic crises going on, and the money the gov owes is its own, then solvency IS not an issue. Is high inflation an issue? Yes, absolutely, it can get out of control and be very dangerous.

    It’s very different for (otherwise healthy!) households, businesses, state, local, and Eurozone countries… or countries with large foreign currency denominated debts. Those entities, though they are healthy, DO need to be concerned with solvency. They CAN’T issue risk-free bonds, by their very nature!

    So yes, big picture, economic forces can force the Fed’s hand… but our situation is entirely different than a household or the favorite bug-a-boo of political pundits: Greece! “We’d better watch out … we might become Greece! We’d better get out *economic house* in order!” Both false comparisons in my book. We are nowhere NEAR being Greece! Being a currency USER, their situation is entirely different! That’s one of my problems w/ R&R in general… they seem pretty cavalier about conflating us with eurozone countries. My point is that’s an apples and oranges comparison. If they want to compare California with Italy… that’s a much more fair comparison.

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