Home > The Economics Profession, The Economy > Doubts about debts: Reinhart, Reinhart and Rogoff on the nature of modern capitalism (1800 – 2010)

Doubts about debts: Reinhart, Reinhart and Rogoff on the nature of modern capitalism (1800 – 2010)

from Merijn Knibbe

I’ve  spent some quality time with Reinhart, Reinhart and Rogoff. They write about the long term development of debt and modern capitalism. It reads like a Post-Keynesian/Austrian/Institutionalist/Georgian economic history synthesis – interesting, as their findings are presented at, among other occasions, ‘The Federal Reserve Bank of Kansas city Jackson Hole Symposium’ of August, 2010.

R., R.  and R. have assembled an awe inspiring amount of data on GDP growth, private debt, government debt, domestic debt, external debt, unemployment, inflation and government defaults from about 1350 to the present. Some results:

  1. Again and again (and again), waves of credit fuel booms which eventually go bust, shattering lives and disrupting societies. These busts are not just cyclical downturns – this is stuff like the Asian Crisis, the GFC, the Great Depression and a number of other episodes.
  2. Recovery does not come easy. Market economies survive and adapt, albeit quite slowly if ‘phoney debts’ are not restructured quickly. The same holds to an even larger degree for growth, employment and prosperity. Even decades after the bust of a credit boom, unemployment is in almost all countries (except those which already knew high unemployment before the bust) higher than before the bust. Unemployment only comes down quite slowly, anyway.
  3. About the same for economic growth: it easily takes a decade before economic growth is back to ‘the old normal’ (R, R@R might however mix up effects of the crises with long term changes in growth rates. According to the preliminary findings of P. Foldvary and J.L. van Zanden: before about 1880, maximum GDP growth seems to have been lower than after, while max. post 1970 growth rates in the ‘leading’ economies might be lower than before – R., R. and R. do not take account of this).
  4. About the same for inflation: it stays lower than before the bust for an extended period of time.
  5. ‘It’ happens everywhere and always. There are some lulls – most notably the 1948-1978 period – but irrational excuberance followed by default and crisis is no exceptional eventIt’s part and parcel of the nature of the monetary beast.
  6. Every emerging economy (no exception) has at least once experienced a serious credit bust and default (the data of Foldvary and Van Zanden make it possible to investigate if this also caused some countries to quite the ‘convergence club’ of growing emerging economies – but such things still have to be figured out, as R., R. and R. admit in a footnote.).
  7. House prices seem to be some kind of leading indicator and there might be real estate cycles (the OECD (2011) has, quite recently, also discoverd that ‘housing’ can be a contributor to macro economic cycles…)
  8. Credit growth (measured as a % of GDP) sometimes continues for some time after the bust – but eventually, deleverage follows (bad news for the UK and the Netherlands).
  9. Countries which experience a serious credit bust and reorganize banking seem to be less prone to other busts for decades (for instance the Nordic countries and Canada during the GFC).
  10. Governments do not need fiat money to manipulate the currency.

Where does this leads us, aside from the idea that it might be wise to teach students of economics a little history of economic thought and a little economic history?

First, Real World economies doe not tend to neo-classical General Equilibrium with perfect use of factors of production. Again and again (and again), the inherent forces of modern Real World capitalism change a healthy supply of credit  into reckless lending  which disrupts and dislocates economies. We’re listening to the song of the sirens, again and again (and again).   

The findings of R., R. @ R. (especially september 2010) underscore the ideas of Steve Keen on the recent World Economic Forum (WEF) report, as he expresses these on this blog: the long and the very long run do matter, when it comes to credit and debts and the WEF has (not ‘should’, but ‘has’) to pay more attention to this. As the WEF study does not use the R., R. and R. september 2010 data (presented at the Jackson Hole conference – this is not obscure stuff!) while it does cite studies published as late as november 2010, the McKinsey company which wrote the report could and should have done a better job. But maybe I shouldn’t expect the same standards from McKinsey as from my students. 

The report – which does contain a lot of usefull information – advises, in the end and among other things, to tie Odysseus to the mast – to resist the song of the sirens. But it advises to do this with thin, soft and weak silken threads, instead of titanium chains. This has to change – though even chains will, in the end, give way to the song of the sirens. Again. If I remember this well, it were anyway not the ropes binding the leader which prevented Odysseus his ship from crashing, but the wax in the ears of the underlings.

The report also does not adress the problem of asset inflation – which, according to R., R. and R., is a main problem  of credit fuelled booms. The siren-song proposal to double the amount of credit between now and 2o20, based upon 2000-2010 trends, therefore implicitely accepts that credit fuelled asset inflation in the run up to the GFC was not a bad thing – and that we should try this, again. If we manage to curb asset inflation (i.e. rising prices of houses, land and stocks), much less credit is needed. Anybody any proposals?

By the way, we do need a global metric of asset price inflation, I think. Money still is a national thing – but reckless credit isn’t.

Aside: the WEF report is fun, too. It states (p. 16): “There is potential for securitization to recover: market participants surveyed by McKinsey in 2009 (i.e.: the bosses of the Big Banks, M.K.) expected the securitization market to return to around 50% of its pre-crisis volume within three years. But to rebuild investor confidence, there will need to be increased price transparency, better data on collateral pools, and better quality ratings (emphasis added, M.K.).” In other words: the banks really, really did not know what they were doing at the time.


Földvári, P. and J. L. van Zanden. Global Income Distribution and Convergence 1800-2000, http://www.iisg.nl/research/income-distribution.pdf

OECD, ‘ Housing and the economy: policies for renovation. Chapter from forthcoming Economic policy reforms 2011, Going for growth (Paris, 2011). http://www.oecd.org/dataoecd/42/11/46917384.pdf

Reinhart, C. M. and K. S. Rogoff, This Time is Different: Eight Centuries of Financial Folly (Princeton: Princeton University Press, 2009)

Reinhart, M.C. and K.S. Rogoff, ‘Growth in a time of debt’, NBER working paper 15639 (January 2010)

Reinhart, C.M. and V.R. Reinhart, ‘After the fall’, NBER working paper 16334 (September 2010)

World Economic Forum in collaboration with McKinsey and company, ‘More credit with fewer crises. Responsibly meeting the World’s growing demand for credit’ (Geneva, 2010)

  1. January 23, 2011 at 6:04 pm

    The main asset price rise fueled by credit expansion is land value, and the remedy is land value taxation.

  2. merijnknibbe
    January 23, 2011 at 7:35 pm


    Data on stock market prices are everywhere. More and more organisations assemble house prices – a good thing. I do not know about a systematic international land price data base on land prices. Do you know if something like that exists, anywhere?

  3. Stephan
    January 24, 2011 at 6:47 pm

    “This time is different” is awesome for its historical narrative and data. But that is about it. The rest of the story is a big lie and bullshitting normal citizens about the true nature of our current monetary arrangements.

    Remember? Bretton Woods died 1971. Since then most nations are fully sovereign in their currency. Meaning the federal government is the monopoly issuer of its non-convertible free-floating FIAT currency. By definition these governments can’t run out of money and there’s also no empirical evidence for how much sovereign dept hampers growth.

    But Mister Rogoff launched his worldwide marketing campaign by conflating different monetary arrangements and telling people lies. He came to Europe issuing dire warnings about Greece (which is true given the foolish set-up of the Euro) and that the UK might join the PIGS soon (which is a blatant lie because the UK government if fully sovereign in the Sterling.)

    In the book you will find a single example of a sovereign default on debt issued in a non-convertible free-floating FIAT currency. Japan during WW2. This was a political decision because Japan thought it is not a good idea to honor the debt owed to war enemy US bond holders. Nevertheless Rogoff doesn’t stop to scare the shit out of his unsuspecting audience about unsustainable US federal debt.

    This is for me one of the worst examples of an economist who pretends to present some positive economic findings free of normative judgments. (Friedman) The normal libertarian economist in the US has at least the courtesy to make his ethical position or normative judgments explicit before presenting his economic findings. The US would be much better off by immediately closing the economics department of Harvard for sheer incompetence of its major employees.

  4. merijnknibbe
    January 24, 2011 at 8:56 pm


    There are a lot of things not mentioned by Reinhart and Rogoff. Wars play a mayor role, when it comes to historical defaults and inflations. This very, very obvious fact is largely ignored by them. For another: nineteenth century economic growth was, on average, lower than twentieth century economic growth. In the by now famous debt/growth table, R. @ R. however lump both centuries together. When you disentangle the ‘early birds’ countries in the table, i.e. countries for which time series are available back to 1880 or earlier (Austria, Belgium, Denmark, France, Germany, Greece, Italy, the Netherlands, Portugal, Spain, Sweden, United Kingdom, United States) from the rest the correlation between debt and over-90%-public-debt becomes even weaker and in fact non existent (growth in a time of debt, table 1). And countries like Australia, Belgium, Finland, Greece and New Sealand experienced their highest growth when government debt was over 60% of GDP (the Euro ‘limit’), Austalia and Belgium even when it was over 90%. Same for emerging markets like Bolivia, Chile, Ghana, Nigeria, Sri lanka, Malaysia and Singapore – though for these countries the 90% treshold seems more compelling (the causation might however run the other way). Average as well as median growth of emerging markets even does not show any serious differences until debt reaches 90% of GDP (table 2). The relation between debt and growth is not as compelling as Reinhart and Rogoff suggest.

    But that was not my point. They do show that ‘reckless lending’ is not a new thing – and that it is endemic to capitalism (that’s however not their explicit conclusion but mine). That’s what makes these findings so threatening to people like Lucas and other neo-classical economists: a monetary economy does not tend to General Equilibrium. It’s completely consistent with, among others, Minsky (according to me, the ideas of Minsky are quite consistent with ideas of ‘Austrian’ economists on this, by the way). Unfettered financial capitalism leads, in the long run, again and again to an unsustainable situation where too much money chases too few assets which leads to asset price increases which energize the chase – until the Ponzi scheme breakes down. There are, of course, ideas to prevent this – from a land value tax to a Tobin tax. But that’s step two. First, everybody has to know that R. and R. show that these waves of credit are no isolated ‘black swans’ – but characteristic of monetary market economies.

  5. January 25, 2011 at 9:09 pm

    Fred, I too am intrigued that no one ever picks up the land issue and runs with it. The economics profession is still in denial that land is the elephant in the room.

  6. merijnknibbe
    January 26, 2011 at 8:37 am

    @Carol, Fred

    I just consulted (not: read)

    Click to access 2009eindrapportherzieningkapitaalgoederenvoorraadstatistiekart.pdf

    (Final report on reconsidering the estimates of the stock of capital)

    A: This report is based (like so many statistics) on the methodology of the National Accounts and indeed shows that standard statistics by design do hide the elephant.

    B: The National Accounts measure, in the end, the flow of value added – i.e. everything what we make. ‘Non produced assets’ as well as value increases of other assets are not counted.

    C: The value of land is, however, implicit in the value of buildings, roads, farms etc. which constitutes about 75% of the value of the total stock of capital.

    D. Though additional calculations are added to the National Accounts to correct this, this concept also means that the depletion of the stock of minerals is not substracted from GDP.

    There are statistics on the value of land – but these are not included in the standard economic overview of the national accounts.

  7. January 26, 2011 at 12:18 pm


    It’s time that land wasn’t just ‘implicit’ in stats. The analysis is incomplete and so therefore are the policies.

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