Archive for January 2nd, 2014

The most important economic development or new research in 2013..

January 2, 2014

Bloomberg asks a panel of economists to identify the most important economic development/research in 2o13. List of econs include — Janet Currie, Susan Athey, Simon Johnson, Douglas Holtz-Eakin, James K. Galbraith, Dani Rodrik, June O’Neill, Laura Tyson and Glenn Hubbard.

Wide range of topics include mortality to austerity to virtual currencies:

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Advanced economies were once emerging/developing economies themselves…

January 2, 2014

Reinhart and Rogoff have this interesting paper on the topic. They say that most advanced economies are stuck in this trap to resolve crises in their economies. The reason is the easier solutions look pretty much of the developing world. Now, how can advanced economies use such policy measures?

The reality is much different. Throughout their history, today’s advanced economies have used the solutions which are now termed as belonging to emerging world:

Even after one of the most severe multi-year crisis on record in the advanced economies, the received wisdom in policy circles clings to the notion that high-income countries are completely different from their emerging market counterparts. The current phase of the official policy approach is predicated on the assumption that debt sustainability can be achieved through a mix of austerity, forbearance and growth. The claim is that advanced countries do not need to resort to the standard toolkit of emerging markets, including debt restructurings and conversions, higher inflation, capital controls and other forms of financial repression. As we document, this claim is at odds with the historical track record of most advanced economies, where debt restructuring or conversions, financial repression, and a tolerance for higher inflation or a combination of these were an integral part of the resolution of significant past debt overhangs.

Further:

In this paper, we extend our earlier work on pre-WWII sovereign defaults by further documenting lesser known domestic default episodes but particularly by delving deeper into the widespread default by both advanced and emerging European nations on World War I debts to the United States during the 1930s. We quantify this largely forgotten episode of debt
forgiveness (the debts were never repaid) in terms of both its incidence across countries (which is relatively well known) and its scale or orders of magnitude of default in comparison to the debtor countries’ GDP as well as to what it collectively amounted to from the US creditor perspectives. 

We also illustrate the continuing depth of the debt overhang problem, which in our view remains the overarching obstacle to faster recovery. Research shows that debt overhang of this magnitude is typically associated with a sustained period of sub-par growth, lasting two decades or more.3 In light of this danger, we review the possible options, concluding that the endgame to the global financial crisis is likely to require some combination of financial repression (a nontransparent form of debt restructuring), outright restructuring of public and private debt, conversions, somewhat higher inflation and a variety capital controls under the umbrella of macroprudential regulation. While austerity in varying degrees is necessary, in many cases it is not sufficient to cope with record public and private debt overhangs. All these options, while understandably anathema to the current generation of advanced country policymakers, are more familiar to their economies than is commonly recognized.

We take this opportunity to highlight four basic of the lessons from the historical track record learned as well as those economists, financial market participants, and policy makers seem to have collectively forgotten.

What are the four lessons?

  • On prevention versus crisis management. We have done better at the latter rather than the former… We have doubts that this will change, as memories the crisis fade and financial market participants and their regulators become complacent.
  • Diagnosis or understanding the scope and depth of the risks and magnitudes of the debts. What is public and what is private? Lines are blurred; Domestic and external debt are not created equal—there are fewer options to deal with the latter; Hidden debts… (contingent liabilities, below the line arrears, local governments? Debts are usually MUCH bigger than meets the eye. 
  • Crisis Resolution: How different are advanced economies and emerging markets??? Not as much as widely believed. There is an extensive “forgotten” history of pre-WWII credit events in advanced economies (default, restructurings, conversions and other forms of confiscation…). These credit events involved both private (junior and senior) and public (domestic and external) debts in varying degrees. It seems improbable that restructurings in the current crisis will be confined to Greece…
  • After global crises: International financial architecture—the return of financial repression… There are recurring sequencing patterns in these events.

Useful stuff…

Central banking before and after the crisis

January 2, 2014

I must have written many posts in the past as well in different ways, on the topic. But the research keeps coming.

Frederic Mishkin of Columbia chips in with his views on the topic.

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How India’s current political thinking resonates memories from past..

January 2, 2014

Experts on American politics always point how much of American thinking even today (or whenever) resembles the thinking held by the founders of America. So most arguments can be traced back to thinking by Hamilton/Jefferson/Madison and so on.

Sunil Khilnani in this interesting ToI article shows how the current most visible political leaders also have their thinking going back to India’s founders.

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