This Time is Different

April 17th, 2024

This is going to be a tricky book. It seems very technical and data heavy, but appears to have a good number of graphs and charts to aid understanding. I thought it was pretty long but a third of it is appendices and notes. I only got through the preface today and that was no small task for me. I’m already lost at the concept of “default”. It talked a lot about governments in default either to internal or external lenders. Then there are banking crises to discuss. The data I guess will reveal that default and banking crises are not just something emerging economies go through and grow out of. 2008 showed that the complex US economy could go into a banking crisis. But I think the first good bit of it is “sovereign debt”, or how countries go into default.

April 19th, 2024

There was a preamble that I read yesterday that explained some things but I forget it. The first chapter defines some terms and concepts that will used throughout the book. I guess the first three are more “symptoms: inflation, currency crisis, debasement. An inflation crisis occurs when it exceeds 40% per year, and hyperinflation is 40% per month. Pre-WWI periods did not have such high inflation, so 20% is used as the limit. A current crisis is when a currency, compared to the dollar or whatever strong currency of the era, drops by 15%. I don’t really know how that works. Old style debasement is when the government would use less precious metal in their coin, but give it the same value. The modern version is something like where the government changes the currency. Like if $1 becomes so worthless that they make new currency, the &, and &1 is now worth $1000. Then there’s three more crises: banking crises, external debt, domestic debt. Banking crises are determined either by a bank run which leads to closure, or a situation which leads to the public takeover of one or more financial institutions. A lot of these start and end dates are murky and the reasons are hidden since banks often fudge the books. They don’t exactly advertise they’re doing poorly and have risky investments. External debt is when the government owes money to foreign creditors. When the government misses a payment and defaults, it’s highly advertised and thus well studied. These seem to be not so big a deal since the foreign creditors have no jurisdiction in that country and better terms are usually worked out. It will affect their ability to get future loans, though. Domestic debt is the murkiest of all because the government hides everything. It’s like the above but when the government defaults on debt to locals.

April 22nd, 2024

The first chapter ends with the author’s definition of “this-time-is-different” syndrome, which essentially is that people always assume that bad things happen elsewhere to other people and that we are so much more advanced and immune. The second chapter is on “debt intolerance”, which I think means why less developed countries cannot handle the debt levels that advanced countries do. Where a country like Japan can go on with a debt equal to its GNP, the less developed economies seem to start defaulting at around the 40% mark. I think that’s as far as I got.

April 23rd, 2024

Continued the second chapter. Note that debt here refers to government debt, public and private, external (to foreigners). Note that in general, private debt in these cases is very small compared to public and often becomes public after buyouts. The authors use the ratio of debt to GNP or exports and something called the IIR, which I think stands for international investors rating. A high rating means they are unlikely to default. Using these numbers, the authors split the countries into clubs, split by the average IIR plus/minus 1STD. Above a sigma, the countries are in Club A and are the least debt intolerant. Below a sig, they are in Club C and have practically no access to foreign loans. In between in Club B, it is broken down by 4 types. If they are above the mean (I & II) or below the mean (III & IV), and if their debt ratio is below 35 (I & III) or above it (II & IV). As Type number increases, the intolerance to debt increases. This group is the least understood and the focus of the next chapters.

April 23rd, 2024

April 25th, 2024

Now begins Part II, Foreign Debt, and chapter 4 mostly raises questions about it. The first is: why do lenders loan to foreign governments? There is nothing they can do to force a repayment. Back in the old days, a country could and would invade another for debt repayment. This is now seen as too costly and unrealistic, given that debt owed is often split among countries and continents. A country pays back its debt because it wants access to the capital markets. I don’t really know what that means, but I guess the government does not want to be on some sort of blacklist that will make them persona-non-grata and unable to trade in certain countries. But since we’ve seen that governments default at percentages much lower than their income, we know that default is a choice. They are not companies who cease to exist when they cannot pay. It is a political decision that payments up to X are endurable, but after that it is unreasonable. Unless you want to be shot like Ceausescu, you won’t make your people starve to pay foreign debt. The government usually will negotiate terms rather than refuse to pay altogether and I guess that should make everyone happy.

Then there was a section about illiquidity vs insolvency. Illiquidity is the problem of short-term debt where for some reason when the debt term is over, the lenders lack confidence in the government and do not allow a rollover of principal. Even if the government could and would continue paying the debt, they cannot now because no one will give them the loan. Nowadays the IMF would step in and give a bridge loan. Note that “lenders” may be an aggregate of small lenders who cannot individually meet the loan value, thus a consensus among lenders is required. Insolvency is when the government cannot or will not pay, which is another confidence crisis. It becomes hard to tell which is which and thus loans can be given to insolvent governments, which leads to more default.

The short-term loans are given as a way to “force” governments to pay. Since there is regular rolling over of principal, they need to keep confidence high. In return they get lower interest rates. I think.

April 26th, 2024

The fourth chapter ends with a bit on domestic debt, which I didn’t really follow (surprise). Where does domestic debt come from? I guess bonds and apparently when I put money in my bank, the bank can loan that to the government. Makes sense. I only ever thought about private loans like for houses and businesses, but don’t see why a government couldn’t borrow from a bank. Turns out governments default on domestic debt, too, but the data is much harder to get a hold of. Then there was something on odious debt, like giving dictators money to commit war crimes like Israel and Russia.

I only read a little of chapter 5, which shows charts of countries in default since 1800. The real interesting part was a side box on the history of external debt. Since the church banned usury, there were “work arounds” like paying the loan back not with interest, but with a stronger currency, i.e., one that hasn’t been debased. Eventually the backdoor stuff went away and it was all open. One of the best examples is Edward III getting loans from Italians for his war with France. England was a developing country, which made money from its wool industry. When Edward lost some battle, it caused a bank run in Italy and 2 banks went bankrupt over a couple years. There were more defaults and England didn’t cross the threshold to “developed” until after 1688 and Parliament had a tighter control on finance. Then there was Spain with its American silver, but Spain and France defaulted 6 or 7 times in the 17th century. War is a big reason for default.

April 29th, 2024

The chapter continues showing different correlations with external defaults. A major one is the correlation with banking crises. These lead to the advanced economies contracting and not loaning any more money. This prevents principal rollovers and some other stuff. In earlier periods but still relevant today are commodity prices. If commodity prices fall, defaults rise since the emerging markets can’t get enough money to pay the debt. There was one more but I didn’t understand it. There was a side box about restructuring the debt, using something called the Brady program, which actually saw that most the restructured countries defaulted or had worse debt ratios. This is because they did well and then borrowed more, creatin another scenario of default.

April 30th, 2024

Chapter 6 ends the section on external debt default. The chapter reiterates that even a rescheduling must be considered at least a partial default. This is because the rescheduled debt often has a lower interest rate and longer term, giving the lenders a high risk illiquidity with a low rate of return. The return is comparable to bonds in a low-risk nation, not at all comparable to the high risk returns of venture capitalism. The chapter gives a history of default through different continents and different centuries. The summary is that repeated defaults are not a new phenomenon and they are not confined to Latin America. They happened everywhere for hundreds of years. Over the centuries, some emerging markets like France and England graduated to advanced economies, but they had plenty of issues in the past.

May 1st, 2024

The next chapter starts on internal domestic debt and default. There was a little background but mostly charts and data, so not much to summarize. Lots of tables, too. Charts and tables are very helpful. Apparently economists mostly ignore domestic debt, assuming that it is not significant and will always be paid off, or it can be inflated away. The authors show that throughout history that this is not true. Domestic debt across 64 countries has varied and probably averaged slightly above half of all debt, more so in developed countries. They also noted many instances of default or things that should be considered default. The idea that the government doesn’t have to pay its domestic debt has some logical foundation, but in reality it’s hard to the believe the government can afford to anger the wealthy and powerful lenders, especially when a government can be voted out of office.

May 8th, 2024

Chapter 8 and 9 give some data about domestic debt. At the time of default, it is usually several times larger than external debt. It is also a significant burden when high inflation events occur. Lots of graphs and charts, but other than that, not very interesting. That ends the section.

May 9th, 2024

The next section is on banking crises and inflation. The main idea so far is that while many advanced economies have “graduated” out of defaulting, no country has graduated out of banking crises. The data shows that the developing world and the advanced economies are both, and nearly equally, plagued by banking crises. The book mentions two types of crises. The first, which I’m not sure if it is covered much more, is under a repressive economic system. For example, the government limits what people can do with their money, and thus they are practically forced to keep it in banks. Then the government gets low interest loans from the banks; this is essentially an indirect tax. The government can also increase inflation beyond the allowed earned interest and inflate their debt away. The more typical crisis the bank run, which most of us will be familiar with. The short-term deposits are used to back long-term loans. Runs are about confidence in the bank and can be caused by completely false information, which I recall an episode like this in The Jungle. The bank then has to get rid of assets at cheap rates. If multiple banks have to get rid of similar assets at the same time, then what should have been liquid assets now become illiquid and unsellable as the market saturates.

May 10th, 2024

The rest of chapter 10 talks about banking crises and real estate. It seems that there is a link between real housing prices and a crisis. The prices run-up and peak shortly before a crisis and then bottom out shortly after. This is roughly a 4-6 year event and happens in countries of all status. This may be why it takes longer to recover, whereas “non-tangible” bubbles like stocks or the dot com bubble had short recoveries. Then it talks about the costs of a banking crisis. The main two are that the government takes on a huge amount of domestic debt, average 86% more than at the start of the crisis, and a decrease in GDP. GDP goes from positive to negative and takes 3 years (or 2 years in developing countries) to become positive again. Note that this positive percentage is smaller since it based on a lower income. The other note is that a lot of crises occur after a market liberalization or a reduction in oversight/deregulation. The chances increase dramatically after such an event.

May 13th, 2024

There’s a short chapter on currency debasement, the pre-paper era method of inflation. It doesn’t specify but I assume this mostly effected silver coinage than gold. Gold coins you can change the diameter a bit and save money, but the common method of debasement is to just use less silver. Even in the 19th century this happened, such as the UK going from pure silver coins to sterling (.925) silver. Henry VIII lost so much money somehow (war I guess) that he removed 50% of the silver out of the coins. Thus a coin with less value had the same face value, which would actually be a good thing if prices stayed the same. 1lb, with half the silver, should be worth half a pound, but could buy 1lb. The assumption would be that people get wise and raise prices to cover that difference, but the government still pockets the real value of the silver. This type of this impacted every country everywhere for the 7+ centuries on record.

The next chapter is on modern inflation of fiat currency. I didn’t get very far and it didn’t provide any conclusions yet. The data shows that in the past 200 years or so, like debasement, there has been significant inflation episodes at one time or another, with multiple years of +20% or more. The US had almost 200% in 1779.

May 14th, 2024

I couldn’t really pay attention to the rest of the chapter. I don’t know if it’s me or the material. The rest was I think about currency crashes and dollarization. Once a government inflates their money and there is no confidence in it, people use foreign currency for transactions and debts. Once the foreign currency takes hold, it’s near impossible to get rid of it. Even reducing inflation to low levels has no impact, unless it lasts a very long time. Only four countries on the list had succeeded, often with some sort of buyback plan or “punishment” for using foreign currency, like when Israel made putting foreign currency in the bank un-withdrawable for 1 year. Mexico did a buyback, or some forcible conversion. This ends the section.

May 15th, 2024

The next section is on the 2008 financial crisis. The whole first 200 pages are background for understanding what happened and if it was predictable. I only got through half the first chapter. It talks about some previous bank crises and then shows some graphs about percentage of the world (based on GDP) were in a crisis at any given year since 1900. The 2007 crisis peaks almost as high as the Great Depressio. Another graph shows the rapid increase in home prices, which had a small 30% or so rise from like 1891 to 1970 and then shot up 3x until the housing bubble burst. I could be wrong about the 1970 year, but that’s when deregulation started to happen in the economy and has continued ever since. The bit I stopped on talks about the “this time is different” syndrome. I guess what was happening was a lot of “saver” countries were looking for safe investments for their savings accounts and then invested in US things. So all this foreign capital was flowing into the US and there was some sort of mismatch between this and some other thing that should not have been so mismatched. I guess with so much more money flowing, they could do riskier things, even though these are savings accounts. Some people thought this couldn’t last and it would hit a wall before crashing, but most leaders thought it was fine and everything was safe and calculated.

May 16th, 2024

I am trying my best to pay attention but it’s pretty dry. It continues with some warning signs, comparing the US in the 2000s to the “Big Five” crises of the post-war (Japan in the 90s and some European countries at other times, I think) and also to the average banking crisis, which has much milder results. I don’t remember the details but it followed the trends, more or less. The only thing that the US had in its favor was no inflation crisis. I wonder if we are going to a crisis soon? My stocks are the best they’ve ever been, up 11% from a year ago. I read an article about heavy US borrowing for investments (instead of just raising taxes). Is this the sign of a coming recession? Should I pull out of the stock market?

May 17th, 2024

Where chapter 13 was about the lead ups to a bank crisis, chapter 14 is about the aftermath. Almost all of this was already said in chapter 10. There were a bunch of charts comparing different countries in the post-war years plus the US and some other countries after the depression. The trend is that house prices tank and stay low for 6 years or so, equity tanks more but has faster recovery due to more liquidity. Unemployment increases for a couple years, though emerging countries have less unemployment, possibly due to the low wages and efforts to keep jobs due to lack of safety nets. GDP drops, lots of things drop. The depression years are generally much worse with longer durations because there was a laissez-faire attitude by the government.

May 20th, 2024

The next chapter was short and talked about what makes crises become global. I got nothing from it. The next one will create an index based on the types of crises discussed in the book: default (domestic and foreign), banking, currency, and inflation. Then different countries and events at different times will be scored 0-5 based on what events were experienced. Obviously this doesn’t show the scale, since each occurrence is binary, but if more things are going on then it is clear it is a worse crisis.

May 22nd, 2024

I read some yesterday but it was boring. I finished the 16th chapter today and most of it just talks about what makes a crisis global vs regional and shows some more charts. They compare 2008 to the Great Depression a lot, and the charts show why. It was the worst crisis in the post-War world. I don’t know how Covid compares, but that was a bummer for stock markets, too. They create a “prototype” for a financial crisis. After financial liberalization, banks and institutions have access to foreign credit. At some point they get in trouble and the central bank has to provide loans. They usually choose to keep the currency exchange up as they can, but it leads to a currency crisis. This worsens the loans that are in foreign credit and may lead to default. The final chapter summarizes everything. It hopes that people will use metrics to monitor the state of financial markets and look for warning signs like housing prices. They can’t predict when a bubble will burst, but the information may cause people to rethink actions, though as noted many times, “this time is different”. They also want the IMF and a new institution to monitor national debts and stuff like that. This will create transparency that could prevent or diminish crises. Only a bit of book left.

May 23rd, 2024

Finished the book today. The conclusion ends with a discussion on “graduation”, which really only applies to default. All countries have banking crises, regardless of stability. The graduation is essentially marked by a countries ability to pay debt and the world’s confidence in the country to do so. Once a rating is achieved, as long as the trajectory is positive, a country can be considered graduated. The last bit is kind of a repeat of earlier, with the “this time is different” syndrome. It calls for more transparency and whatnot. I wonder what the authors have to say about things 15 years later?