Intereview worth reading if you invest

[Lsbcal]

Very interesting interview with the economist Carmen Reinhart. She and Rogoff wrote the well reviewed book This Time is Different: Eight Centuries of Financial Folly.

I think she puts the US and European debt issues in perspective. Also sets some expectations for future policy directions:

Interview with Harvard Economist Carmen Reinhart on Financial Repression - SPIEGEL ONLINE

 

[donheff]

How about listing the key points for lazy folks?

 

[heeyy_joe]

"Carmen Reinhart argues governments are incapable of reducing their debts and that central banks are now stepping up to resolve the crisis themselves. In the end, she argues, everyday savers will pay the price".

I think this observation is a little late to the party.

 

[haha]

How about listing the key points for lazy folks?

No attempt to summarize; that is not my portfolio.

Now to the article. ++++! Carmen Reinhart is very smart, and not afraid to speak out. She says that governments have passed the baton of handling the indebtedness in advanced economies over to the central banks. She does not explicitly say this, but I took it that Mr. Bernanke or his Euro and Japanese counterparts cannot be expected to raise interest rates. Their whole goal is to shift wealth from debtors (banks and governments) to savers, the rest of us. And if some foreign buyers of our debt go on strike, the rest can always be bought by China and Mr. Bernanke. China, because they need to prevent the from renminbi rising, and Mr. Bernanke because this is what he does. This process is called financial repression.

She points out that interest rates were kept very low after WW2 to allow governments to retires a lot of debt, and it wasn't until the 70s that central bankers achieved some independence.

A very similar point was made by Kyle Bass in response to a typically intelligent Bloomberg TV reporter. She asked, will Mr. Bernanke raise interest rates soon? Bass said no, he can't. That would turn a stealthy default (via negative real interest rates) into an obvious default when interest costs would overwhelm the federal budget.

I took a position with puts against the yen which has worked out, but to be short the yen I must also be long something else, in this case the USD. I have begun to trade out of this, and into some longs on gold mining stocks,. I have mucked around with these things since the late 60s, and always made some money but not a lot, as the risks are pretty clear. There really are no conservative yet appealing plays.

Thanks for posting this great interview Lsbcal.

Ha

 

[MichaelB]

Too well written to summarize. Everyone interested in monetary policy should read the interview. Thanks for the excellent link, lsbcal.

 

[Lsbcal]

I don't know how to summarize the article as the reader will take different lessons from it depending on the reader's viewpoint.

To me it confirms a few investment ideas I have. My bias:
1) Light on bonds due to financial repression and possible inflation much later
2) Heavy on US stocks
3) Maybe some international stocks but don't be afraid to be chicken about this one. Euro zone problems are a real concern still. I don't have any internationals at the moment.

 

[traineeinvestor]

Their whole goal is to shift wealth from debtors (banks and governments) to savers, the rest of us.
Ha

Completely agree with everything you say except this bit - at the moment it looks more like the wealth is being shifted from savers to squanderers (aka governments etc).

 

[ERhoosier]

I also saw Bass interview. Very, very thoughtful comments. Great point he made about gov't need to keep interest rates low. While Congress & Prez squabble about real spending cuts of only $15-20B/yr, just a 1% increase in interest rate (based on 10yr bond IIRC) would cost the US ~$150B in annual interest on the US Debt. No way is there the political will to cut spending or increase taxes to cover that, let alone a 5+% rate from just 6-7yrs ago.

Like Ha, I just don't see many appealing opportunities just now. Still some long positions in US and abroad, but definitely a bias to sit on the sidelines at the moment. Hard to fund a decent ER like that

 

[donheff]

Completely agree with everything you say except this bit - at the moment it looks more like the wealth is being shifted from savers to squanderers (aka governments etc).

+1 You all convinced me to read the darn thing. Ha's summary is good but he must have typo'd a reverse on the wealth transfer direction. Continued low rates are transfering wealth from savers to borrowers.

The whole situation does push toward a more aggressive equity allocation but that has it's dangers as well. Oh well, no free lunch.

 

[haha]

Completely agree with everything you say except this bit - at the moment it looks more like the wealth is being shifted from savers to squanderers (aka governments etc).

You and Donheff are correct. I reversed the flow, wealth is going from the only actors that have it, savers (us), to governments and broke banks.

Ha

 

[Gumby]

I think a key point of the interview is the observation that a Euro bank "bail out" is not for the benefit of the feckless Greeks or Cypriots or Italians, it is for the benefit of German and French banks who hold the debt of Greek, Cypriot and Italian banks. Something to keep in mind when the Germans are whining.

 

[samclem]

Dear Uncle Sam: Have you got any expenses you need to pay? Short on cash to meet your needs?

I'd like to buy some TIPS with a 3% real rate, please.

 

[RobLJ]

Very interesting interview with the economist Carmen Reinhart. She and Rogoff wrote the well reviewed book This Time is Different: Eight Centuries of Financial Folly.

I think she puts the US and European debt issues in perspective. Also sets some expectations for future policy directions:

Interview with Harvard Economist Carmen Reinhart on Financial Repression - SPIEGEL ONLINE

I've been interested in Reinhart and Rogoff's thesis for sometime, given the US recovery from several wars, including the Revolution and Civil War.
You all should be aware of the recent posts on the errors in their spreadsheet and lack of corrobation of their conclusions. This is not to say that high debt is good, but their conclusions including the 90% point aren't holding up.
I'll post the Krugman link since he links to the academic studies and analysis, rather than the other coverage:

http://www.nytimes.com/2013/04/19/opinion/krugman-the-excel-depression.html?_r=0

To reveal my prejudices, since my grandfather was at the vortex of the great depression in Oklahoma and saved his family through work with the Recovery Administration and other stimulus projects, I'm not overly impressed with austerity when austerity was due 8 years before. We'll see how austerity works out at stimulus in the on-going Europe experiment. My own view is that the housing recovery (in building) will compensate for U.S., so we will continue the slow growth of the last 5 years, and continue the slow recovery out of the light depression or Great Recession.
There is debt and there is demand collapse. Since both my boys acquired jobs, I'm glad we are not Spain or Greece.
Austerity will not work in the US, longterm. A slow grinding of the young like we have seen, we can survive.

 

[clifp]

Good article. Nice to see that the war against savers is not just a US phenomena but a global one.

But what pissed me off is generally when the Government declare war against something, drugs, poverty, obesity, it is generally a failure. But the war against savers seems to be resounding success on the part of the government. Just our luck.

 

[target2019]

SPIEGEL: Do you think it is wrong for Europe to focus on austerity measures with inflation at such a low level?
Reinhart: No. Restructuring, inflation und financial repression are not substitutes for austerity. All these measures reduce your existing stock of debt. Unless you do austerity you keep adding to the debt. There is no either-or. You need a combination of both to bring down debt to a sustainable level.

That makes sense. "Eventually the U.S. will figure it out." An ex-pat in AUS mentioned that to me. I think our politicians are beginning to figure out a balanced approach.

 

[Lsbcal]

I've been interested in Reinhart and Rogoff's thesis for sometime, given the US recovery from several wars, including the Revolution and Civil War.
You all should be aware of the recent posts on the errors in their spreadsheet and lack of corrobation of their conclusions. This is not to say that high debt is good, but their conclusions including the 90% point aren't holding up.
I'll post the Krugman link since he links to the academic studies and analysis, rather than the other coverage:
...

I think Krugman has some very interesting things to say. I tend to be an observer of these multifaceted issues rather then coming down strongly on the growth or austerity sides. I doubt the situation is so simple as growth versus austerity as some might try to tell us.

 

[Lsbcal]

Here is a link to an interesting article on the grad student that discovered the spreadsheet errors in the Reinhardt & Rogoff paper: Grad Student Who Shook Global Austerity Movement -- Daily Intelligencer

I know from my own recent experience how easy it is for subtle spreadsheet errors to creep into calculations.

 

[haha]

Everyone loves this story, because they hate low government spending. But the Saturday WSJ ran a scatter plot of the corrected data.

It is still obvious that debt is a drag on an economy.

Ha

 

[donheff]

Everyone loves this story, because they hate low government spending. But the Saturday WSJ ran a scatter plot of the corrected data.

It is still obvious that debt is a drag on an economy.

Ha

Yeah, even the Washington Post has an editorial this morning stating as much. I do think the incorrect data did over hype the situation undermining alternative approaches like Krugman's. But his more massive stimulus approach would not have been in the cards in any event, so ho hum with the mistake.

 

[Lsbcal]

The Economist article on this is here: Free exchange: The 90% question | The Economist

Both sets of authors turn up a negative association between debt and growth. But whereas the Reinhart-Rogoff work suggests a sudden jolt to growth once debt attains a certain level, Messrs Herndon, Ash and Pollin reckon growth rates merely ease downward.

And in conclusion they said:

The latest dust-up does nothing to answer the question of causation. Slower GDP growth could be the cause of a rising debt load rather than the result. Ms Reinhart and Mr Rogoff acknowledge in their academic work that this conundrum “has not been fully resolved”, but have sometimes been less careful in media articles. This is perhaps their biggest mistake. The relationship between debt and growth is a politically charged issue. It is in these areas that economists must keep the most rigorous standards.

 

[Lsbcal]

Some of the latest comments from Rogoff and Reinhardt are in this Financial Times article: Austerity is not the only answer to a debt problem - FT.com

First and foremost, governments must be prepared to write down debts rather than continuing to absorb them. This principle applies to the senior debt of insolvent financial institutions, to peripheral eurozone debt and to mortgage debt in the US.

...

One of us attracted considerable fire for suggesting moderately elevated inflation (say, 4-6 per cent for a few years) at the outset of the crisis. However, a once-in-75-year crisis is precisely the time when central banks should expend some credibility to take the edge off public and private debts, and to accelerate the process bringing down the real price of housing and real estate.

If you cannot get at the FT article then there is a summary here: Rogoff and Reinhart: It’s not just tight-fisted austerity or freewheeling spending - The Tell - MarketWatch