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Book Review: A Decade of Debt

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In the wake of the global financial crisis, mainstream economists have begun to realize that financial markets need to be incorporated into their theoretical frameworks. The traditional view holds that asset prices ultimately reflect underlying economic activity. But it turns out that economic activity is, in turn, directly affected by asset prices, which is why the pathbreaking work of Carmen M. Reinhart and Kenneth S. Rogoff, economics professors at the University of Maryland and Harvard University, respectively, is so valuable. Their research offers a wealth of empirical data concerning the impact of debt on macroeconomic activity, as well as an analysis of the data. Because their analysis tends to be in the form of narration rather than econometric equations, it is highly accessible, even to nonspecialists.

A sequel of sorts to their acclaimed best-seller, This Time Is Different: Eight Centuries of Financial Folly (Princeton University Press, 2009), A Decade of Debt (Policy Analyses in International Economics) is shorter and summarizes some of the authors’ research that has appeared in academic journals since the publication of This Time Is Different.

In A Decade of Debt, Reinhart and Rogoff document that the public and private debts of industrialized nations have grown to unprecedented levels relative to their GDPs. Historically, high public debt levels have been reduced not through higher macroeconomic growth but, rather, through a combination of austerity measures and default. Default can occur through repudiation and restructuring, which is how debt incurred during World War I and the Great Depression was typically unwound. Default can also occur through what has been called financial repression, which refers to such government-imposed measures as ceilings on interest rates, regulatory requirements that effectively create captive audiences that extend credit to the government, and direct governmental influence on the ownership or management of financial institutions.

Financial repression is how governments of advanced nations dealt with the debt they ran up during World War II. It is likely also—Reinhart and Rogoff hypothesize—how they will deal with the debt incurred in the effort to support national banking sectors during the recent financial crisis. Because historical episodes of delevering have tended to last as long as seven years, the authors suggest that we are currently in the middle of “a decade of debt,” extending from 2008 to 2017.

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