This Time Is Different: Eight Centuries of Financial Folly

If you are an investor, you need to read this book: "This Time is Different" The authors went through and captured data from around the world for the last 800 years to demonstrate that while financial crises are not identical, they do rhyme and have patterns that are recognizable. As someone with money on the sidelines because of all the shenanigans in the stock market (15 seconds front running, trade and cancel order in 65 microseconds), I am interested in how I should invest for my kids and retirement (if at all). The portions of the book that stood out are: (a) whenever banking crisis and housing bubble go hand in hand ("the twins") they tend to be very destructive as opposed to a pure stock bubble (e.g., internet bubble). See Table 10.8 at this [...] On average, these crises last 3-6 years except for Japan, which is still ongoing for 19 years. Equity price collapses on average 56% over a duration of 3.5 years. Unemployment is usually deep and prolonged, increasing by 7% over a four year period. Output drops on average 9% over an average of 2 years. (b) when the twins are synchronized, a sovereign debt crisis usually follows the twins. The typical sovereign debt crisis has the government exploding its debt by 86% either to bail out the bankers or to pump stimulus into the economy. You may remember that we had the banking and housing crash in 2008. In 2010, we are now seeing signs of a sovereign debt crisis so (a) and (b) are right on schedule ... for other countries at least. But (b) has not occurred in the US at least because (1) the dollar is the reserve currency (i.e., the Windows XP in a world without Apple Mac); (2) the dollar is backed by 6000 nuclear warheads; and (3) backed by 700+ military bases around the world. On the other hand, the US is borrowing as much money as all of the countries combined in 2010 alone. At some point, someone is going to yell "fire" and then we will have a full on sovereign crisis. For now, though, everyone is yelling fire in the Greek theater, Spanish theater, Irish theater, Portugal theater and so on so we're safe .... for now. The US' response to the crisis in 2008 was to do what Japan did and more. So don't expect this crisis to end in 3-7 years but may be much longer. This may be the first job-LOSS recovery because of the overcapacity of (1) labor in China and India; (2) manufacturing; and (3) housing. For an example, look to Japan where Japanese are outsourcing themselves into lower wage countries: [...] The authors end with the following empirical model for the crises in (a) and (b): Step 1 - financial liberalization. Any one with a breath can get a loan. NINJA loans (No-Income-No-Job-or-Asset) Step 2 - stock and real estate market crashes. Iceland in 2008. Step 3 - currency crash. This happened to Iceland in 2008. Step 4 - inflation picks up. Again Iceland in 2010. This has not happened yet in the US because the amount of debt $100Trillion is backed by only $1Trillion in physical dollar, hence deflation. Step 5 - peak of banking crisis - if there is no default of the banking system. The 6 US banks are too big to fail so this won't happen. Step 6 - default on external debt or domestic debt. Step 7 - inflation worsens, running 40%+ if step 6 occur. Personally, I believe that the financial, insurance, and real estate (the "FIRE sector") has metasized into a virulent form of cancer. This cancer, thanks to supercomputers and derivatives, will modify the above model as follows: Step 1 - financial liberalization. Step 2 - stock and real estate market crashes. STEP 3A - DEFLATION allowing bankers to buy up assets such as water purification plants, power plants, toll roads that our "betters" whom we have elected had loaded down with debts and derivatives. Step 4A - inflation picks up for these essential assets because only the banks have access to Uncle Ben Bernankio teller window. For the rest of us, deflation in jobs, housing, employment. Step 5A - the US becomes a corporate-kleptocracy like Italy or Spain. If you are not vigilant, your 201K will likely turn into a 101K so best to take the above model into consideration the next time you vote or invest. Best, KT "The issue which has swept down the centuries and which will have to be fought sooner or later is the People versus the Banks." Lord Acton - who, by the way, also wrote: "Power tends to corrupt, and absolute power corrupts absolutely"

This was an interesting read and I have read a fair share of Economics books to put it mildly. The most interesting theory this book turned me onto was the work that was done by Ricardo Hausmann and Federico Sturzenegger of the Kennedy School of Government at Harvard University..ever since then I have been trying to understand a new economic theory that attempts to answer an intriguing puzzle in our international trade and finance statistics: why is it that the US has a positive income of around $30 billion when our net international investment position shows a debt of about $3 trillion. How can be earning income on debt? This new theory claims that, in part, our current measures of investment miss a large chunk of intangible assets -- what they label "dark matter", akin to the concept in astrophysics where the known mass of the universe is not large enough to explain why gravity can hold the universe together, that there is more mass (some "dark matter") in the universe that we can see and measure. Just as astrophysicists can impute the amount of that dark matter from the laws of physics (how much is needed to explain how gravity is working), these economist have imputed the amount of economic "dark matter" missing from our international asset position. The conclusion is that we really aren't in debt at all. The policy implication is that the trade deficit and international debt don't matter and that the dreaded currency correction (where the dollar falls enough to bring our trade balance back in line) won't happen. Aside from that this book uses sharp analysis and comprehensive data, Reinhart and Rogoff document that financial fallout's occur in clusters and strike with surprisingly consistent frequency, duration, and ferocity. They examine the patterns of currency crashes, high and hyperinflation, and government defaults on international and domestic debts--as well as the cycles in housing and equity prices, capital flows, unemployment, and government revenues around these crises. While countries do weather their financial storms, Reinhart and Rogoff prove that short memories make it all too easy for crises to recur. I suggest checking it out - Kindle version just because available! Cheers - Jeffery

Es un recorrido bastante academico por las diferentes crisis que han llevado a la sociedad predominantemente occidental a situaciones de crisis, depresion o recesión en repetidas ocasiones. Como los seres humanos tienen solo un poquito mas de memoria que un pez y repiten sus errores las crisis se suceden y los ilusos al salir piensan dos minutos antes de la siguiente crisis que ya no habra mas. Lo de dos veces en la misma piedra varía con este libro, son mas bien una veintena de veces las que repetimos. Y las que vendran. La escasez de memoria y las pasiones humanas como describe el libro, la codicia y el afan de enriquecerse nos llevan una y otra vez a recorrer los mismos caminos. El paisaje diferente hace pensar a muchos que el final sera distinto. Nunca lo es. Pero con lo facil que es, nadie le pone remedio. Aparte de eso, hay una parte del libro llena de tablas y comparativas que es super tocha. Pero esta bien que esté hay de consulta. El libro se ha puesto de moda y muchos hablan de el sin haber leido mas que la sinopsis. El trabajo de ambos escritores profesores de busqueda de datos y acumulacion de tablas es impresionante. Será, bueno ya lo es, uno de los clásicos de la crisis. Si politicos y economistas hubieran de aprenderse por ley un resumen de este libro antes de ejercer, igual a las generaciones venideras les lucía el pelo de otro modo. De un modo mejor.

A great reference for anyone interested in debt crises and banking crises that have occurred in world history. The “box” references add an enjoyable and rich dimension to the book. A lot of material for the novice. Highly recommended.

Awesome book

Well, reading this book has been a pretty great experience. The style is easy to follow, and the content is thorough. In a nutshell: if you want to understand the depth of the financial system and crises, along with a long series of data, this book is for you. So, enjoy!

Really azppreciate the book and research. For five stars, I would have preferred a more objective perspective and unifying theme. Plus would be interesting to see the post GFC update.