reinhart & rogoff - this time is different; eight centuries of financial folly (2009)

market> in Encland and Spoin... Al>OIhcr Imponam d." oicri.... currency fulls prcdr1tuto uf \'cry high inB._ lion... Lalin Am~rk.durifll: ,IIrrobl"",.. with exrem:Il dt:bt defuult, Ju>t

Copyrighted malElrlal

THIS TIME IS DIFFERENT

e- c:> JOO9", fri><.<t"" Uni_", P=o

1'ubUhOO", 1'nn<<<On U""""''''rrn ~1 Willi>a S<=<,

"""'"on,~.J." ,M«)

In "" UnitN Kin.J"." f - n U , ,'" r 6 000.1s m,

WooJ.ro<l., 0»0nl0Iili< ClXIO lTW

To William ReinhaTl.

Copyrighted malElrlal

PREEACE >"x"

-\C!:"['X1WI FIC\I E>.'IS

PliEA\fI'l E- SO\JE ['limA[ INTIIITIONS

ON EIN~"ClAI ERA!,II ITy"\InTHE fIC!:"! f

NAIl 'RE DE WNEIDENr:E n.-jx

eAIDJ

FiO'lncial Cri""" AIl0r<-'fJlion,,1 Prin",r

1

V"jl'! j,-., of Cri,," ,,,<1 I1.'jr D-,,,_, J

Cf'''' Delio,,; h' (\J"""";"o T1,,,,-.h<>I.k

Io,~"t",n, ('~,,,,,,,.-, C"pJw~ "oJ Deb",""",,, -I

ens",1)""","'dhv[,-,W" &,"kio~en"".'

"oJ f>Icm,1 "oJ I)'me'"'' 1\·[,,>,1< ti

OThe'>:<I'Co,,<:<r" 14

2

Copyrighted maerial

The [':>urAl"'" dl),'f."h Er'snd"" $1

vIii

Copyrighled maerial

The, ~l\'!i:cl foCI< ~fl)"',n",,ie Doh, "nJ [)'·fJult 10,

I)"w,.,,,." and f""rn,l Dcbl JO)

1.1"UDl\" R.IO<<"ofR",u"', ,nd Cunene C-,mp",i,~,n 105

12<,m,,"~-[\+,Oll JIll' E,-" and jn ,bo

Th'larrn"'u- "" Inth""p ,,,,.I the ·Infl,nop1'". J1i

1).:,"DlO~IkT.~<It,,,,, [lon",,,k Deb 0' ,I-.< /'\""'"'.'J R"",! ) 15

TI", -Tco,p"',,-,,, ", lnfl,,,"" R<O';",.,1 In

9

Which I<\'1/0''''' WIlD " So'pinc' 1' B

I"b'.)n ," II-.< Run·up '".oJ I;"" ,\f'Nm"hclD"bll)"f.ult, )1~

Th" I"d'"'ocerlD"j-",Ir O!l 1l"N> {)"',,,1 "I f,tl:m',1 O!l>! P",p,<,,,, Cu;.lttCl> 1 \1

S"mm'"., and I),"''''''''n ,,(~-h'lool""e' I}i>

"

Copyrighted maerial

ill

A P"" H,."n,I.,Th<-."., ,.ll.1nU"gerl"" I~1

Il>n'mgC,,~,.: An F ,,"I·()l'f'(,mJn;ty Mon", 147

FIon\;,"~ en«,.C"!'i,,1 1\.1 0,1",-, ,,,,I F'n,n«.1 L,h<mli::u~'n

('"",i,.1 Flo~ l~~,.n",., C,,-~ht o."b, ftc!A""" I'"co'

O\'~""I'''''''''Tl.,N-b in rl.eFin,n<i,llt,d"",l'~ 161

11 Fi"",1 \~'g""y 'i fl".,,,,'''] C,i,," R"v;,i"'d 162

An Eo,ly HUlo"" 0(InA''''ln Cri 181

Mod,'m Infl"IO"em." R.jli"",,1 O>alI"'T;IOn 182

Gm,,"q era,h", 189

Th AI'omuth 0(Hil.i> InIL"",." >tidCut1<1\Cj'Cull,poe, 191

The U-S Subprime Mdtdo,,'ll and the

13

A 01,,.,.1 HblOllo.1 \'oc~ ,i,he SubrriOl"

Cr,,;, ,,,,,I I!.Af""mo,b 204

Copyrighted maerial

Th,> Thi,·T,,,,,,_J,·[~ff,',,'ntSmdll"OC ,r><! rhl'

l<i.,b 1\>,,,,-[ hI" ';'"",1"".1 u.s, fu",,,,'i"g I",m ,h,

Tho:- Er'~""" 01 ~."t~-.If B,nk·C'.cntorcl Fin'"",;,l CIi,h

ColDr"i.;m l,h bp<ri-<n«' fn)mIho

FI"" Ole., e."",,,,,,,;o,, '" ,n., J~]()' 233

(;"""I",I,n<; R"",,,,,, ,;R

The RL~(JlbofG"\l"ci,~', 0)",,,,<,,, f",,,bmen!.l<! 2-10

C.,n<'1't<niC.""'!\I"'" ]'Ii

Common F"nda""'n,.b on" <h<SoO"""0",", em"""ion Hl

A", MOle Sr;lk>wn U JerWayr 246

C"mp.)!iW M"."L"~"cofFin.nd,l TLinTloil 248

1)"",1''1'+"0 "Con\[?O'I I":kx ofC", ~, n", OCDI 1nJ<, l~9

r\'~nrn5" Oh'Jl,,1 Fin"",-"I C,i,;' !6011><50""'''0'''>: ,,( Cru." A I'''''O'H'' 170

5<'''''''",1' !71

,;

"

Polk-I" R,'>PO'''''''' '00 the roibl", ofHum." N.ture 177

Some('i,,< 'ion on Pol."" R0'f'O""-" 187

T1l< lot"" V t"" 01t'"Thli-T, ·I D;/f.,.,n' 'hndrom 290

A.I M"""""'O""D\k;1111l~ Se<1 295

lASt ES

6.4 [)({.ul! 000 ,,,,,,h<.'<!uli"E' EUf('f" ~nd L,.,<ln A"w,k.,

6 S Tl", cumub,j"e ",llv "I"'f'ul, "n ! r=h<,>Juli"K;

7.1 Inl""-~' """ on ,I .me«ic "",Iextern.1 tid",

u n Of ~A.U>

,. Scl"",~d c-piso<le ofdomeOlic d<:b! k·lault or

• , Deb< rodo<"' th~'i"'" ofdefaul" SeI,'<teJ episod'" 120

• , In~",;onand oo""""tk public deb" Sd"",,"Il,,!,i.ooc,

1917-1994

'"

'"

Prelimin.ry« to ror ,heequality of two l''''lX'rtiom

10.1 Debt and b.ul~in~ cri" " Africa and A'ia, Y""r of

Nonh Americ., and Oceani • yc• , 01in<kf""l'knce

10.4 Frequency of banking crises: EuI'Ol"" Lalin America

'" Summ"y of the in<:iJc ce.nJ frc'<jUCllCY ofb.nl:in~

crt 1800 (or imkperulc'nce) to2008

'"

10.6 Summary of the incid<.""", 00 ( '<!UC'1lcy of b.nkinl;

craes 1945 (or in<lt.>rc-ndence) to 2008

'"

ofa banl:in~cri'i, in ••i'ly_.ix coontry 'ample,

196J -200i

''"

10.8 CyeI""of rea1housing pric nd rnnkitl~crises

'"'

10.9 Ct""ti.e ""counting? Iloilout <OSts ofoonkin~ c'i ".

Il.l Expr~riatiOllth""4:h currency deb>sc-mem: Europe

LIsT o' TAHB

16.1 l"dc'xC'> of IOlal buildlnt: """vity In ,k",redcoomrieo 268

16.2 Unemplol"'nem 'al/" for l"''''ed COUntl"',

17.2 l li'ulioMl !n'~!l<\T,",;nil"of''''Iy.'il< countrie>;

l.Jrgra<.Ito01 "",,'mion, 1979-1ooB

'"

A.I.I Prk '" OJlUum~". or ",,"I-of·living Index 296

A.I.'! The,tl",,-conl""l of<u""nde< 306

A.l.6 GrQ<'n.tionall"oduel

'"

A.l.7 ('.mtnl l:',n.'tT1menl expenJi'uteSand "-",enu,," 3<4

A.2.1 Public dd:",ntu"''' Extc"TTl.1 gcw"mm"m bond i"uc 3"

A.i.l B:",king cri ,,: Hi'tark.1 ""mm ;"', 1BCJO. 2008 348

Copyrighted malElrlal

cOIlmrks in exle"",1def.uh or """ru<:luril\l:

eigh<c'<l by lh"tr ,hare "f I>'OI'ldInc""", """i"

;2 So"C'l<';';:" ex[e",.] <kbt: Glu,,"ie i" ex'em.1 d,1.ul,

lL'~ 0' OJuu01.

counlric "nd La,in Amc'Tb 1914-1959

""

7.5 So",re~ <lorn i< debt: Percent e>fcoomries in

8.2 R.""" of public debllO n,,"< ,ue00,1,,& ",,'emal

1-""'" before crist> ond l"ar of cri,is, 18CO-looB IJ<J

Th< prob.1bility ofoon'~"l< nd extt'rrtoJ doofuult,

l8OJ-2006

"'

" 7 O' ,"OUH'

10.~ Reol GDP gro""h per capi,~ (PPP bosi,) and bankl,,!:

10.5 R, IGDP gro ,thpe' ",'pito (PPP b io) and bankh~

crl ,,: EmerginG marh economies (112 cpioodeal

'"

10.6 R, I remral ~'O"ernm"m,e'""""" gro ~h and

10.7 Rcal ccmral !/<J"'-'TnmL'Tl1 'C"cnue gmwth and

bonkin~cri ·" Ali coontri<,., 19<\5-2007

'"

to.8 R Icem",llI"""mment ""'eo",, growrh and

bookln~c,,,,,,: A(I<-anced ""-Onoml~,. 1815-2007 ".

10.9 Real cenl",1 ~'O'''''Tnrn''''l ,e,,,,,,,,, ~rowthand

bonkln~ cri"": Eme,~lngmark '! ",<;OtlOltllt.",

1873 -2007

'"

10.10 TI\t, e,,,IUlion c>f"'al public dt.-b< fullowing major

1Ll Ch"n~in lhe ,i!>'<>J' coolent ofthe CUm:llCj'.

I765-18t 5, Au",la and Russia during ,he

'"

'"

12.1 Tnc m "<llao infl.llion Ie: Fh'''''Y''ar moving

a""tal;<' for allcounttl 1.500-2007

'"

12.3 Cum-ncy crashes:The ,11""ofcoum,l., "'i,h

annu.1 drpr<"Cl"'ton ra,~ ~""a,,-,, ,hon 1Srcn;~m.

IflOO -2oo7

'"

1M M J18o onnual dLl'reci"Iion' Flve_l""'r moving

"·">J'ol." for all coun,ri", I&."'>J. -l007

U.' TI\t, proportion ofcoun"i", wi,h bonkinl: crise<

19(\}-20Cl8,""'l~ht,'ti bv th ir ;Mit!of world i""Offil'

'"

13.2 R I h.:> [n~ pzite<: United S,Ol"'. 1891_2008 WI

,"

Copyrighled malElrlal

13.5 R.llo ofcum.'1l' "c<oom b.ll.m<~ 10GOP00 Ih~

"''' ofl'O',war ballking en :Ad"allCcd ,-conomk

'"

13.6 Gro\\,h ilt ",.1 per <apltaGDp (PPP "",I,) aoo

I""t""'r b>nkinJ: <d : Adv,n<cd e<:OIloml , 220

13.7 Real centrol l:"'"<.'fT1mem Jdlf ltd ["QM"".r b3Jlklng

otis : Ad,,"""eJ ""onoml'"

14.3 Cyd of P"'t """",ployment 3Jld banking ctise, no

14-4 Cycle ofpaS( ",,,,II"'"""pi",GOP and barn:ln<:

14,5 The rumulative Inc",a", In ",al p.>blio doobt ,n th,·

14.6 C",Ie of h"lirUlioll<l! Inwswr :",,,"~,,,ign minJ:l.OO

14.7 The dUrlItlon ofmoJor fin""",,1 Ctt.es: Fourt""n

O",,,1t Depression e1'I<o<l,," nu {outre""

r<><t-Wo<ld W" II "'Pi>od< (dur.tkm ofth" f.ll in

14.8 The duradoll ofmojor fironci,l c,ise;: F""rteell

post-World War 11 'l'ioodc'(number of\"ars for OOlp<lt

14.9 The <umulati , inc",a", in I'<'al p.>blic deb! du,

3Jld 'ix VL.,,'"following ,he ons,-,t of ,he O" :lt

15.1 Percentage challie in real homing prk",

Copyrighled malElrlal

' ' ' 7 O' ,"OUH'

crise:! ("'''il;h,LXl by ,hdr ,h"r~of world incom.,)

ant! U.S COIl"JI"otC Sf!<""latl'"'-~~t.odc def'ult rotc"

16.2 V ktk", ofetl"'" World al:l:l"<"l:",tlc 19O.1 20C18 l5J

16.3 Vark'ies ofcrise<: Ad,"!\C''<l L"COnOII1ie; a!%"1:"'~'

190.1 2008

'"

16.5 Varicd,'" ofcrise>' All cou",rico and A,i.,

16.7 Glob.1 "ock mark,,,, during glob.1 cr;"", Tf ,

composi'c "'al rock rricc index {~nJof period)

\ 7.1 Ch.,,~ in Jnsti,,,,;.,,,,,, 1"'~'lDT ",v ,.,~n creJi'

t>t,in~"ofsixty·'ix co"m'iL", \979-2008

'"

Copyrighlad malElrlal

Copyrighted malElrlal

market> in Encland and Spoin

Copyrighted malElrlal

Th;;1xxJ\; prO"Ld", • qu.n,i,.,i", h;;t<)ty of tUL1neial en"''' in ,""it

al-",.v arf>t:""', ,hen' are U'!u>.\\y rema,kobl" in,it.,ili", ",'i,h I"'''

~lohallin"nciaj '\'S1<'1'Il, both toreduce ,ho ri,k of fulUrc ,.ri.i, and to

Ifrh~., , ;; 0'"'" cOmm(lr'l ,hem" ro the ,· t rnn~"fcn"-,,, "'"

l'O"" ~''''''''''y"""'ic,t>ksIhan ir """'"Ju'in{: • boom. Jnfu.o.;.rul of

cay, Oan ",ake "l:O"l'rtHn""llook lik it;; pl\l\"iding ,,,,,Ol'" wowlh

10 its cor;ooorny than i' -ally i, Prin,e 1IO:C1Or berra",'ing bin", ", can

bco:"'" 11 r(>(' on"" Pl<l\"iJ~faJs.o affu""llioon "fa l:cw"rnrtlent',

a challenge rolioj' "",k"", i'''''''ror<, and otdirt3ry oiti""" must n,',.",

forge,.

In ,hi> book , 'Hxly • numberofdiff=m 'I"""oifinanci.l

OC",,",The}' Indud.e"""""il.'11,1t·fuullS, which OCCur whctl0 lI", -rn

ment f.ll, to rtll!'" paymen" onito,,,,emal 01OOm t!c d.'ht

oblljl.-liom or borh Then d",,,, a", banking cri", weh a, rhooe ,he work!

ha experienced insp.de.in ,,'"l.,c 21XXh.ln "I'Pic.1 major b.nk·

ing cri.is, n:lllon linds ,h., ••ignilicam paIl oflIS b.nking """Of

or both Al>OIhcr Imponam d." oicri co",i", ofexch.nl:" Me

cri""" such., ,hose thor pla~ucdA,i., Europe,:md Latin Americ In

counlty' currency fulls prcdr1t<)U,ly often despite 3 l/<wemmem

·~.",n""'· that it will rlOl llow rhi to h.pp<.'11 undo.'t any circum·

"allCeo We.bo co",iJ.,r en", marked by Ix>uto uf \'cry high inB._

lion Needle to oay, unc"p"cred mere""", In mllatlon re the de

facto "'lui,·.knt ufuutrll(h, Jefuult, for inllatlon 1\0 11 dehIors

(Including the~o"emmemJ to r"Pay their deb<. ineurIe""y thatI,

moeh k purch ing power ,han I, did "'he", ,he 100m ""ere made

In much of,I-., book we will expl"re ,hose erbe> """"rately.BUI crise<;

oft"" ocCur ;ncIu<te" In the penultimatc text ch.plcr of,he book

, will look at ,ituations-sueh •• the (",,""tDo.l', ion of the 19300

and rhe la,c", ""rldwlde 6nand.1 e,ilio-in which erl , OCCur in

bunches "nd on klob.J scale

Ofcou"'-", financial eri", arc lI<){hl"l: new They han' r ,.,n

of ,he earli l crise,; WI.'te dri"e'Tl by currency dd,a"'men,, tho, 0;:_

eurr, ! when ,he mon.rch of a e""""I' reduced the!:OW0',ih-crcon·

tent 0( rhe colli of th~ ",.lm to b""nee ~'" hortfJII> often

prompted by " ". T~",hnoloi:ic.lad"a""e ha"e lon~ ,ince dimi·

nancial erl"" have eon,inued to ,hri,,, ,hrough th" ", "S. and ,hey

plOj(UC coontri", ro thi! day

Moo ofour foco> in thi, book i>on two particul., form, of

cd""" th"t are particula,ly rek"",m too.y: ",,''-''''I~'fl""hI eri and

b«nkin~crise> fu,h have hiot ieo tha,:.ran «,,,rorie••ndeut ac'UI'

'.11Ion•.Su< 't'L'iI(ndcllt croo",,,re(l[ICe eom monpbceart1O<"I/lthe nnw

.,k.nced economic" thot 'P!"';Il' ro h,,-c 'graduated" from pe,iodic

"""i

ix.u ofgo""mn," " insolwflcy In emcrging mark"", however

"'-eUlTi"l; (Ol ",rial) <k-fauh r,'maim " chwnie and ""riou, di=",

&nl<ing cris", in e,.""'-'t, ",main a recur'ht/l probkm'-"""'Y""he",

Ther are an l.'1ual·orrortun;t)' men""c "ffi.'(;lin,g rich.00poor coun·

tT;c:< Iil:c Our Nnkin,g eri,,, InI'c"igJ1ion fal:c u, C>ll a ,our from

ronk llJn> aM banI: fail""" In Euror<-du,in,g ,he Nopoleonlc Wars

to ,he ,,-'(;enl ~jobal ~n'''lCi.l cri>c th", bc~an wi,h the U.S.•

ub-prime eri.i.of 2007.

tl,'~: 001 ~mplrk.1analy.1< e""en ixty.•ix eount,i 0' n~ar\y

"i~ht ""nturie< Many imp::lnant book.have b<:.>n wrincn bout the

hl'wt)' ofintern.tional ~n.ndalcrl, ",' pcrh"l",he most f.lOOU of

"'hkh is KiOOlebcrgcr' 1989 rool: 1,10"",,, Pon", 1m.:.! Cra.J.e ' By

itppt\lach, fOfllfi.,J bl' rdatl"~ly ,p: ~d"a

Herc, hy ronl"''' "'e l-uild oor "n,lpl' rooM da," cu\k,d

hom" ma,,;'·c d.,arose tha, <",romp""'" ,hc enrift.' """Id and goes

roel: a, f.r a, ,,,,,,,If,h.cemut)' a.ina and nm.ii<-"'al Europe. Thecore

"\;Il:,"ofthis b::x>1: is eonlai",'<l In ,he (l.rgt>lj') 'Implet.bl", and li~.

u,,,,, in "'hkh ,he", roll. arc rre"'nt<-"j rath<-1" th,n in n'IT;IlI"'" of

I"'roon.lilies, politic, and nq;'Of;ation" We !lu" th.t oor visu>ol

qu.ntll.'h hl'wry" linancial crises ~ no \""eompe\1ill£ ,han the

.,a,lkt """,",I,'c "rr!O'OCh, and "'"hope that I, m.y open new ,·i.(lIS

fu, poliey an.ll"lio and n"".rch

Abo"" Il,oor c'Illphasi>ison looldn~a, loo~"'=ofhislory

,,,ca,ch sigh, of"ra,,,",",'t.1"m,hal arcall ,,'"<itc " iorg"""",al,hough

,ky,urnOU' to beforrTlO'"eOlnIt>;)n and ,imilar ,hanp ",,\ """" 10

,h inl: Il"ltleod,,,,,,IY''''.pol Icy "'" ke ,nd '" ,n""ademIe ",onom",,,,

h.,,,,, an unfOlllrllJlC,cnJency{(I ,>iew ft.",em p' , .nce thl'OtJl;h,he

lUlrroW"'indo",,,,,,,,,cd by".",lardd:Jta """', '\'Pic3Uybo Jon ana,·

raw r:l~ of ,'xp, ,iene In t",.m' ofcountries and tim<> I"'riod< A

f.>ul, dfa"" condu.iorur basedon d:Jra coll,'(;[<,,) ,ince I\180,inno,m.11

f'lrl bt.""u!CsuchJ.113 are ,he tnO>, ",.dily ocr:cSilibie.This"Wroach

1OQU1Jbelin",""ct."Pt k:l',he fact ,ha,financial e,lresJulY much\QnI:I.'t

eyd._", and • dat:l "" ,hat co'"'''' ,,,'en'j'.fi,,, y " Imply canno, ~ive

Copyrighted malElrlal

<me"n a<kq""te JX-"fSpc"C,iw on ,Ix- ri," of "I',,","'ive poIkb"nd

in,.".,m "[\lS An ''"','" ,h.,w'" r"",in,ha,'wc"1l'y.fi, , l"'"' "J'"n tn:ly

all a """",,,,ht.'T stao<!, only" oo.,.in,fooT ch,nce of obse,,'ing a

"hundn.>J.y".rflood" in "''1,my·fi'·e "",,,' """h ofda,•.To e",,, b ~

gin 10,hin].; arou, such e'''-"ll'', one n<n!, 10compiledata for "",".1

cenNri., Of<""<>C thO! i> p "C;,.,ly OIlr oim ho 'Te,

In addition,",,,,daNdata>eU are ~rcatly limited in "'.,1

J<>rnestic.lly issu""&O\'"mm""tJebt is ""n:iIlobl~ difficult toobt.in

fo, mOlt coontri.", which h"'e "ft 'll been little more t.,nop>rent

th"" n>o<km·t.Ia~bonk, "'ith ,heir off-b.lance ,ho -c' ""n,actio,,,

on<!o,h "!" "ccounting ili<:nani~"n.<.

Thlo foundation, ofoor naly." ",,,l-ouil, on a con,p",h~n.

,h'erlCW d aba", for ,tudying Intemotloo.l debt:mdban\:ing ",I,.,.,

infla'ion, and currency cl'll5hco and deoo:ICmcm., Th<.·d,," come from

Afri<:a, A,ia Europe, La'in America, Nonh America and Oc""ni"

(da,a from ixlj",.ixcoun[Tit.~In .\!.Mpn>viou,ly noted, pI",,de<t >J

data lOr " number ofOlht ,- <OIlntr;".) Tbc "'TIl:" of 'i.hle "ll'

comp" , mong monf 0Ih< ,. dimt.""iollO ext,,"",,"1 ~nd OOm 'Stlc

:mclCOn\lnodlt~ pri""•.T1u:!dll'" cowrJg"leC"" hac\: ""'"' than el!!h'

hundred l"'." 10 the dotc of lnJe'(lCndcncc fa, m,,,t coontri", and

"'c11lmo ,hee<>loniall"'riod for ",wI'llI, Ofcou''''.we recos:ni>c ,ha'

the cxerd:ICS and illus,rn,iom ,ha, we proviJe h;,re can only sc"nch

,It" ",-ri"",~ ofwha, • d", "'-"of thl, scope ""d"al" can poten'ial\y

unveil

Fmtuna,oIf con"'\"ln~the<I.:,"il, of the tit I,00'css.;,mi.1

toundtrSlanding ,hc main mcs,~,,"ofthl, book, wc han' been hcrc

thc.~"•••• h., , thc ')"PC'of lru;tltut;om llt.l ho"c expanded mi~h"

ilf onlf tofuil ma lvel~. But~n.nd.1 ",i",.f"lIo,,' a rhythm ofMm

ond bu"Iltll'l<Jgh ,he a~"",.Ccx"nrries. institution".nd tinaneial in·

"n,men!; m.yCM¥'aeJ'(JO.timc ,"-,thu"",n n.lU'"doe<1\01. A, "

will di"' in the fin.l cit"",,,,, of thl> boo\:, ,It"~,,"nciol c,isl>of

""viii

Copyrighted malElrlal

,he laIC2txXls ,ha'orij:inou"din ,hc'Unil~.,jSt.tc'Sand ,pread 3C1'OS>

,ru, ~lobt -which w~ ".(c., to •• th~Seco"d G",., Con".ch,m-I.'l

only lhe 1""'1 m."if"'I'lkm of th" p'UCtn,

We lokc up th~ I.tcst e,i,;' ill the ~ll.l fout ch"ptc"'" b<.{ore

the conclu'ioll in"'hich wcr,,~icw wh" "" h.,'c I""ned: ,m,re.der

aod ••,[[-<;OI\l>Ii",,'<I (lndc"->J, rcade" imerc t~od mainly ill le>lo'" of

hi,tory for thc l.r"'l ~ri,i>.'c CllCOO"CC'<l to jump directly to thi

nUlle,i.ll" Ii", rc.,Jin~.) We ,how lh.l tn fhe run·up to ,h~ "'~

p<im~e,c.;", ".ndMd Indicator' for the United Stlll~',,,,,,h:lS",,,,,

p<ic~infl'lion, r;"ing lc''''''!:",I"JI''' ;ull.ine<l CutrL"'1 'C«lUr\1 ddi

cit>, ,"d ••lowlng I",j~"'t(}{)'of."'onomic grow<h,exhibil~od 'irN.lIy

all ,he,ign, ofacountry on ,hc'""'l:""a financial c'l.'lis indttd.a

'MI''''' """I' ou, can L quill' perilou' as "",Il Tho.- llft~,m,"h of'1'

'ernie oonklllg <ri Ill"ok~, protra<,~d nnd pronou",,<od

cont"",-tion ineconomic ",,<lvi,\,.nd puts,ignmc.nt'U'lIin,Ol\ t:<:".cmment

""""fCC>,

Thefi"tp.rtof ,n" book ~i,'-" prcci",Jclinitio:;)Jtlof"""<0"1'''

desc'lbif\i: crl oo discu lhe d" ullderlyil\l: lhe hook, In lhe

<ot"nuc,ioo ofour d., • ,1 we h,,'c built hea"Ily Oil ,he work of"",·

II'" sehola"" Ho ,.,'~r (luJ' d., -"', .!so indudl's • co",I<kr"bl

arnount "f new ma,erl,l from ell,'cr'" primary "d "'''ond.,y ""u",e,,

1" adJI'k>n to provldillil ••., tem.ticd'lin~ of~""t,-·m.1 d~bo: a"d

ox-~hani:<' ra'~ e,i""" ,h<' "pp""dix", to ,hi.> book ~","l"l: dale'" ktr

00-me,,;" inRa'ion .M bankingeri.«:>, Tbe da'ing of""vere~,,,dc-f.ulfS

on do_"I~(mO>lly k",.[.currt.oney) debt i'One "f ,h~ ,no", "", ,1

fealUre, 1M' round, 001 oor.rudy ofnn"llC;,.1 cri

"'I.Part ilIUm' OUr 'llcn,ion togOvcn\men, debt,~hro"icli"ghun_

d«-d.of~"'Piscde>ofrl<.{.ult by ,,"vcreiJ:ll ll.cioll'on lheirdebt to ~x·

'em.1 ~rc,jlto",Th"", ·d~1x crl",,' h.w r~ngcdfrom those relal~od

lQmid.k.u"""n,h"", n,ury lo m hy Floren'ine fut.llCien:toE"gl.nJ',

Edward 111'0 Gt.>rrnan "''''''han, ha"k"",'loo'" '0 Spai,," H.pot ,tg

Mun.",hy to m ,I,'e Io.ns made by (mo>dy) N"", York bank"" to

xxix

Lalin Am~rk.durifll: ,II<, 1970 Ah~h ~ find mal during me

mOO"", ~r. «)"""'ignex,,,,,,"1 dcfauh cri"",, ha,"" bern far more~l\l"I.

"",'~,mek emph i", m., ,n ",vcreign oo.ult on ~x,ern.l<kb,

politi<:~l<!c,·d0l'mc"t1t c.n tale eenrur""

rrobl"", with exrem:Il dt:bt defuult, Ju>t many """""l(illg ma,l<:IS

th~".rlyItoli:!n cl'y.'ta'es A, the ffig~of Eu''1''', E~YP',Ru io, and

m"",,~ '0 a'\lW defaults 0" cen"al ~""'en,rru:",debt to for<:ill"

"cd;""" ,,"'h.'1'C", far more countri h"'e beo.'t1 charac'e,i:w by

""rialdefault "" ,heir e~,ernaldebts,

th"", afEurope nd Latin A""",ico. Indeed, the ""'i<:\e<p,,,.d belid'

th", modem """"'1'Cij:n J,.>{auh i a ph -nomenon confin -d to Latin

America and • fel\' poon European coonuie i, hc,vily coloroo

by ,he paocity~' "reh On othe, "-1!iclll'l A, we shall .Itt, pre·

Copyrighled malElrlal

"-'fore ,he ~n, pos,war roond of l"'in Jefaul P""col"nial Africa

"".:lJef:mil record ,har 100., '" ifi' i " "l<""",rrip ,h", ofany

pre-,·i(x.J<ly em""lllns: marh't re~jm. (kerall, we ~"d ,hOI' 'Y'lerna,Ic

quamlt:HI, , examlnalim of the postooloni.l def.ult ,,""onbofA'i"

and Africa dcl>unk, ,he ""'ion tha, mo", coumric> haw a<'oided,he

I',,:ril' of """"reign ckfault

Th"near uoi""" lityofdd'.ult bc<"",c,>.bulld"mly dear in

de-fJult,nd lin.""i"l "rhe.In broad<lrolu:s u.ing tabl., nd fi<:urc•.arK"

polnr ,h., cet\.inly jumps oul from th~ analysI, I' that ,ho faitly

re-,,~nt (10ilJ.-1C081 quit!l "",11 in whIch gc>, "."""",,,, h., , """"rally

The hIstOf"\' of oom""", public debt (L~ internally Is.uc'il

l:<lV""llmen, debt) in emctgi"ll marl",., in J'l'''icular, has lol),'Cly

bt.en lJ(noreJ by con'~rn!X'rary ""hola", and policy mole" (~, ,nby

offici,l d.m prl)l,'ider "",h ;is ,he Int"m~tional Monetary Fund),

"'I", ""'1Il<.'il '" "Lew ito CfIl<'Il!C'llC" at ,he ~inlllnIlof tnc ,wentI"

ti""century asa >runnIng nc'''' poc,lOm,'t"oOtl YC"t, we Will ,ho'" in

lremely ,ignili<-.m dUlin~ m.~\· po."ioo nd in fuct potentially help>

resol<'e ~ hosl ofpuulesp<.'Jl.lning to c'(lisode, of hiolh ill~",ioo.oo

default W~ vI ,ht difficul,I." one ""l"'tIo>nces In findit\ll tlata on

llOn'tt\menl debt jll" ""e facet oflhe i(l'ncr.llow "-"'e1 of tmn

p"rcncy wllh hkh m"" I:Owrnm""", maintaIn their bool, Think

of,he implici' guaran,ee gl"cnto ,he1n .,I,'c mortgage tende", ,ho,

ultimmdy aJ<k'<l nillion'l to , dfcet;,·c i:!e of the US notlon.1

debt In 2008,,he'riliIon, ofdoll", Inoff b"lIn<:~ ,h"",""""""ion!

""l:ag<.'<l in b~ the 1",,1<,,"1 Reoo.,"", .00 the implicit JiU","nt"." in·

<'01 '<1 in totJting bad "=t,off botnk balance '1l<:<:18, nol to mention

uofunded pcmioll and rn<'<liocalliabili,j"'.loclof'ramparcocy i' ,·

clcmic in g(w,'J1lmen, debt but th" difficultyofGndin~ basIc histor_

ic,j d.t. on cem",1 ~owmm"mdeb! i ,lmos! comic,l

P.rt 1ll.I",offen Ii,st attempt to,,",.Iog episod",ofo"en

def,u lIon and re",hed ulin~ofdom 'ic publicdeb, acro,,, m(}leIh""

a c~>ntury. (Ih:""", 00 rn""h of d'" history of dom,,,;,Lc deb, has

largely1:0<"" fO<~llen by ",h"l.n, not urpri!ir\l:ly '"100h I" hi

xxxi

Copyrighled malElrlal

10ry of defauh.) Thl' phenomenon "l'!'<'aJ'S '0 bt, ",m~ h." rore"

tha" CJl'e-r",,1 defdultbu, i'l faT lOU c"mmun 'i>justify!h,.CJl"cm~""

sumption ,ha.1K"''''''mo>nts l~'.y; honor ,henomln.al f""e ,,,I,,,, of

oon", icdebt, an ,,"sump<ion that oomln.' lhe ",,,:>nomico H",,"·

tu,,, When o''Cn dctoul, onoomc>,k <Ie'" doe>OCCOJ'. i, app"" 10

occur In ,i'U3tionsof~rc3tC1"durcso rhan those ,ha, k.J 10f'Urc ""

t"m.1 Jcf.,ult-;n ' •."",ofbuth on implooion ofOUlpU'OfIlIa marko ,j

""",l.tion of infl>lion

bilnkln~,curr nq, and inllOllon Unrll ""'Y "",~ntly, 11 study of

bankln~crise.h" t\l'ic.lly foc",,-,<l dthe"on,-",-rlie, hi<toric.l exp'"

WorlJ War lJ or on roo<km-Jay ~"P"rlcncc> in ,merging ma,k

This dichotomy ha pcrhap> be< n ,h"f'l'd by the belief that fur.d·

'"lU'ICed """,,,.>ml de:!t3blli:zI"l; sJ't.", ic, multlc(ll.u1try financial

cri= are" relic of the po,t.Of<00'"" ,he""'COl ~Iobolfin.1ncial <li·

si, manatin& ou, of the Uni,ed SI.,,,, and Europe h lashed thi,

misconception • lbeit", ~'fCatsocial c"",

The fac i> th., honkin~cn " have lon~ r1al(U' J rich and

poor<oonrfi alike We re.",h Ihis <ondmioo aftercx"mininR m.nk·

injlcri '"""~"ll from Denmark', financi"l panicdo,ing the Napole·

onic W"lS to th " " , e " , Ii11lt ~lobol financi.l cli'll, of!h~t ""t\·.fi",

century Thc incidence of bankl"l; crise r"'''''' to be remotbbly

,imll., in the bi~h.and the mi<!dk·to Iow·income countIi", B.nk

in& crises ,,1ffi08' in"a,lably l d ro ,harp d<"Cli"", in tax r~wn"",a,

well as ,igniJican, increases in l:Ov<-rflI""n, 'f'CTIJing (0 ,han· of

which" pr<'SUm.bly Jis<lpatl,"') On ",-er"l."'. ~,~m"m debt t~

b~86pcr<em durin.ll the Ih",,,, \","' following a banking erioi, Tbcsc

iOOl,,"C, 6"'01 con '<I""'''''C> are thus an orde, of m.gnitud<· I"r~ "

than ,h~u,ual cool; of bank b.i1ntlL<_

rent the"", No cmer~ln~ market country in hatOIl' h manag>.>d to

avoided ,ri.l bouts ofhiw inilation hen the United St."" h h.,J

Copyrighled malElrlal

a eh "h""") hiswry, induJinj: in 1779, wh 'fI the infl,tim rale

"P-proachrtl 200 percent Early on aeros, lhe world, "' "lreooy nOlrtl,

tN, m.in df,"",e for Jefaultlnjl on !K''''rt",,,,nt obligmiQn ",·d.,hm

of deoo,i"ll me eomem of the coinage Modem currency I""""""

aehk:vitll: the ,arne <on<I A •• eon"",!""nee, " ele"r inflationary

inflalion orih>d radically hiJ:h Since th,'lt, inflation cri ha,'"

em peri<xlalso ha, ""'" a highet incldenceof eha,,£<, rate cl'll<h",

and brger medi.n chanll'" inCltJ'I'-""'y'"lIlu Perh.p; more rpri

in¥, nd made "i,ible only by a broad 'f historicol comext, are the

early -piso<k ofpronouoccd ""eh3fll," rale in".bilily, notably

dur-ing lhe Napoleonic W.".

J'-"l ao financial lOT""" h."e ",-,mmon m""t()OoCOtl(llnic an·

tecedents in ", -r (TTic",.ecooomic aeli,'ity, extern"l indica,,,,,,, and

50on, 50 do common pa" "", app<'.r in the S<.'ql>Coclnj,: !temporal

order) in which crist., Wlfold, the tinal 'ubj , ofp"" IV.

TheeC1I\Cludill/!chapter offen """'" rcfl'-'"Ctiorn on crise po\

icy, and rath"'''j'' for academic otudy Wh" i, certainly c\c i, tha'

all'"in.nd ;lJjain eromri , oonl<., individuals,:md firm lake on

ex-cessi, , debt in ¥DOd II""" with ,t ~h ""'", ,.,., of the ,l,b

thaI will follow when lhe in,,,·il.ble ""''' ion hit• Man\, plaj"''' in

,he ~1ob.1 fin."ci.1 '}~lemollen dlt: 0 deb! hole for law."-thon they

c.n """,,,ably ,.,;peel to "",arc from, m06t f,mouslj' Ih,' Unit<'<!

States and its ~n.ncial 'Y'lC'ITl in lhe: late 1().XJs. C",)\'trnmC1'lI and

l:')".",""m""t.~>tla,"r\l Jdebl (which, d""todqvolt in<ur.nce,of'en

implicitly ;nduJeo bonk Jebtl i> c"'minly the moll probk'lllatk,

forit c.n '<cumul.,e m"ssiwly and forIon>:period; ",ilhoo,hem.:put

inch""k bl' math'''' "'f'C<',,\\y where fCl:ulatioo 1"'''''''''lhem from

ctfecliwlydoinJI 50.Although pn".,ue debt cen.inly pl.ys 0 leyrole

in many cri",., i:O,· "",mentdebt is for more ollen the unlfy{1ll: prob

Iem 'cross the wide range<ilinanci.1 crises "'e~x.millC.A,we"al,'ll

,-,,,,Iiet, the[""lthat"".ic do,"00OOme>tic dd.1 ",'-' '"OJl'lIllTe"OO

dif-I>cul, toohr:lin is proofIh'l i:O,,,,,,menlJ ",ill goto lIOO"t len~h. to

hiJ<,their books",hen things.",goin/l """"g, jUot a fi""""I., I"",i·

xxxiii

Copyrighled malElrlal

",_

Flo P.l s.,,,,,,,w .,., ",,1<!of.<, l~l\Xlll, PI'«on'_nf«>Un""" In

<<t<mal ,Iouh 0< """"'t~•.<,.1.,«1 ~ ,1.<"~ of ",IJ on<om<.

tUlionshow" dOlle in theCOll!cmro':"yfi""nd,,1 en.i" We , •

m.-jorwk fo, imem:ltio""ll"'licy-makillg ""g:mlzalions, such3 ,nc

In-terna'ional Mooc't3r)' FuAd, In wldlnl; f,:<)'''''ffim,~ll deb, 'C"""n15

thal.re mo'" Inn,p,,,,,,,ttn.n ,ho<""",,iI.bl.>todoj·

Ou, immersion inlhe detoil, ofe'i Ih.1 h.w an",,, 0""

th"! !he n'O:)St commonly '''I-",ateJ and moot expen'i,'" in,·";ltm"nt

:odd"" ""er~h ,niolhe boom jus, t."f"", tInan"i.1 eri,i "MI' from

the perc''Ptioo tn., ·,hi l!me i,diff"""'I,' Thai ad,·ice, IMI theold

rulesof"alua,lon no Iongt., opply, isusually 10110 -.:1 up "'ith "igor

Fin:tnd"1 proks,ion"l, and, "11 "'" llft<'n, f,:<)' ,nmO'l'll leader> ex_

plain that "" ,edoi~ thin~.betl'" Ih"n I;.,[o<e, we",e ,.[1,." and

"" h"'e learned from 1'••1miOl"k~ Each lime, society co[winee it·

tr~,hic coll.pse; in t1", ('tit, i< buih on sound fu"d.n"'nt'Is,

"me'u l Tcl(,nm, l""hnologic.1 int""03lion,.nd good policy

Gi,'''" lhe ''''''''''Ping J.t.Oilwhich this bookh Ix-.'ll buill,

il l, ,imply nrJI f'O",iblc 10 providc tex!Urnl con,,,,,, '0 11 me hun·

JreJ" ofcpi,;od"" ,he d:lla rnc"mI"SIl Neve"hdcss, lhe ",hies "IId

ligurc, !f"'"k ''''y powerfully for !hemsc),',," ofthe pI,,-",omc'n 1 """

eUlT""l mwrc of the problem, T"ke ligurc 1'.1, ",hieh "'o"~ the pc"

xxxiv

Copyrighlad malElrlal

",-'(\10"" ofcoumfic>"",Wwi<k, 1WCil:1\l~d byGO£',that haw bttn in

~ ,tate of default on <klr"",ern \ deb, a, lUll' lime

Th" ""COOt ('<"tiod of 'M 2(XX)" "-'P",,,,m,.,j bytherlJ:h,.homd

[;Iii of the eh"n, Iookuuffidemly b<:ni,:n.Bu, "'"'Itr;~h, for so many

fOlicy ma"" '0dcc\aI"l-' hy lOO5 ,hat the problem of "'\'ere;"'n

de-fault on ""t,=ol deb, hoJ ~nrilllo dt,ep",mis,kIn! UnfonuIl3,e1y,

enoo~h.We h"l'" th.tlhe ,," ,;~htof "";<10.=" in Ihi, book will i,"ive

declare. "Thi, lime i diffe,,'!n'." Ita\"""1 two· ,. is.

Copyrighlad malElrlal

Copyrighted malElrlal

A b""k '" long in 'N:, m.kin~ """' t'" rtL1flj'd bt< of ~""'itude.

Amon~ ,00 "no helped i,Vin" ", Rdnh.n ,,+.0 con.ultcd on ,he

"""o"",,,k" and ><a,ls,kal COntent aud cditcoJ and R>-<,jitcod all the

chap''''''' He al", provided the an<:<:dote ,hat led to ,he book" 'itle

Vin<ent ""tke-d for the F -dot>l Rc "'" for alm,,"t a qu'ttC'f c<'Il'ur.,

Capi,"1 Management in 1998 ,,·hkh ,tt><:d like a major eri,;' thett

bu, ,cern 1, '" ~~"ett recen, "ve~m, he ol!en<!eJ 0rn""'in~ of the

board of 1lO""'no" with Irulrht practitioncrs A tr""'-., ,,;th an un·

ehar.ct<'Tink"lIv long memo ,. explained, "More mon<oy h l'C<",

'Thi'ltime ~dilTe",,,,.~

A peci.l Jehlof~ratitude "o,,'edtoJane Trahan fot h<'T "x·

Itc-melj' helpful nd thoroogh editing oftlte ma"u",ripr, nd to oor

<>.Iitorat Prine,,",ofl Uni"'''ity I't"'"', Seth Dj,chik f01hl<",~"ions

an<! editori"1 ~'Uio:I.l\Ce thrrughout th;, r=. Edulll 1iI<t:k~ !'cr·

grale-ful to Pc"" SltuP!' and hi, oollc"l:uc, a, Prin"",on Editorial A"od·

,It'" k>r ikillfijl1l' ""l,,<>'iotinl; all the "",Mic.l detail>' of p",duein~

tha "01""",

Copyrighted malElrlal

PREAMBLE: SOME INITIAL INTUITIONS

ON FINANCIAL FRAGILITY AND THE

FICKLE NATURE OF CONFIDENCE

TIIi book 'Ulnma'Lre' ,lie 10"1< hislOry oflinancial c.ises in ,kit

m.'nyill;""'C",,"'tn.nl- CoolllTie> BoIO,elleOOill~ illlO the deep

".,.-te of""f"'riencc tllio clI"pter will "ttemp' to ,h"tch"" ~'eollOmie

frnmework to help ,lie "",de """", ,and why 61lancial c.i , ,~-rul

lO be b<lth ultpr.>dictabl<,.nd darn"lllll~. A, ,h.· book unfold., ""

will tak" orh"r opportuni,i'" to i:Uide in,,,,"'t,,d read"" through

the ,da,,>d ,,,.,kmk li,erdtu'" whell it i> absolutely e,itkal to oor

story_ R~" .,,"', ,] th these are only"",," del"""" and ,I\ost, un_

c<.>nc<'11lro wl,lI <!COnomlc ,heo'y.' an ~n~in~ofdisc"'"ry can by_

pa the", bl"'"d)'>

'0"" tha, 6na""ial m.,kc18, partieul••ly one; ",1i'1ll on l""~rage

(whiell m<.-:lns,hat ,II~'YlIa", thin capirnl compared to,liearnoont of

a "t' at otoke) can be quitc frn~il~ .nd ,ubi."'t to eli of

cooli-dene~.' UIlP.>rtUllately th"ory Ri"'" littlc guidance011 the exact tim·

PerM?, more ,ban .ny,hin~ ~b.o. f.llo'" to ""'01:";"" the

p<""ariousnes, and licklen~" ofconf,J.,nc_p"d.lIy in c""" in

,,-hieh 10'1:" ohort-tc'm debt Il~"'''] ro be rolled 0 '1"

cominuoo.ly-is ,hek~'Yfocto tha, Rive, rise lO the ,hf,-,ime-h.diff=1ll,yOOrom~.

Highly inddxN l:"'·~·rtlmerttS.b<uw or c"'l"",-,iilnl; can "-"CltI'<l be

,",-",Oyrolling alol\J;lOr an~""cn.kdp<'l;OO ".he", "''''C! <<lnf.denc~

coUal""".1c",<k',"dio.I'f'<"" ""d" e,i,i hi

Copyrighlad malElrlal