What I Learned from This Time Is Different–Sovereign debt is forever until ok…whatever!?

The bottom line for 2012 is that for advanced economies who are unwilling to devalue their currency, allow high interest rates, encourage high inflation rates,  or default on their debt, the only solution is for these countries to pay down their debt. Without a financial calamity to motivate legislators to break the gridlock, this scenario sounds like a script for Mission Impossible. Does no pain translate to no gain? Sovereign debt investors would like these countries to grow and pay down their debt as part of the increased tax revenue but regardless of the economic growth or the pain, they will be paid or else that advanced economy and it’s sovereign debt degrades into “something else”. This “something else” position is assumed to be something similar to but not as bad as that experienced by Argentina in their 2002 default. It is generally assumed that a “default” should be avoided at all costs. Greece is teetering between “default” and something folks have started to call a “managed default”. “Managed default” is supposed to be a better situation than “default”. Regardless of which name you use to describe the situation, the sovereign debt investors are not getting their money back and they will unlikely make this mistake again. The primary attraction of the “managed default” plan to the European Union is that it will inflict less economic pain on Greece and as a result the Greece’s economy will fall less and recover faster than in a “default” scenario. The unanswered question is how much economic pain is required in Greece for necessary economic reforms to occur. That is probably why the European Union is asking Greece for budget veto power over the Greece budget. Considering the situations in Ireland, Portugal, Spain, and Italy are not far behind, maybe the authors will have enough material to write their next book about this never-never land for advanced economies, its pitfalls, and its benefits.

Yes, I know the authors collected a lot of valuable economic history but unless you get excited over lots of charts, it is a very dry read.

This Time Is Different: Eight Centuries of Financial Folly
by Carmen M. Reinhart & Kenneth S. Rogoff