Everyone's Missing the Bigger Picture in the Reinhart-Rogoff Debate

George Washington's picture

You've heard that an incredibly influential economic paper by Reinhart and Rogoff (RR) - widely used to justify austerity - has been "busted" for "excel spreadsheet errors" and other flaws.


As Google Trends shows, there is a raging debate over the errors in RR's report:

Even Colbert is making fun of them.

Liberal economists argue that the "debunking" of RR proves that debt doesn't matter, and that conservative economists who say it does are liars and scoundrels.

Conservative economists argue that the Habsburg, British and French empires crumbled under the weight of high debt, and that many other economists - including Niall Ferguson, the IMF and others - agree that high debt destroys economies.

RR attempted to defend their work yesterday:

Researchers at the Bank of International Settlements and the International Monetary Fund have weighed in with their own independent work. The World Economic Outlook published last October by the International Monetary Fund devoted an entire chapter to debt and growth. The most recent update to that outlook, released in April, states: “Much of the empirical work on debt overhangs seeks to identify the ‘overhang threshold’ beyond which the correlation between debt and growth becomes negative. The results are broadly similar: above a threshold of about 95 percent of G.D.P., a 10 percent increase in the ratio of debt to G.D.P. is identified with a decline in annual growth of about 0.15 to 0.20 percent per year.”


This view generally reflects the state of the art in economic research




Back in 2010, we were still sorting inconsistencies in Spanish G.D.P. data from the 1960s from three different sources. Our primary source for real G.D.P. growth was the work of the economic historian Angus Madison. But we also checked his data and, where inconsistencies appeared, refrained from using it. Other sources, including the I.M.F. and Spain’s monumental and scholarly historical statistics, had very different numbers. In our 2010 paper, we omitted Spain for the 1960s entirely. Had we included these observations, it would have strengthened our results, since Spain had very low public debt in the 1960s (under 30 percent of G.D.P.), and yet enjoyed very fast average G.D.P. growth (over 6 percent) over that period.




We have never advised Mr. Ryan, nor have we worked for President Obama, whose Council of Economic Advisers drew heavily on our work in a chapter of the 2012 Economic Report of the President, recreating and extending the results.

In the campaign, we received great heat from the right for allowing our work to be used by others as a rationalization for the country’s slow recovery from the financial crisis. Now we are being attacked by the left — primarily by those who have a view that the risks of higher public debt should not be part of the policy conversation.

But whether you believe that the errors in the RR study are fatal or minor, there is a bigger picture that everyone is ignoring.

Initially, RR never pushed an austerity-only prescription.  As they wrote yesterday:

The only way to break this feedback loop is to have dramatic write-downs of debt.




Early on in the financial crisis, in a February 2009 Op-Ed, we concluded that “authorities should be prepared to allow financial institutions to be restructured through accelerated bankruptcy, if necessary placing them under temporary receivership.”


Significant debt restructurings and write-downs have always been at the core of our proposal for the periphery European Union countries, where it seems to us unlikely that a mix of structural reform and austerity will work.

Indeed, the nation's top economists have said that breaking up the big banks and forcing bondholders to write down debt are essential prerequisites to an economic recovery.

Additionally, economist Steve Keen has shown that “a sustainable level of bank profits appears to be about 1% of GDP”, and that higher bank profits leads to a ponzi economy and a depression.  Unless we shrink the financial sector, we will continue to have economic instability.

Leading economists also say that failing to prosecute the fraud of the big banks is dooming our economy.  Prosecution of Wall Street fraud is at a historic low, and so the wheels are coming off the economy.

Moreover, quantitative analyses provides evidence that private debt levels matter much more than public debt levels.  But mainstream economists on both the right and the left wholly ignore private debt in their models.

Finally, the austerity-verus-stimulus debate cannot be taken in a vacuum, given that the Wall Street giants have gotten the stimulus and the little guy has borne the brunt of austerity.

Steve Keen showed that giving money directly to the people would stimulate much better than giving it to the big banks.

But the government isn't really helping people ... and has  instead chosen to give the big banks hundreds of billions a year in hand-outs.

(Obama's policies are even worse than Bush's in terms of redistributing wealth to the very richest. Indeed, government policy is ensuring high unemployment levels, and Obama – despite his words – actually doesn’t mind high unemployment. Virtually all of the government largesse has  gone to Wall Street instead of Main Street or the average American. And “jobless recovery” is just another phrase for a redistribution of wealth from the little guy to the big boys.)

If we stopped throwing money at corporate welfare queens, military and security boondoggles and pork, harmful quantitative easingunnecessary nuclear subsidies,  the failed war on drugs, and other wasted and counter-productive expenses, we wouldn't need to impose austerity on the people.


Neither stimulus nor austerity can ever work … unless and until the basic problems with the economy are fixed.


But stimulus and austerity are not only insufficient on their own … they are actually 2 sides of the same coin.


Specifically, the central banks’ central bank warned in 2008 that bailouts of the big banks would create sovereign debt crises. That is exactly what has happened.


Remember, it is not the people or Main Street who are getting bailed out … it is the giant banks.


A study of 124 banking crises by the International Monetary Fund found that propping up banks which are only pretending to be solvent often leads to austerity:

Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.


Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions’ liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery.



All too often, central banks privilege stability over cost in the heat of the containment phase: if so, they may too liberally extend loans to an illiquid bank which is almost certain to prove insolvent anyway. Also, closure of a nonviable bank is often delayed for too long, even when there are clear signs of insolvency (Lindgren, 2003). Since bank closures face many obstacles, there is a tendency to rely instead on blanket government guarantees which, if the government’s fiscal and political position makes them credible, can work albeit at the cost of placing the burden on the budget, typically squeezing future provision of needed public services.

In other words, the “stimulus” to the banks blows up the budget, “squeezing” public services through austerity.


But instead of throwing trillions at the big banks, we could provide stimulus to Main Street. It would work much better at stimulating the economy.


And instead of imposing draconian austerity, we could stop handouts to the big banks, stop getting into imperial military adventures and stop incurring unnecessary interest costs (and see this). This would be better for the economy as well.


Why aren’t we doing this?


Because – underneath the false easing-versus-tightening debate – this is not a financial crisis … it’s a bank robbery.


Profits are being privatized and losses are being socialized.  So the big banks get to keep the mana from heaven being poured out of the stimulus firehose, while austerity is forced on the public who has to bear the brunt of Wall Street’s bad bets.


The big banks went bust, and so did the debtors.  But the government chose to save the big banks instead of the little guy, thus allowing the banks to continue to try to wring every penny of debt out of debtors.  An analogy might be a huge boxer and a smaller boxer who butt heads and are both rendered unconscious … just lying on the mat.   But the referee gives smelling salts to the big guy and doesn’t help the little guy, so the big guy wakes up and pummels the little guy to a pulp.


And creditor committees dominated by giant banks like Goldman which helped countries like Greece fraudulently cover-up their financial problems are now demanding austerity, and Greece is holding a fire sale of its infrastructure, public utilities, tax base and whole islands to give to the creditors.  Spain, Italy, and even countries like the U.S. are no different.


As we wrote last year:

Economists note:

A substantial portion of the profits of the largest banks is essentially a redistribution from taxpayers to the banks, rather than the outcome of market transactions.

Indeed, all of the monetary and economic policy of the last 3 years has helped the wealthiest and penalized everyone else. See this, this and this.


A “jobless recovery” is basically a redistribution of wealth from the little guy to the big boys.




Economist Steve Keen says:

“This is the biggest transfer of wealth in history”, as the giant banks have handed their toxic debts from fraudulent activities to the countries and their people.

Nobel economist Joseph Stiglitz said in 2009 that Geithner’s toxic asset plan “amounts to robbery of the American people”.


And economist Dean Baker said in 2009 that the true purpose of the bank rescue plans is “a massive redistribution of wealth to the bank shareholders and their top executives”.


The money of individuals, businesses, cities, states and entire nations are disappearing into the abyss …

… and ending up in the pockets of the [fatcats].

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AmCockerSpaniel's picture

It's the giving of money that keeps it from "stimulating". You give money to any one of us (on an on going bases) and we will never work again. It's called domestication. We all know what happens to an animal that gets feed. We are no different. What must be done is to spend money making work (jobs). FDR had it right with the CCC in the 30's. Workers will take their skills learned working and move to higher paying private jobs as they become available. The private sector will have a market as soon as "free trade" is repealed. America first for Americans, and not China or any others. In turn the other counties will have to do the same. Advantage to the larger counties. Sorry, but charity begins at home with me.

honestann's picture

All the above is interesting, but nothing more than a smoke and mirrors scam to avoid asking and answering the fundamental question.  And make no mistake, answering the fundamental question makes 100% of these types of analyses completely irrelevant.

The fundamental question is: are humans slaves?  Or to state this question slightly differently: can there be any justification for borrowing money today to spend & enjoy today, and then making the next several generations of not-yet-born, and therefore definitely not-yet-voters-or-signatories, pay off the principle and interest of these loans?

The only possible honest answer is no.  If it was wrong to enslave "black people", then it is also wrong to enslave "all people".  That people actually invest huge quantities of time and effort to formulate theories about the kind of topics we see in this article only proves that everyone in these fields are craven predators.

The answer to all of them is: I do not agree to be part of your debt, your plans, your schemes, your enslavement.  And though the next several generations of debtors being created by all these schemes can't say so yet, because they aren't born yet, they do not agree either.

To everyone who has presumed us to be slaves, and subsequent generations to be slaves: you have assaulted us in the most egregious and diabolical ways.  Do not be surprised if some of your presumed slaves defend themselves against your aggression, as they should, and are surely justified.

John_Coltrane's picture

Very clear thinking and comment (Randian in its simple premise and irrefutable logic)  "The road to serfdom", F. Hayek.  Everything one needs to know about the dangers of debt and central planning.

SKY85hawk's picture

In the future, some people will still prosper and do Ok.  The slavery thing is not guaranteed!

Teach your children well:

- Financial reporting forms have Section-TITLES that have no basis in law. But they do mislead the reader!

         Only the details must conform to law;

- If your child has an idea to start a business, use a Trust not inc or LLc  Just because all the advice magazines suggest inc. or LLC doesn't mean they are giving out good advice.  Notice that most of the US gummint uses Trusts for their legal foundation, ( Secretary of Commerce, Sec'y of the Treasury, Sec'y of Army, Navy ad nauseum.  All COMMON LAW business organizations!  Many of the gummint's rules and regs can not apply to a Trust;

- Determine early on if your child is better suited to a trade instead of COLLEGE.  There's lots of rich Plumbers and Electricians around;

- Make sure your child is getting an education relevant to the employment market.  Liberal Arts does teach one how to think, but who will pay off the loans?

- Many JOBS depend on a technical specialty.  If your child can't develop one of those (Architect, Engineer, Health Care, Programmer)  They will find themselves pushed into some kind of mANAGEMENT situation.  Do they really have the temperment for that?

-Understand that your child's basic temperment is quite visible and established, by 3 years old.  A caring parent has a reasonable amount of time to guide the young'un towards success in life.   

-What did Lee Iacocca say?  "The ability to communicate is EVERYTHING!"


Don't let the bastards get you down.  .  .  .



Anusocracy's picture

If you have young children, I would suggest a few things:

Help them learn to collect and organize things (stamps, coins, beetles) to develop systemizing in the brain.

Raise them as much as possible without authority figures and hierarchies: 


Start teaching them to repair, design, and build things.

Teach them about other people's property.

Don't get them interested in sports.

honestann's picture

Teach them about their own property!

WTFx10's picture

Teach them firearm safety and usage, their gonna need it.

Punch Bag's picture

I liked your advice, except the last line.

Punch Bag's picture

...and beetle collecting sounds a bit creepy, but I get your point.

Diogenes's picture

Liberal Arts does teach one how to think,

I seriously doubt this. To the point where anyone who can and does think would find it impossible to earn a Liberal Arts degree.

The Old Man's picture

Some, not all, of the college kids working for me during the summer months, are like domesticated horses. If you left them out in a field of hay for 2 weeks, you'd come back to find a starved to death horse.

Miffed Microbiologist's picture

Liberal arts in the Classical sense DOES teaches one how to think. If it weren't for the constant questions and counterpoints to all my espoused ideas at college, I wouldn't be the person I am today. But, my experience was in the 1980s and i can't speak for today. Of course one doesn't need college for that. Just an inquisitive nature and surrounding oneself with provocative, questioning people should suffice. Perhaps this ultimately is the problem today.


Colonial Intent's picture

+1 for knowing what liberal arts actually means, rare to find an american with that level of education, were you home schooled?

honestann's picture

Yes, don't let the predators get you down.
But don't become a predator either.
Or adopt their fictitious schemes.

Anusocracy's picture

Most people are slaves in the sense that ants are slaves.

honestann's picture

Exactly true.  But the point is, ant's have an excuse: they are incapable of understanding the system they are part of, or refusing to participate, or behaving otherwise.

Humans are different.  Okay.  Actually, you're correct.  Human's aren't different.  But they sure as hell can be different, and should be different.

If humans behave like ants, humans are finished.

Which is why, humans are finished.

WhiteNight123129's picture


There are three types of people.

The guys who can make themselves look like an idol, a leader and can manipulate the psychology of other people. He is the church leader.

Next there is the cohort which follows the church leader, they do that because they do not know anything else to do.

The third type of people sit on the fence and enjoy the show.

This theory is also valid for stock market. There is always a church of something and a church of that. People prefer the church thing than the fundamentals, because fundamentals are fairly boring.

So in investing like in religion you have.

1. The piñata, the one who needs to die and be sacrificed, the witch to be burned.

2. You have the messiah, the thing that will change the world for the greater good

3. You have the blasphemy (the thing that burns the ears of the other when you say them.

The most powerful myths are the ones which mix up the pinata with teh messiah (Jesus).

Jesus in investing was AAPL, coming back from the dead in 2000 to reign supreme in 2011,  and hten you have a new powerful church for a while.

So we have covered the pinata and hte messiah at the same time. The blasphemy is to be short AAPL last year, or to be short treasuries today, or to be short base metals back in 2010-2011 (first half). The problem with blasphemy is that you need to do it when things turn. For that fundamentals (the boring stuff of the accountant bean counter) help.

The current pinata which could turn into a messiah might be the solar industry, but the problem is that you do not know which company will win. Right now the ones attempting to nail FSLR on the cross are realizing that the victim has "super powers" and are started to get afraid, "could it be that we are putting on teh cross the Messiah?, they ask themselves" . The head of the romans trying to crucify the whoel industry (Axiom Capital) has been striken by thunder bolt when he had a short recommendation on Power One (inverted manufacturer) that ABB is buying with 50% premium, now the leader of the crucifiers is surrendering (Axiom Capital) with a "hold" at a price 50% higher than is "sell" reco. So the fundamentals are far remote from the "narrative" you need to understand how narratives develop, fundamentals are not enough and can not explain price movements many times in the short medium term.

As for human nature it will never change, but the current arrangement is that the new idols Buffet, Tim cook, Kardashian are pathetic. The west starting to revere the golden calf since the end of XIX century with communism and political ideology.



blindman's picture

humans behive like ants, I like that a little better.

JOYFUL's picture

We don't really know what ants are capable of/excusable for....because our 'studies' of their particularities are blinded by our own biases as to what constitutes -understanding-and\or 'behaviour.

But we do know that ants, like ourselves, share a common bacterial-based background(our 'human' cells are heavily outnumbered by our "bacterial co-inhabitants"!)...which is cause for more optimism than your post allows for Honestann...

because our very limited understanding of bacterial communities shows them to have an astonishing degree of sophisicated mechanisms for mutal-aid, self-organization, communal awarenss, and survival strategies which we 'humans' can only 'dream' of imitating!

angel_of_joy's picture

True... humans seem to be equally dumb but without the reproductive proficiency.

Herd Redirection Committee's picture

Exactly.  I made this remark to my mother.  We outlawed slavery in the 19th century.  And yet, here in the 21st century every man is a debt slave, and it is somehow legal, accepted, and common practice.

sgt_doom's picture

One thing I'm definitely sure of is that everyone should read this:



"Conspiracy theorists of the world, believers in the hidden hands of the Rothschilds and the Masons and the Illuminati, we skeptics owe you an apology. You were right. The players may be a little different, but your basic premise is correct: The world is a rigged game. We found this out in recent months, when a series of related corruption stories spilled out of the financial sector, suggesting the world's largest banks may be fixing the prices of, well, just about everything."


Diogenes's picture

Nothing in there regualr ZH readers haven't seen weeks or months ago. The basic thesis predates the founding of ZH.

alien-IQ's picture

Great article. Maddening as fuck...but great.

Westcoastliberal's picture

Saw this earlier on the 4closure site Sgt and was surprised Tyler & the bunch here didn't have it headlined.  Biggest bank heist in history, squared.

TheMonetaryRed's picture

This is a VERY good post. The first problem is that we don't know - because we can't know - what the true level of private debt is. In a world of rehypothecation, and synthetic bonds, it's essentially impossible to determine the level of net promises to pay. Does interbank debt matter if ot all goes around in a circle? We don't know and it's just one of the uncertainties. 

One thing is clear: net promises to pay can't be met without a transfer of wealth to the wealth OR monetization or both. There simply isn't enough austerity to go around at present GDP levels. 


DaveyJones's picture

that's the problem, the picture keeps getting bigger

Son of Loki's picture

$85 Billion a month is not enuff. Consumers are depressed, no longer confident they'll get that zero down, 360 moths to pay house, car, student loan, Thingamajig or what have you.....

DaveyJones's picture

anything for any form of inflation, especially forms that you can TRY to claim are not - all in an attempt to inflate away the debt (because deflation hurts the big boys and is easier to detect). Of course, it still kills the economy and is an extra pressure on top of depleting vital resource. These idiots have under estimated both and now deny that effect. Or perhaps they realize everything and are just criminal serving scumbags. Take your pick

williambanzai7's picture

And this is why Paul Krugman is a useful idiot for Wall St.

booboo's picture

"And this is why Paul Krugman is a useful idiot for Wall St"

and why Wall Street is the useful idiot of the Statist.

Well, Paul Krugman is not really a Wall Street kinda guy, he is more the economic mouthpiece for the Statist, or Minister of Illusions and Fables.

akak's picture

"Useful" is subjective here.

alien-IQ's picture

The thing that makes you so sharp is the fact that you clearly understand that brevity is the soul of wit.

Tombstone's picture

So, according to the libs, debt doesn't matter.  If not, Benny must be persuaded to increase QE from $85 billion /month to $850 billion.  I could sure use a small hunk of that; .00001% would suffice.  This central planning crap could turn out to be fun.

alien-IQ's picture

You seem trapped by the red/blue paradigm. So much so in fact that you have chosen to ignore the fact that both parties run up debt when they are in power and rail against it when they are out of power.

The question you should be seeking to answer is: Who benefits from this ever greater debt? (and please, don't say it's the fucking people on food stamps, that simply idiotic).

andrewp111's picture

And what could Benny spend $850B a month on? There aren't enough government bonds in existence. He would have to buy stocks - something which he said is illegal. Maybe that is why Benny is going out ot pasture and leaving the Fed in the hands of Old Yeller.

RickC's picture

It suddenly occurred to me that the left has been castigating Cheney for saying "deficits don't matter".  The fact is Cheney was talking about election politics.  But, after all that, the Keynesians are now saying "debt does not matter".  But, debt grows by deficits, so the Keynesians ala Krugman are now taking up what they think Cheney said.  Up is now down and down is now up.

RafterManFMJ's picture

Up is now down and down is now up.


No, we are beyond that; Up is now lime, down is sardine stawberry.

ebworthen's picture

58008 on a calculator turned upside down spells "BOOBS"

Westcoastliberal's picture

Thanks for pointing that out; it solves everything.

Unique Snowflake's picture

Sometimes boobs do solve everything.

Uncle Remus's picture

Well, not everything, but they do make a hell of a consolation prize.

blindman's picture

when you define money as debt increasing debt increases
money which is required to accommodate progress,
development and increased production.
it is a Ponzi scam at the root of the unit of measure
which is like oxygen to a breathing organism.
it doesn't matter and is not to be questioned until it
is poisoned, then, everyone is poisoned so collectively ,
all are in the same situation again, it does not stand
out or "matter"; (except) everyone is sick and dying, unable
to find the root cause /problem.
usury is so powerful that it intoxicates everything and
then fails fantastically.
I say consult Bernie Madoff for the way forward !

BraveSirRobin's picture

If liberals did not have double standards, they would have no standards at all.

nmewn's picture


I know you mean "progressives"...so kudos!

Herd Redirection Committee's picture

Right vs left

Red vs blue (even English school kids pick a side)

D vs R

North vs South

Black vs White

Christian vs Muslim

Middle Class vs Poor on Gov't Benefits

Divide and Conquer.  Any time you find yourself having one of these sorts of arguments, just know, you have been programmed to react like this.  Who does this sort of thinking benefit?  If, as a society, we are easily divided, then we are easily conquered as well.  And plainly, society is highly divided, so I will let you draw your own conclusions as to how, and why that is the case.


nmewn's picture

With me its not about dividing...its more about shoving a fucking mirror in their face and forcing them to see themselves for what they are or have become.

Back in the 60's-70's a liberal never would have dreamed of using government to enforce their will on everyone else. That is not what a liberal is.

This is a very different "thing" we're dealing with here now, decidedly un-liberal and just as destructive to society as it has always been down through the ages.

So here we are, debating "government austerity" which is nothing more than dividing the ill gotten spoils stolen from the taxpayer, the People themselves.

"Liberals" have some splainin to do ;-)

Real Estate Geek's picture


Back in the 60's the liberals seemed to do just that with forced busing.

nmewn's picture

Yes, their "grand social experiments." They never seem to tire of them, that and eugenics.

Starting around the fourth grade I was bussed to every school on the "southside" of town. It was a...learning experience...lol...that I'll never forget.

I learned a lot about human nature, culture and people in general.

The most important were, my friend Tyrone (yes, really, his name was Tyrone...lol) while smoking a doobie out back, I asked him if he would throw his body across mine if "the blacks" came after me like they did some of the other white kids there.

He said no, he couldn't...he has to live there with them. I nodded, understanding...and said I would for him, if the roles were reversed. He looked at me as he took the joint, smiled and said, it ain't like that here.

The other was...when the shits in the wind, you can only really trust yourself and those around you who think like you do. He never knew about me setting up a "pre-adult black faggot" in the boys restroom who preyed on little white boys in high school, to get his ass kicked by the little boy himself as we watched.

I'd like to think Tyrone would smile and I know this isn't what "progressives" had planned in my "learning experience".

But there it is...and many more ;-)

Diogenes's picture

Back in the 60's-70's a liberal never would have dreamed of using government to enforce their will on everyone else. That is not what a liberal is.

I don't know about that, but I can go along with the rest of your argument.

Obama is quite a ways to the right of Richard Nixon. If that is liberalism, you can have it.