Carmen Reinhart: "No Doubt. Our Pensions Are Screwed."

Tyler Durden's picture

"The crisis isn't over yet," warns Carmen Reinhart, "not in the US and not in Europe." Known for her deep understanding that 'it's never different this time', the Harvard economist drops the truth grenade a number of times in this excellent Der Spiegel interview. Sweeping away the sound and fury of a self-serving Federal Reserve or BoJ, she chides, "no central bank will admit it is keeping rates low to help governments out of their debt crises. But in fact they are bending over backwards to help governments to finance their deficits," and guess what, "this is nothing new in history."

After World War II, all countries that had a big debt overhang relied on financial repression to avoid an explicit default. After the war, governments imposed interest rate ceilings for government bonds; but, nowadays, she explains, "monetary policy is doing the job. And with high unemployment and low inflation that doesn't even look suspicious. Only when inflation picks up, which is ultimately going to happen, will it become obvious that central banks have become subservient to governments."

Nations "seldom just grow themselves out of debt," as so many believe is possible, "you need a combination of austerity, so that you don't add further to the pile of debt, and higher inflation, which is effectively a subtle form of taxation," with the consequence that people are going to lose their savings. Reinhart succinctly summarizes, "no doubt, our pensions are screwed."


This will take 3 minutes to read - read it. Understand what she is saying.

Via Der Spiegel,

... governments are incapable of reducing their debts and that central banks are now stepping up to resolve the crisis themselves. In the end, she argues, everyday savers will pay the price.


SPIEGEL: Ms. Reinhart, central banks around the world are flooding the markets with cheap money in order to spur economies and support governments. Are these institutions losing their independence? 

Reinhart: No central bank will admit it is keeping rates low to help governments out of their debt crises. But in fact they are bending over backwards to help governments to finance their deficits. This is nothing new in history. After World War II, there was a long phase in which central banks were subservient to governments. It has only been since the 1970s that they have become politically more independent. The pendulum seems to be swinging back as a result of the financial crisis.

SPIEGEL: Is that true of the European Central Bank as well?

Reinhart: Less than for other central banks, but yes. And the crisis isn't over yet -- not in the United States and not in Europe.

SPIEGEL: But the danger of such a central bank policy is already well known: It can lead to high inflation.

Reinhart: True. But it is certainly more difficult for a central banker to raise interest rates with a debt to gross domestic product ratio of over 100 percent than it is when this ratio stands at 39 percent. Therefore, I believe the shift towards less independence of monetary policy is not just a temporary change.

SPIEGEL: As a historian who knows the potential long-term consequences very well, doesn't such short-sighted decision-making frighten you?

Reinhart: I am not opposing this change, I am just stating it. You have to deal with the debt overhang one way or the other because the high debt levels are an impediment to growth, they paralyze the financial system and the credit process. One way to cope with this is to write off part of the debt.

SPIEGEL: You mean some kind of haircut?

Reinhart: Yes. But we are in an environment where politicians are very reluctant to do write-offs. So what happens is that money is transferred from savers to borrowers via negative interest rates.

SPIEGEL: In other words: When the inflation rate is higher than the interest rates paid on the markets, the debts shrink as if by magic. The downside, though, is that this applies to the savings of normal people.

Reinhart: The technical term for this is financial repression. After World War II, all countries that had a big debt overhang relied on financial repression to avoid an explicit default. After the war, governments imposed interest rate ceilings for government bonds. Nowadays they have more sophisticated means.

SPIEGEL: Which means?

Reinhart: Monetary policy is doing the job. And with high unemployment and low inflation that doesn't even look suspicious. Only when inflation picks up, which is ultimately going to happen, will it become obvious that central banks have become subservient to governments.

SPIEGEL: Do you think it is wrong for Europe to focus on austerity measures with inflation at such a low level?

Reinhart: No. Restructuring, inflation und financial repression are not substitutes for austerity. All these measures reduce your existing stock of debt. Unless you do austerity you keep adding to the debt. There is no either-or. You need a combination of both to bring down debt to a sustainable level.

SPIEGEL: Is the new trend in monetary policies a good way of tackling debt problems?

Reinhart: There are no silver bullets. If central banks try to accommodate and buy debt, there are risks associated with it. Somewhere down the road you are going to wind up with higher inflation. That is a safe bet -- even in Japan …

SPIEGEL: … which is currently dealing with the opposite phenomenon: deflation with sinking prices.

Reinhart: A further risk of such policies is that efforts to save will be delayed.

SPIEGEL: So what should be done?

Reinhart: The best way of dealing with a debt overhang is to never get into one. Once you have one, what can you do? You can pray for higher growth, but good luck! Historically it doesn't happen -- you seldom just grow yourself out of debt. You need a combination of austerity, so that you don't add further to the pile of debt, and higher inflation, which is effectively a subtle form of taxation …

SPIEGEL: … with the consequence that people are going to lose their savings?

Reinhart: No doubt, pensions are screwed. Governments have a lot of leverage on what kinds of assets pension funds hold. In France, for example, public pension funds have shifted money from shares (on the stock market) to government bonds. Not because their returns are great, but because it is more expedient for the government. Pension funds, domestic banks and insurance companies are the most captive audiences, because governments can just change the rules of the game.

SPIEGEL: We have seen 50 years of peace and democracy in Europe, but also 50 years of rising debt. Are democracies incapable of setting a budget and sticking to it?

Reinhart: No, but after World War II austerity was easier to pursue, because you had a younger population and therefore less entitlements. Furthermore, military expenditure was easier to reduce. So, the build-up in debt we have seen since the crisis is very rare. Usually you get that kind of build-up when there is a war.

SPIEGEL: But is it not a declaration of bankruptcy for democracy if central bankers, who haven't even been elected, have to step in to fix the problem in the end?

Reinhart: I think the biggest mistake that European policy-makers are now making is not to put debt restructuring more explicitly on the table.

SPIEGEL: Are you referring to Greece?

Reinhart: Greece has had its restructuring, that's history. But look at Ireland and Spain. Private senior bank debt has not been written off, despite the fact that underlying asset prices in those countries have collapsed and are still collapsing.

SPIEGEL: So closures of some banks would be helpful?

Reinhart: What is sacrosanct about bank debt?

SPIEGEL: Well, the bankruptcy of banks can have a considerable effect on the financial system.

Reinhart: Let me be a little blunter: A haircut is a transfer from the creditor to the borrower. Who would get hit by a haircut? French banks, German banks, Dutch banks -- banks from the creditor countries. So you can see why this is politically torched. This is why it is not done, it's a redistribution. But ultimately it is going to happen, because the level of debt is too high.

SPIEGEL: The United States is very highly indebted as well.

Reinhart: Yes, but who are the large holders of government bonds? Foreign central banks. You think the Bank of China is going to be repaid? The US doesn't have to default explicitly. If you have negative real interest rates, the effect on the creditors is the same. That is also a transfer from China, South Korea, Brazil and other creditors to the US.

SPIEGEL: And what happens if the creditors don't continue to play along and the interest rates on American government bonds climb? Do you see the danger of a debt crisis in the US?

Reinhart: Why do we have such low interest rates? The Federal Reserve Bank is prepared to continue buying record levels of debt as long as the unemployment situation isn't satisfying. And China's central bank will also continue to buy treasuries, because they don't want the renminbi to appreciate.

SPIEGEL: That sounds like a perpetual motion …

Reinhart: ... of course it is!

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BlueStreet's picture

It's like the credit card company lowering the interest rate so you can pay off the balance but then upping the credit limit at the same time.  What a fucked up world.  

ghandi's picture

To repudiate the debt, the assets must be seized.



markmotive's picture

Can't run from debt. Meanwhile, markets are getting WAY more complacent.

A picture says 1000 words:

New_Meat's picture

can't outrun 3200 fps, neither.

Oquities's picture

buy stuff and hide it !!!!!

disabledvet's picture

Buy stuff and flaunt it!!!

AssFire's picture

Rent whores...and flaunt it!!!

Zer0head's picture

the Harvard economist drops the truth grenade

should read

the Harvard economist drops the prop grenade


(hey Carm, sweetheart float this, okay. glad you understand need to move this meme from the conspiracy crowd to mainstream) 

MillionDollarBogus_'s picture

What's a pension..??

Most corporations did away with them years ago...

eatthebanksters's picture

That's in part becasue they were taxed so heavily to pay for the fat benefits and pensions of public workers...

Jack Burton's picture

Yet they are making record profits, how does that work?

AldousHuxley's picture

By having private sector pay for public sector...slaves not shareholders

macholatte's picture

the Harvard economist drops the truth grenade

should read

the Harvard economist drops the prop grenade


I don't see any "truth grenade" getting dropped anywhere. Maybe it's just that Carmen has figured it out so now it's a revelation cause she's got a PhD. Sheeit. More like a dud to me. Like telling me the suns comes up in the morning. Gimme some truth and tell me that a central banker is going to jail for treason or a politician isn't getting reelected because he's corrupt. Otherwise, fa ged about it.

Hey, what time's Doomsday Preppers?



Harlequin001's picture

This woman is an absolute fucking genius, but then so is anybody else who read ZH for more than a mere few days.

Maybe we could all get PHD's eh...

because like you say, there's nothing new here...

Bicycle Repairman's picture

Yeah, the government is running out of money.  Look at their income statement.  But wait.  What about the government's balance sheet?  Looks to me like they "own" most of America west of the Mississippi.  Plenty of value there.  Mineral rights.  Grazing rights.  Logging.  They also have lots of equipment.  Maybe I could use one of those IED proof vehicles or my very own drone.

How about we declare the government bankrupt and disperse the assets to its citizens.  Maybe we can unlock the value in the assets.

Imminent Crucible's picture

"because like you say, there's nothing new here..."

Disagree. There's nothing new in the content, we've been hearing it for years from Faber, Rogers, Richebacher, etc.  But it is new to hear it from a Harvard establishment bankster economist--an insider. Tells us that Reinhart isn't looking for a job at the Fed or BIS--she knows that the fiat reactor core is about to melt down.

marathonman's picture

Her book with Roghoff, 'This Time is Different - Eight Centuries of Financial Folly' is actually very good.  A bit dry and academic, but at the height of the financial crisis I got it and read it.  This stuff is as old as dirt.  Government hucksters, sociopathic national politicians, and banksters have been playing this game for ages.  The upshot that I remember is that once your country's debt to GDP goes over 90% a financial crisis often results in a sovereign debt crisis.  Very few escaped that outcome.  Argentina, Brazil, Germany, Austria, Zimbabwe, Russia, etc, etc, couldn't escape.  The road is well plowed.  Americans are ignorant (by design) of financial history.  We are about 25 years out from the bust of the Soviet Union.  We'll get there shortly for many of the same reasons.

No Euros please we're British's picture

Ever considered that company pension schemes were taxed heavily so that they would be closed down?

Companies paid a fixed defined pension which was (hopefully) funded from company profits and investing pension contributions in the stock market. A system which was out of the direct control of the government and because it was linked to final salary was to some extent inflation proof.

Now you have to put your pension with a pension provider, aka bankster, who puts the money where ever the government dictates. They don't need to make a profit and they charge you administration costs for losing your pension and effectively handing it over to the government.


The Big Ching-aso's picture

I'm pensive about my pension to the point of pensiveness causing tension apprehension.

HardAssets's picture

duh . . . what a 'genius' this woman is. The pension grab has been known about for a couple years at least.

Though it is a little surprising she finally figured it out given that she's spent so much time in 'school' that she go a Phd. Most of them never figure it out at all.

ACP's picture

Steal 401k money, and flaunt it!

Obama wants a $3 mil limit on 401ks but no limit on government pensions?

Flaunt it, gubmint BITCHEZ!

Life of Illusion's picture



 "But we are in an environment where politicians are very reluctant to do write-offs."

and who do they work for?  ,,,,,debt collectors,,,,


TrustbutVerify's picture

And I'll bet that the $3 million limit (wink wink) won't be adjusted for inflation over time.  So after a while the real limit amount will come way down.  'Cause inflation is on the cusp.

imbrbing's picture

Buy whores and rent them out!

TheFourthStooge-ing's picture

Charge whores to credit cards and stiff them both!

ShakaZulu's picture

And end up in a debtor's prison with Shemp as a cellmate?  

prains's picture


spolier alert your pensions were FUCKED back since 1981 <Raygun fucked you>

Watauga's picture

Okay, it is all Reagan's fault.  Just like what is mostly Obama's $17T debt is all W's fault.  Now, please explain yourself and enlighten us.  Just how did Ronal Reagan do this?  And, if you want to go back into history and start casting blame, why not go back to at least LBJ, who foisted hell upon our nation to buy the permanent Democrat majority via unbridled Third World immigration combined with unbridled transfer of wealth from those who work to those who vote Democrat?  Or, why not go back to FDR, who foisted upon America the single worst mass social program in its history in order secure his idea of a permanent Democrat majority?  Or for that matter, why not go back to WW, who not only changed the U.S. from a nation concerned with the U.S. into an imperial nation, all the while touting worldwide freedom and one-world order?  Or why not go back to General Lincoln, whose war upon a sovereign nation cost nearly a million American lives in order to secure the monied interests of the North?  Or heck, why not go all the way back to the Founders, who set up the system under the Constitution, likely understanding that, over the long-term, the system would permit the perversion of the balance of power such that the Central Govt would assume ALL power and destroy ALL rights and take TOTAL control?  Reagan was a lot of things, but for this mess, and for the loss of the pension system, the blame goes to a whole host of monsters.

marathonman's picture

+1 E 99   Wataunga is the man!!!!!!

Mr. Magoo's picture

Is this supposed to be something new? I guess nobody remembers 2008 when most peoples retirement funds were wiped out by 50% due to bad investments by the banksters. And since then the negative interest rates when compared to the real cost of living increases people who continue to keep their money in banks  and investment funds are being robbed right before their eyes

Buck Johnson's picture

I know, I was one of them.  Also this won't get any better because we literally have to much debt that must be written off but they won't do that.  Look at the market right now, set to burst through 15,000.  Many are saying that we are going to take a major hit down soon, and I think it will happen.  There is a monster that is swimming under the dark  waters that isn't breaking the surface but is making waves on the surface of the ocean of finance.  I think we haven't figured out the one truth to all systems, and that is there is a chance of anything happening to muck up a system no matter  how remote or silly.  It may be billions to one but it's still there, and the more that we monkey with the odds and averages the more that it makes possible for the one in  billion chances to come into fruition.

tango's picture

The monster is always (and has always) been there but he grows in ferocity and size as we feed him bad massive, unsustained debt.  The central planners have thrown everything off.  This is why the old "hyperinflation if trillions are added" is not following script.  It's why markets rise even as disposable income dwindles in a consumer economy.  '

I have heard (and believed theoreticaly) for years that hyperinflation was an emminent threat but a quick look at Japan giives pause.  Here is a nation that has pumped trillions for two decades and prices are lower than when it all began.  Something had to give among all the components -  currency, abiity to borrow, markets, inflation, etc  - and in Japan's case it was markets and currency...but no inflation. 

Winston Churchill's picture

Japan was/is atypical.

Asset prices were so overblown that those trillions merely went to propping them up.

Now we are in the same situation which is not sustainable while the dollar is


mayhem_korner's picture

"The crisis isn't over yet,"


The crisis hasn't started yet

Freddie's picture

I am hoping union govt workers pensions and other union pensions are screwed.  My guess is taxpayers will get screwed to make the goons pensions whole.  Hope & Change = Cloward Piven.

Jack Burton's picture

BINGO Freddie! Here in Minnesota many police and firefighter pensions are way underfunded. Our state legislature is working on a special tax on Car insurance policies and Home Owners Insurance policies. It works like this, every person buying one of these policies, i.e. ALL home and car owners, i.e. EVRYBODY, will be charged a special tax on every insurance policy, this money will go to the state to then be handed out to municiple Police and firefighter pensions funds.

The legislators say we OWE this to the brave men and women who come to the scene of house fire and car accidents. Do you see the logic here? We OWE them these fat pesnions at age 50. Cops and Firefighters are getting all the tax money from citiy tax payers, now they want to spread more taxes state wide to garner more cash to fatten their pensions.


otto skorzeny's picture

what a fucking joke-the MSM is totally complicit in this hero-worship.

AldousHuxley's picture

Meg Whitman ran in California with public pension as her agenda. Before she started public campaign trails cops told her not to touch their pension or else they won't guarantee her safety. Whitman excluded police pension months prior to election.

otto skorzeny's picture

fuck 'em- she could hire private security.

Colonel Klink's picture

Just one of the components necessary to take over a country without a coup.

brettd's picture

Tax everyone more so Warren Buffett, Bill Gates and Oprah can collect Social Security.  Genius.

AldousHuxley's picture

Warren invests in china
Gates invests in India
Oprah invests in Africa

prains's picture

America invests in China


wait... no Iraq

err.. Taiwan??

no... Mexico

that can't be right....

it invests with Goldman Sachs.....right

cherry picker's picture

We don't "owe" them anything.  They have good salaries and they accepted the jobs knowing what they were getting into.  People want to be fireman and cops, at least some of them.

Paying them more than twice for their labors is rediculous.


There are others out there who risk their lives, people who drive over frozen lakes to transport goods for example.  I wonder what kind of pensions they get?

Watauga's picture

I would suggest that ZH posters reduce the emotion in this discussion and increase the reason. 

Any government employee who entered service under a particular pay/benefits/pension system must receive the "benefit of his bargain" with the local, State, or federal government with whom he bargained.  If "the people" wish to change any particular system of pay/benefits/pensions, they should either persuade their representatives to make the change or elect representatives who will make the change.  Anything less than orderly decisionmaking and execution of this exchange of work-for-pay/benefits/pensions is either tyranny or anarchy.

So, the police, firefighters, soldiers, marines, sailors, airmen, federal employees, state employees, and local employees, including teachers, all took positions in government based upon a particular system of pay/benefits/pensions.  They chose to take their positions based on a rational calculation that it was in their best interests.  They "bargained" for their positions based upon expecations created by contract.  YOUR representatives, at all levels of government, and in every branch of government, made the bargain FOR YOU.  Now, the workers, the representatives, and YOU have to abide by the bargain.

The only rational way out of this is to change the bargain for FUTURE employees.  For example, the government that represents YOU will eliminate the retirement penions of all police and firefighters in city X.  YOU elected people to do this for you.  When dregs and buffoons fail to show up at your house on fire, you can blame yourselves.  But you will have created a new bargain and yes, all parties abide by it. 

This is how rational government works.  Irrational government results in tyranny or anarchy.  These, of course, mean death. 

stewie's picture

How about the "bargin" the founding fathers made through the constitution?

How about the "bargin" Cyprus depositors made with the banks?

How about the "bargain" MF Global made with it's Corzined depositors?

How about (insert any of countless injustices performed by bankovernments here)


Rational Governments?!  Get real W!  They change rules on a whim and don't give two fifth of fukc all about anybody but themselves.  Contract law is applied to the masses and gleefully pissed on by the connected ones. 


ebear's picture

"There are others out there who risk their lives, people who drive over frozen lakes to transport goods for example.  I wonder what kind of pensions they get?"

None, but they do get residuals from the reality shows they make about it, so there's that.

StychoKiller's picture

WHERE do ya think all that simulus munny went? (Hint: State employee pension funds)