Reinharts And Rogoff On Why The Debt Overhang Matters

Tyler Durden's picture

In a recent NBER paper, Ken Rogoff and Vince and Carmen Reinhart address the long-lasting consequences of high public debt loads. The authors findings are shocking to many - especially those who choose to look at 10Y Treasury rates as an indication of stress (as opposed to our earlier note on the stresses beginning to occur in the less financially repressed USA sovereign CDS market). Across 50 countries, they find 26 periods of public debt overhangs where the government has pushed gross public debt to GDP over 90% and held it there for at least five years. The stunning reality of their empirical work is four-fold: 1) the median duration of these overhang periods in 23 years (that's a lot of can-kicking); 2) real GDP growth averages 1.2% lower than trend during these overhangs; 3) real GDP drops by on average around 25% at the end of the deleveraging episode; and 4) most critically, "waiting for markets to signal a problem may be waiting too long because governments have the ability to suppress market signals." So while all the chatter of renewed growth in Europe has us ebullient with an unchanged US equity market today, the longer-term reality is - unless this time is different, there's a long and painful road ahead.


From Vince Reinhart's Morgan Stanley note:

Some Observations

Nations rarely move into a region where gross public debt is greater than 90 percent. Across 22 advanced economies since the early 1800s, there have been 26 such episodes lasting five years or more. When they get there, they stay there a long time. The median duration is 23 years.


The neighborhood is scary, in that economic growth averages 1.2 percentage points less relative to the years outside of debt overhang episodes. The duration and growth differential of those episodes compounds: In the typical experience, the level of real GDP is about 25 percent lower at the end of an episode than the experience outside the episode would have predicted.




The reason for this subpar economic performance is not always the force of market discipline pushing up real interest rates. Rather, high government debt induces some other form of crowding out of the private sector. This might include a reliance on distorting taxes to pay the interest service on the debt or more direct restrictions on finance that creates a captive market for government debt. The former concerns the dead-weight loss from taxation, and the latter is sometimes known as “financial repression”. Financial repression includes directed lending by captive domestic audiences, explicit or implicit caps on interest rates, regulation of cross-border capital movements, high reserve and capital requirements, and moral suasion applied to regulated entities.

In such circumstances, waiting for markets to signal a problem may be waiting too long because governments have the ability to suppress market signals. Despite the absence of market signals, or perhaps because of it, growth often suffers.

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battle axe's picture

But we will have the SUPER COMMITTEE take care of it. BWAAAHAAAAAAAAHAAAAAAAAA

LedMizer's picture

What you are really saying is the cocksuckers in CONgress and the Fed ought to be charged with treason.

NotApplicable's picture

Like, say... operating without a budget... for how long now?

Aziz's picture

Wish we had had President Paul instead of President Bush in 2000....

AbelCatalyst's picture

Remember, these were all essentially "stand alone" countries.  This allowed them to use the strength of other conutries to pull them out.  Now, the entire developed world is in this "debt overhang" phase, which will make the end result (25% drop) and ongoing growth estimates (-1.2%) far more intense and painful.  

Now, there's a happy thought!!

trebuchet's picture

Delever, Bitchez!!

sunaJ's picture

"waiting for markets to signal a problem may be waiting too long because governments have the ability to suppress market signals. Despite the absence of market signals, or perhaps because of it, growth often suffers."


He who defaults first, defaults best.  The American dollar is the world reserve currency based upon oil and energy distributions that are increasingly untenable and despite the best efforts of our miltary/industrial/intelligence complex.  We default last.  We should envy Greece's opportunity.

SheepDog-One's picture

Theres a long shit road ahead? GEE I'm shocked!


vote_libertarian_party's picture

All we need is one more really good TV show with singers AND dancers and it will absolutely be fixed.

NotApplicable's picture

Add in recycled TV and movie stars from my childhood, and fuck, I'm sold!

Stuck on Zero's picture

Righto!  And add in lots of celebrities! Everyone loves celebrities.


AcidRastaHead's picture

I vote for B.J. and the Bear.  Everyone loves a chimpanzee side-kick.  Remember in the 80's when TV was rife with chimps in red t-shirts on roller skates smoking cigarettes? Yes, that might just help us forget our hopeless futures.

SheepDog-One's picture

All this 'historical' data means nothing today. We're headfirst charging over the cliff and it wont take anywhere near 20 or 30 years. 

Dr. Engali's picture

Rip the band aid off and default.

q99x2's picture

This time is different. They are buying time until they are ready to kill us.

NotApplicable's picture

They only variable is how much of our shit can they steal before being forced to pull the trigger, making the crime obvious.

XtraBullish's picture

ZH bombards the site with negative articles every single time the Eurozone blow-up results in a ain't going to change, Tyler. The "boys" control the E/S and the Euro pits so with the uniimited margin granted by U.S. taxpayers, they can stay afloat a lot longer then your readers can.

Just BTFD in everything and avoid the pain of being short-squeezed to death every time you "know" the crash is coming.

LawsofPhysics's picture

The key to your own hypothesis is "with the uniimited margin granted by U.S. taxpayers".  Now how is that going to work when there are no taxpayers?  

The wealthy are paying much less and everyone else will be unemployed soon so they won't pay anything.  Fine with mine, the sooner this all burns, the sooner compensation will return to folks who are actually worth a shit.

slewie the pi-rat's picture

nothing ever seems to change much, from day to day, especially on the long-term stuff; perhaps reinhart & rogoff might agree

yet, somehow, things keep turning into their opposites, too;  winter to summer;  growth to decay

and yup, everything stays afloat, unitl it sinks

so maybe it is your perception of zeroHeads' ability to stay afloat that is your problem here?

so if you want to BTFD and avoid the pain, great!

and, good luck!

Poetic injustice's picture

You should change your nick to XtraDumb


That was to minused Xtra guy.

Black Forest's picture

I classify your comment as "cognitive dissonance".

SAT 800's picture

Maybe just buy the dip in Silver, and let the rest of the dips alone. Obviously, there are a limited number of rallies in any given series; and then there will be a crash down a staircase; with reference to the stock market, of course. But I'm not interesting in guessing which rally is the last.

DaveyJones's picture

"because governments have the ability to suppress market signals"

among other things

what I like most about their work (other than being right) is that labels don't matter. No matter what they call it or who they blame it on, it has the same effect. 

It frightens me that history has rarely had this many entities doing it at once while being so interdependent. Something big is coming.

slewie the pi-rat's picture

i saw a t-shirt ad, here, yest

the 50%-full glass on the t-shirt was well presented with rack marketing;  and the bottom was labelled:  water;  the top of the glass was labelled:  air

and the well-racked shirt proclaimed:  "The Glass Is Always Full"

pretty transcendent, really...

Swarmee's picture

Median, nvrmnd.

yogibear's picture

Eventually Bernanke's policies create havoc and a run on the US dollar. It's the only thing that stops the fed from QEing. Otherwise it's QE to infinty.

falak pema's picture

One thing comes to mind : Economic growth should only be left in the hands of Entrepreneurs and creative people; never in the hands of financers and economists. THese latter should only be off-line animators of analytical tools that provide feedback. Never as hands on decision makers who use their models to centrally plan and to PREDICT future investment as decision making tool of future investment. Decision making should only be in the hands of :

a) Elected leaders who define the rules of the game, civilization objectives after open debate,  and then referee the game

b) in the hands of risk takers and creators who PLAY the game.

Never let the intendants, the water carriers,  of the economic activity, the bankers, insurance and bean counters or economic analysts, decide in the place of those who carry TRUE responsibiity with their OWN wealth or with their political REPUTATION. Invest banks should obviously be separated from deposit and naked derivatives banned and regulated; no OTC opaque. 

LawsofPhysics's picture

Careful falak,  most sheeple will see what you are proposing as regulation when it is really transparency.  If it was transparent that MF Global was going to simply steal from their client, they never would have had any to begin with.  The longer (and greater) the fraud is allowed to continue, the messier this will all get in the end.  Hedge accordingly.

falak pema's picture

well, even the referee on the field does regulate, by applying the rules and obviously transparency is better than no visibility. Perfection is not of this world and choices are in our image, human. 

SgtShaftoe's picture

The Bernank will buy more bonds (under some new shiny moniker) and when that fails, they'll outright devalue.  "Kill the dollar!  Kill the dollar!" Then it will get interesting.  I wish they'd hurry the hell up and blow up the system already.  If we're lucky, they'll blow it up before the police state is fully activated and functional. 

debtor of last resort's picture

Got out of paper 5 years ago, just simple stocks. Should have bought phyz 5 years ago. Got in phyz 1 year ago. Still cheap? Hope so. I feel like a junk who can run out of stuff any minute now. The paper world is going down the drain.

Unprepared's picture

This is depressing. I want my crash-purge soon.

Shizzmoney's picture

We all want the crash purge, minus the 15% of the people who play the market aggressively/super rich people.

Imagine when the DOW (and it will) has that week where it has daily -500+ losses?  I'm going to be one of the guys fist bumping every single moment and laughing all the way to the bank (of my mattress) when that happens!

sbenard's picture

Having read Reinhart and Rogoff's book, This Time Is Different, none of this surprises me except the duration. When this bubble pops, life and civilization as we have known it WILL be vastly different for the rest of our existence! Plan and prepare accordingly!

NotApplicable's picture

So... what you're saying is... meth may be required for optimal performance?

Manthong's picture

Well..  maybe methane will be all that is left.

carbonmutant's picture

"...governments have the ability to suppress market signals."

This really is why nobody is reacting.

The market is giving us signals almost on a daily basis but they're being quickly suppressed. The problem here is that this distortion is skewing the WH, congress and the FED's models of what's coming and more importantly the amount of time they have.

blueridgeviews's picture

Not like if they knew what was coming they would act differently.



ddtuttle's picture

Pretty simple.  All debt gets serviced out of the same GDP.  Debt payments are unproductive, and significantly slow the velocity of that block of money. Since its not availble for productive deployment, that causes a lower GDP.

Mailart's picture

This time it's different!