[ame=http://www.youtube.com/watch?v=UMb61dyw2Js]Pedro Schwartz on the creation of money out of thin air - YouTube[/ame]
MESO-Rx
Anabolic Steroids
The Modern Monetary System
- Thread starter Michael Scally MD
- Start date
Planning for Liftoff
Narayana Kocherlakota - President
Federal Reserve Bank of Minneapolis
http://www.minneapolisfed.org/news_events/pres/speech_display.cfm?id=4952
Narayana Kocherlakota - President
Federal Reserve Bank of Minneapolis
http://www.minneapolisfed.org/news_events/pres/speech_display.cfm?id=4952
A Singular Achievement of Recent Monetary Policy
St. Louis Fed’s Bullard Discusses Price Level Targeting and Nominal GDP Targeting
"Bullard said that the Reinhart-Rogoff effect has implications for future monetary policy, given that some have called for switching to a nominal GDP target. “Attempting to target nominal GDP without adjustment for the Reinhart-Rogoff effect could be an unmitigated disaster,” he said."
"He [Bullard] concluded, “The consequences of naïve NGDP targeting, without appropriate adjustment, might be more severe today.”"
St. Louis Fed’s Bullard Discusses Price Level Targeting and Nominal GDP Targeting
"Bullard said that the Reinhart-Rogoff effect has implications for future monetary policy, given that some have called for switching to a nominal GDP target. “Attempting to target nominal GDP without adjustment for the Reinhart-Rogoff effect could be an unmitigated disaster,” he said."
"He [Bullard] concluded, “The consequences of naïve NGDP targeting, without appropriate adjustment, might be more severe today.”"
How the Economic Machine Works – Leveragings and Deleveragings
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2012/09/Dalio.pdf
[ame=http://www.youtube.com/watch?v=SFaRazMpxcM]A Conversation with Ray Dalio (Video) - YouTube[/ame]
[ame=http://www.youtube.com/watch?v=Pux0ye8egPQ]Ray Dalio on the Global Economy - YouTube[/ame]
http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2012/09/Dalio.pdf
[ame=http://www.youtube.com/watch?v=SFaRazMpxcM]A Conversation with Ray Dalio (Video) - YouTube[/ame]
[ame=http://www.youtube.com/watch?v=Pux0ye8egPQ]Ray Dalio on the Global Economy - YouTube[/ame]
This Time is Different, Again? The United States Five Years after the Onset of Subprime
Carmen M. Reinhart and Kenneth S. Rogoff
http://www.economics.harvard.edu/faculty/rogoff/files/Is_US_Different_RR.pdf
Sorry, U.S. Recoveries Really Aren’t Different
Sorry, U.S. Recoveries Really Aren’t Different - Bloomberg
Carmen M. Reinhart and Kenneth S. Rogoff
http://www.economics.harvard.edu/faculty/rogoff/files/Is_US_Different_RR.pdf
Sorry, U.S. Recoveries Really Aren’t Different
Sorry, U.S. Recoveries Really Aren’t Different - Bloomberg
Last edited:
[ame=http://vimeo.com/52202198]Neil Barofsky on the Need to Tackle Banking Reform on Vimeo[/ame]
Explain the disease to help US citizens
Explain the disease to help US citizens - FT.com
November 4, 2012 6:56 pm
By Richard Koo
In 2008, Barack Obama told the US people the nation’s economic crisis would take a long time to overcome. In 2012, many of those voters are losing patience, because they have not been told why this recession has lasted so long or why his policies were the correct response. Here is the missing explanation – based on not only the US experience, but also that of Japan and Europe.
Today, the US private sector is saving a staggering 8 per cent of gross domestic product – at zero interest rates, when households and businesses would ordinarily be borrowing and spending money. But the US is not alone: in Ireland and Japan, the private sector is saving 9 per cent of GDP; in Spain it is saving 7 per cent of GDP; and in the UK, 5 per cent. Interest rates are at record lows in all these countries.
This is the result of the bursting of debt-financed housing bubbles, which left the private sector with huge debt overhangs – notably the underwater mortgages – giving it no choice but to pay down debt or increase savings, even at zero interest rates.
However, if someone is saving money or paying down debt, someone else must be borrowing and spending that money to keep the economy going. In a normal world, it is the role of interest rates to ensure all saved funds are borrowed and spent, with interest rates rising when there are too many borrowers and falling when there are too few.
But when the private sector as a whole is saving money or paying down debt at zero interest rates, the banks cannot lend the repaid debt or newly deposited savings because interest rates cannot go any lower. This means that, if left unattended, the economy will continuously lose aggregate demand equivalent to the unborrowed savings. In other words, even though repairing balance sheets is the right and responsible thing to do, if everyone tries to do it at the same time a deflationary spiral will result. It was such a deflationary spiral that cost the US 46 per cent of its GDP from 1929 to 1933.
Those with a debt overhang will not increase their borrowing at any interest rate; nor will there be many lenders, when the lenders themselves have financial problems. This shift from maximising profit to minimising debt explains why near-zero interest rates in the US and EU since 2008 and in Japan since 1995 have failed to produce the expected recoveries in these economies.
With monetary policy largely ineffective and the private sector forced to repair its balance sheet, the only way to avoid a deflationary spiral is for the government to borrow and spend the unborrowed savings in the private sector.
Japan, which also struggled with this form of balance sheet recession, managed to keep its GDP above the bubble peak of 1990 despite plunging commercial property values and rapid private sector deleveraging, because its government borrowed and spent private sector savings. The fiscal stimuli in G20 countries after the collapse of Lehman Brothers similarly averted a collapse of the global economy.
Recovery from this type of recession takes time because the flow of current savings must be used to reduce the stock of debt overhang, necessarily a long process when everyone is doing it at the same time. Since one person’s debt is another person’s asset, there is no quick fix: shifting the problem from one part of society to another will solve nothing.
The challenge now is to maintain fiscal stimuli until private sector deleveraging is completed. Any premature attempt to withdraw that stimulus will result in a deflationary implosion – as in the US in 1937, Japan in 1997, and Spain and the UK most recently.
Japan’s attempt in 1997 to reduce its deficit by 3 per cent of GDP – the same size as the “fiscal cliff” now facing the US – led to a horrendous 3 per cent drop in GDP and a 68 per cent increase in the deficit. At that time, Japan’s private sector was saving 6 per cent of GDP at near zero interest rates, just like the US private sector today. It took Japan 10 years to climb out of the hole.
Average citizens find it hard to understand why the government should not balance its budget when households and businesses must all do so. It is risky for politicians to explain but, until they make it clear that the economy will implode if everybody is saving and nobody is borrowing, public support for the necessary fiscal stimulus is likely to weaken, as seen during the past four years of the Obama administration.
The US economy is already losing forward momentum as the 2009 fiscal stimulus is allowed to expire. There is no time to waste: the government must take up the private sector’s unborrowed savings, to keep the economy from imploding and to provide income for businesses and households so they can repair their balance sheets. Fiscal consolidation should come only once the private sector has repaired its finances and returned to profit-maximising mode.
Once the nature of the disease and its cure are explained, Americans will feel better: they are moving in the right direction, even though the journey is a long one.
Explain the disease to help US citizens - FT.com
November 4, 2012 6:56 pm
By Richard Koo
In 2008, Barack Obama told the US people the nation’s economic crisis would take a long time to overcome. In 2012, many of those voters are losing patience, because they have not been told why this recession has lasted so long or why his policies were the correct response. Here is the missing explanation – based on not only the US experience, but also that of Japan and Europe.
Today, the US private sector is saving a staggering 8 per cent of gross domestic product – at zero interest rates, when households and businesses would ordinarily be borrowing and spending money. But the US is not alone: in Ireland and Japan, the private sector is saving 9 per cent of GDP; in Spain it is saving 7 per cent of GDP; and in the UK, 5 per cent. Interest rates are at record lows in all these countries.
This is the result of the bursting of debt-financed housing bubbles, which left the private sector with huge debt overhangs – notably the underwater mortgages – giving it no choice but to pay down debt or increase savings, even at zero interest rates.
However, if someone is saving money or paying down debt, someone else must be borrowing and spending that money to keep the economy going. In a normal world, it is the role of interest rates to ensure all saved funds are borrowed and spent, with interest rates rising when there are too many borrowers and falling when there are too few.
But when the private sector as a whole is saving money or paying down debt at zero interest rates, the banks cannot lend the repaid debt or newly deposited savings because interest rates cannot go any lower. This means that, if left unattended, the economy will continuously lose aggregate demand equivalent to the unborrowed savings. In other words, even though repairing balance sheets is the right and responsible thing to do, if everyone tries to do it at the same time a deflationary spiral will result. It was such a deflationary spiral that cost the US 46 per cent of its GDP from 1929 to 1933.
Those with a debt overhang will not increase their borrowing at any interest rate; nor will there be many lenders, when the lenders themselves have financial problems. This shift from maximising profit to minimising debt explains why near-zero interest rates in the US and EU since 2008 and in Japan since 1995 have failed to produce the expected recoveries in these economies.
With monetary policy largely ineffective and the private sector forced to repair its balance sheet, the only way to avoid a deflationary spiral is for the government to borrow and spend the unborrowed savings in the private sector.
Japan, which also struggled with this form of balance sheet recession, managed to keep its GDP above the bubble peak of 1990 despite plunging commercial property values and rapid private sector deleveraging, because its government borrowed and spent private sector savings. The fiscal stimuli in G20 countries after the collapse of Lehman Brothers similarly averted a collapse of the global economy.
Recovery from this type of recession takes time because the flow of current savings must be used to reduce the stock of debt overhang, necessarily a long process when everyone is doing it at the same time. Since one person’s debt is another person’s asset, there is no quick fix: shifting the problem from one part of society to another will solve nothing.
The challenge now is to maintain fiscal stimuli until private sector deleveraging is completed. Any premature attempt to withdraw that stimulus will result in a deflationary implosion – as in the US in 1937, Japan in 1997, and Spain and the UK most recently.
Japan’s attempt in 1997 to reduce its deficit by 3 per cent of GDP – the same size as the “fiscal cliff” now facing the US – led to a horrendous 3 per cent drop in GDP and a 68 per cent increase in the deficit. At that time, Japan’s private sector was saving 6 per cent of GDP at near zero interest rates, just like the US private sector today. It took Japan 10 years to climb out of the hole.
Average citizens find it hard to understand why the government should not balance its budget when households and businesses must all do so. It is risky for politicians to explain but, until they make it clear that the economy will implode if everybody is saving and nobody is borrowing, public support for the necessary fiscal stimulus is likely to weaken, as seen during the past four years of the Obama administration.
The US economy is already losing forward momentum as the 2009 fiscal stimulus is allowed to expire. There is no time to waste: the government must take up the private sector’s unborrowed savings, to keep the economy from imploding and to provide income for businesses and households so they can repair their balance sheets. Fiscal consolidation should come only once the private sector has repaired its finances and returned to profit-maximising mode.
Once the nature of the disease and its cure are explained, Americans will feel better: they are moving in the right direction, even though the journey is a long one.
On the Road to Zero Growth
Jeremy Grantham
http://www.gmo.com/websitecontent/JG_LetterALL_11-12.pdf
Jeremy Grantham
http://www.gmo.com/websitecontent/JG_LetterALL_11-12.pdf
[ame=http://www.youtube.com/watch?v=t7Si3XTl6zQ]Kyle Bass Interview - YouTube[/ame]
[ame=http://www.youtube.com/watch?v=XliTvxqTtsE]Keiser Report: Shadow Banking (E370) - YouTube[/ame]
Inside the Risky Bets of Central Banks
Inside the Risky Bets of Central Banks - WSJ.com
Inside the Risky Bets of Central Banks - WSJ.com
Twist and Shout: The Limits of U.S. Monetary Policy
http://www.milkeninstitute.org/events/gcprogram.taf?function=detail&eventid=gc12&EvID=3158
http://www.milkeninstitute.org/events/gcprogram.taf?function=detail&eventid=gc12&EvID=3158
[ame=http://www.youtube.com/watch?v=QGKM8effinU]Nassim Nicholas Taleb at Princeton University on April 10, 2012. - YouTube[/ame]
Market Monetarism Roadmap to Economic Prosperity
[ame="http://www.amazon.com/Monetarism-Roadmap-Economic-Prosperity-ebook/dp/B00B4I35JA/"]Market Monetarism Roadmap to Economic Prosperity: Marcus Nunes, Benjamin Mark Cole: Amazon.com: Kindle Store@@AMEPARAM@@http://ecx.images-amazon.com/images/I/51NDNQ0FFiL.@@AMEPARAM@@51NDNQ0FFiL[/ame]
[ame="http://www.amazon.com/Monetarism-Roadmap-Economic-Prosperity-ebook/dp/B00B4I35JA/"]Market Monetarism Roadmap to Economic Prosperity: Marcus Nunes, Benjamin Mark Cole: Amazon.com: Kindle Store@@AMEPARAM@@http://ecx.images-amazon.com/images/I/51NDNQ0FFiL.@@AMEPARAM@@51NDNQ0FFiL[/ame]
Debt-to-GDP Ratios and Growth: Country Heterogeneity and Reverse Causation, the Case of Japan (Ultra Wonky)
Debt-to-GDP Ratios and Growth: Country Heterogeneity and Reverse Causation, the Case of Japan (Ultra Wonky) | New Economic Perspectives
Debt-to-GDP Ratios and Growth: Country Heterogeneity and Reverse Causation, the Case of Japan (Ultra Wonky) | New Economic Perspectives
cvictorg
New Member
http://www.cepr.net/index.php/blogs/cepr-blog/the-reinhart-rogoff-debt-to-gdp-error-why-it-matte
The Carmen Reinhart and Ken Rogoff (R&R) paper purported to show that countries with debt-to-GDP ratios above 90 percent see sharply slower growth rates, and has been widely cited in policy discussions in the United States and Europe and used as a rationale for a near-term focus on deficit reduction. Politicians and policy analysts relied on the results of this paper to insist on spending cuts and tax increases even in economies that are operating at levels of output far below full employment. Based on R&R’s findings, they argued that it was important to keep debt levels from crossing the 90 percent threshold.
This debate is important because the threat to growth from high debt levels was one of the main arguments against the aggressive use of fiscal policy to boost growth. The work of HAP and UMass economist Arindrajit Dube has essentially undermined the basis for this argument. No one can still maintain that we have good evidence that debt levels of the size we could conceivably face in the near future would impair growth.
The new paper from HAP works off the original spreadsheet used by R&R and uncovers several important calculation errors.
The most important of these errors was excluding four years of relevant data from New Zealand. Correcting this mistake raised New Zealand’s average growth rate in high debt years from the -7.9 percent R&R reported to a positive 2.6 percent.
Because only 7 countries have crossed the 90 percent debt-to-GDP barrier highlighted by R&R, this change alone raises the growth rate among the high debt countries by 1.5 percentage points.
When this and other adjustments are made to R&R’s data, the sharp falloff in growth rates for countries with debt to GDP ratios above 90 percent disappears.
While the corrected growth rate is still lower for high debt countries, the difference is much smaller and nowhere close to being statistically significant.
Furthermore, the sharpest falloff in growth rates occurs at very low debt levels (less than 30 percent of GDP).
If the corrected results from R&R could be taken as a basis for policy, then the implication would be that countries should strive to have extremely low debt to GDP ratios, certainly well below the levels that the United States and other wealthy countries have generally sustained.
Researchers Finally Replicated Reinhart-Rogoff, and There Are Serious Problems. | Next New Deal
Thomas Herndon, Michael Ash, and Robert Pollin On Reinhart And Rogoff - Business Insider
They find that three main issues stand out. First, Reinhart and Rogoff selectively exclude years of high debt and average growth. Second, they use a debatable method to weight the countries. Third, there also appears to be a coding error that excludes high-debt and average-growth countries. All three bias in favor of their result, and without them you don't get their controversial result. Let's investigate further:
Selective Exclusions. Reinhart-Rogoff use 1946-2009 as their period, with the main difference among countries being their starting year. In their data set, there are 110 years of data available for countries that have a debt/GDP over 90 percent, but they only use 96 of those years. The paper didn't disclose which years they excluded or why.
Herndon-Ash-Pollin find that they exclude Australia (1946-1950), New Zealand (1946-1949), and Canada (1946-1950). This has consequences, as these countries have high-debt and solid growth. Canada had debt-to-GDP over 90 percent during this period and 3 percent growth. New Zealand had a debt/GDP over 90 percent from 1946-1951. If you use the average growth rate across all those years it is 2.58 percent. If you only use the last year, as Reinhart-Rogoff does, it has a growth rate of -7.6 percent. That's a big difference, especially considering how they weigh the countries.
Unconventional Weighting. Reinhart-Rogoff divides country years into debt-to-GDP buckets. They then take the average real growth for each country within the buckets. So the growth rate of the 19 years that England is above 90 percent debt-to-GDP are averaged into one number. These country numbers are then averaged, equally by country, to calculate the average real GDP growth weight.
In case that didn't make sense let's look at an example. England has 19 years (1946-1964) above 90 percent debt-to-GDP with an average 2.4 percent growth rate. New Zealand has one year in their sample above 90 percent debt-to-GDP with a growth rate of -7.6. These two numbers, 2.4 and -7.6 percent, are given equal weight in the final calculation, as they average the countries equally. Even though there are 19 times as many data points for England.
Now maybe you don't want to give equal weighting to years (technical aside: Herndon-Ash-Pollin bring up serial correlation as a possibility). Perhaps you want to take episodes. But this weighting significantly reduces the average; if you weight by the number of years you find a higher growth rate above 90 percent. Reinhart-Rogoff don't discuss this methodology, either the fact that they are weighing this way or the justification for it, in their paper.
Coding Error. As Herndon-Ash-Pollin puts it: "A coding error in the RR working spreadsheet entirely excludes five countries, Australia, Austria, Belgium, Canada, and Denmark, from the analysis. [Reinhart-Rogoff] averaged cells in lines 30 to 44 instead of lines 30 to 49...This spreadsheet error...is responsible for a -0.3 percentage-point error in RR's published average real GDP growth in the highest public debt/GDP category." Belgium, in particular, has 26 years with debt-to-GDP above 90 percent, with an average growth rate of 2.6 percent (though this is only counted as one total point due to the weighting above).
So what do Herndon-Ash-Pollin conclude? They find "the average real GDP growth rate for countries carrying a public debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0.1 percent as [Reinhart-Rogoff claim]." Going further into the data, they are unable to find a breakpoint where growth falls quickly and significantly.
Reinhart-Rogoff on Debt and Growth: Fake but Accurate? - Bloomberg
Ken Rogoff and Carmen Reinhart have become known for warning that debt-to-GDP ratios over 90 percent are linked to poor economic growth. But a new working paper from economists at the University of Massachusetts says Reinhart and Rogoff’s findings are created by bad methodology. They seem to have a point.
Thomas Herndon, Michael Ash and Robert Pollin say that the Reinhart-Rogoff finding of sharply lower average growth in high-debt countries rests on three errors: a bad weighting method, inexplicable exclusion of data from certain countries and years, and an Excel coding error. After fixing those problems, they find that “average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower.”
Even if Reinhart and Rogoff had a plausible reason for leaving out these data, the huge effect of the exclusion demonstrates the fragility of their method: New Zealand is one of just a handful of rich countries that experienced a debt-to-GDP ratio over 90 percent since World War II, and leaving those years in or out materially changes the conclusion about the average growth rate of such countries.
And what of Rogoff’s point that even Herndon et al. agree that higher debt is associated with slower growth? The most damaging response to this is a figure near the back of the UMass paper, plotting every observation of GDP growth and debt-to-GDP ratio from the advanced countries, from the 2010 Reinhart-Rogoff paper. This figure seems to show what Rogoff says it does: Even the UMass researchers’ take on the data show a negative relationship between government debt and GDP growth.
Unfortunately for Reinhart and Rogoff, the most notable feature of this chart is not the trend. It is how weakly the data fit the trend. Is this a chart that suggests to you that countries seeking to improve real GDP growth should focus on constraining their ratios of public debt to GDP?
Such policies pose significant economic risks and human costs, and yet what this chart tells you is that low debt and poor growth, and high debt and strong growth, are both reasonably common outcomes.
Unlike the cliff chart that made the Reinhart-Rogoff paper so arresting, this way of looking at the data suggests that the historical performance of countries with varying debt-to-GDP ratios has little to tell us about what today’s fiscal policies should be.
http://www.businessweek.com/pdf/rogoffresponse.pdf
http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_301-350/WP322.pdf
Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogo
The Carmen Reinhart and Ken Rogoff (R&R) paper purported to show that countries with debt-to-GDP ratios above 90 percent see sharply slower growth rates, and has been widely cited in policy discussions in the United States and Europe and used as a rationale for a near-term focus on deficit reduction. Politicians and policy analysts relied on the results of this paper to insist on spending cuts and tax increases even in economies that are operating at levels of output far below full employment. Based on R&R’s findings, they argued that it was important to keep debt levels from crossing the 90 percent threshold.
This debate is important because the threat to growth from high debt levels was one of the main arguments against the aggressive use of fiscal policy to boost growth. The work of HAP and UMass economist Arindrajit Dube has essentially undermined the basis for this argument. No one can still maintain that we have good evidence that debt levels of the size we could conceivably face in the near future would impair growth.
The new paper from HAP works off the original spreadsheet used by R&R and uncovers several important calculation errors.
The most important of these errors was excluding four years of relevant data from New Zealand. Correcting this mistake raised New Zealand’s average growth rate in high debt years from the -7.9 percent R&R reported to a positive 2.6 percent.
Because only 7 countries have crossed the 90 percent debt-to-GDP barrier highlighted by R&R, this change alone raises the growth rate among the high debt countries by 1.5 percentage points.
When this and other adjustments are made to R&R’s data, the sharp falloff in growth rates for countries with debt to GDP ratios above 90 percent disappears.
While the corrected growth rate is still lower for high debt countries, the difference is much smaller and nowhere close to being statistically significant.
Furthermore, the sharpest falloff in growth rates occurs at very low debt levels (less than 30 percent of GDP).
If the corrected results from R&R could be taken as a basis for policy, then the implication would be that countries should strive to have extremely low debt to GDP ratios, certainly well below the levels that the United States and other wealthy countries have generally sustained.
Researchers Finally Replicated Reinhart-Rogoff, and There Are Serious Problems. | Next New Deal
Thomas Herndon, Michael Ash, and Robert Pollin On Reinhart And Rogoff - Business Insider
They find that three main issues stand out. First, Reinhart and Rogoff selectively exclude years of high debt and average growth. Second, they use a debatable method to weight the countries. Third, there also appears to be a coding error that excludes high-debt and average-growth countries. All three bias in favor of their result, and without them you don't get their controversial result. Let's investigate further:
Selective Exclusions. Reinhart-Rogoff use 1946-2009 as their period, with the main difference among countries being their starting year. In their data set, there are 110 years of data available for countries that have a debt/GDP over 90 percent, but they only use 96 of those years. The paper didn't disclose which years they excluded or why.
Herndon-Ash-Pollin find that they exclude Australia (1946-1950), New Zealand (1946-1949), and Canada (1946-1950). This has consequences, as these countries have high-debt and solid growth. Canada had debt-to-GDP over 90 percent during this period and 3 percent growth. New Zealand had a debt/GDP over 90 percent from 1946-1951. If you use the average growth rate across all those years it is 2.58 percent. If you only use the last year, as Reinhart-Rogoff does, it has a growth rate of -7.6 percent. That's a big difference, especially considering how they weigh the countries.
Unconventional Weighting. Reinhart-Rogoff divides country years into debt-to-GDP buckets. They then take the average real growth for each country within the buckets. So the growth rate of the 19 years that England is above 90 percent debt-to-GDP are averaged into one number. These country numbers are then averaged, equally by country, to calculate the average real GDP growth weight.
In case that didn't make sense let's look at an example. England has 19 years (1946-1964) above 90 percent debt-to-GDP with an average 2.4 percent growth rate. New Zealand has one year in their sample above 90 percent debt-to-GDP with a growth rate of -7.6. These two numbers, 2.4 and -7.6 percent, are given equal weight in the final calculation, as they average the countries equally. Even though there are 19 times as many data points for England.
Now maybe you don't want to give equal weighting to years (technical aside: Herndon-Ash-Pollin bring up serial correlation as a possibility). Perhaps you want to take episodes. But this weighting significantly reduces the average; if you weight by the number of years you find a higher growth rate above 90 percent. Reinhart-Rogoff don't discuss this methodology, either the fact that they are weighing this way or the justification for it, in their paper.
Coding Error. As Herndon-Ash-Pollin puts it: "A coding error in the RR working spreadsheet entirely excludes five countries, Australia, Austria, Belgium, Canada, and Denmark, from the analysis. [Reinhart-Rogoff] averaged cells in lines 30 to 44 instead of lines 30 to 49...This spreadsheet error...is responsible for a -0.3 percentage-point error in RR's published average real GDP growth in the highest public debt/GDP category." Belgium, in particular, has 26 years with debt-to-GDP above 90 percent, with an average growth rate of 2.6 percent (though this is only counted as one total point due to the weighting above).
So what do Herndon-Ash-Pollin conclude? They find "the average real GDP growth rate for countries carrying a public debt-to-GDP ratio of over 90 percent is actually 2.2 percent, not -0.1 percent as [Reinhart-Rogoff claim]." Going further into the data, they are unable to find a breakpoint where growth falls quickly and significantly.
Reinhart-Rogoff on Debt and Growth: Fake but Accurate? - Bloomberg
Ken Rogoff and Carmen Reinhart have become known for warning that debt-to-GDP ratios over 90 percent are linked to poor economic growth. But a new working paper from economists at the University of Massachusetts says Reinhart and Rogoff’s findings are created by bad methodology. They seem to have a point.
Thomas Herndon, Michael Ash and Robert Pollin say that the Reinhart-Rogoff finding of sharply lower average growth in high-debt countries rests on three errors: a bad weighting method, inexplicable exclusion of data from certain countries and years, and an Excel coding error. After fixing those problems, they find that “average GDP growth at public debt/GDP ratios over 90 percent is not dramatically different than when debt/GDP ratios are lower.”
Even if Reinhart and Rogoff had a plausible reason for leaving out these data, the huge effect of the exclusion demonstrates the fragility of their method: New Zealand is one of just a handful of rich countries that experienced a debt-to-GDP ratio over 90 percent since World War II, and leaving those years in or out materially changes the conclusion about the average growth rate of such countries.
And what of Rogoff’s point that even Herndon et al. agree that higher debt is associated with slower growth? The most damaging response to this is a figure near the back of the UMass paper, plotting every observation of GDP growth and debt-to-GDP ratio from the advanced countries, from the 2010 Reinhart-Rogoff paper. This figure seems to show what Rogoff says it does: Even the UMass researchers’ take on the data show a negative relationship between government debt and GDP growth.
Unfortunately for Reinhart and Rogoff, the most notable feature of this chart is not the trend. It is how weakly the data fit the trend. Is this a chart that suggests to you that countries seeking to improve real GDP growth should focus on constraining their ratios of public debt to GDP?
Such policies pose significant economic risks and human costs, and yet what this chart tells you is that low debt and poor growth, and high debt and strong growth, are both reasonably common outcomes.
Unlike the cliff chart that made the Reinhart-Rogoff paper so arresting, this way of looking at the data suggests that the historical performance of countries with varying debt-to-GDP ratios has little to tell us about what today’s fiscal policies should be.
http://www.businessweek.com/pdf/rogoffresponse.pdf
http://www.peri.umass.edu/fileadmin/pdf/working_papers/working_papers_301-350/WP322.pdf
Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogo
"The Retirement Gamble"
The Retirement Gamble | FRONTLINE | PBS
The Retirement Gamble | FRONTLINE | PBS
[ame=http://www.youtube.com/watch?v=Cf2i4EUi7j0]The shades of 'shadow banking' - YouTube[/ame]
5 U.S. Banks Each Have More Than 40 Trillion Dollars In Exposure To Derivatives
http://www.zerohedge.com/news/2014-...more-40-trillion-dollars-exposure-derivatives
http://www.zerohedge.com/news/2014-...more-40-trillion-dollars-exposure-derivatives
