THIS
TIME
IS
DIFFERENT
THIS
TIME
IS
DIFFERENT
Eight Centuries
of Financial Folly
CARMEN M. REINHART
KENNETH S. ROGOFF
Copyright © 2009 by Princeton University Press
Published by Princeton University Press, 41 William Street,
Princeton, New Jersey 08540
In the United Kingdom: Princeton University Press, 6 Oxford Street,
Woodstock, Oxfordshire OX20 1TW
press.princeton.edu
All Rights Reserved
Thirteenth printing, and first paperback printing, 2011
Paperback ISBN 978-0-691-15264-6
The Library of Congress has cataloged the cloth edition of this book as follows
Reinhart, Carmen M.
This time is different : eight centuries of financial folly/
Carmen M. Reinhart, Kenneth S. Rogoff.
p. cm.
Includes bibliographical references and index.
ISBN 978-0-691-14216-6 (hardcover : alk. paper)
1. Financial crises—Case studies. 2. Fiscal policy—
Case studies. 3. Business cycles—Case studies.
I. Rogoff, Kenneth S. II. Title.
HB3722.R45 2009
338.5′42—dc22
2009022616
British Library Cataloging-in-Publication Data is available
This book has been composed in Goudy text
with Trade Gothic and Century italic by
Princeton Editorial Associates, Inc., Scottsdale, Arizona
Printed on acid-free paper. ∞
Printed in the United States of America
13 15 17 19 20 18 16 14
To William Reinhart,
Juliana Rogoff,
and Gabriel Rogoff
CONTENTS
LIST OF TABLES
LIST OF FIGURES
LIST OF BOXES
PREFACE
ACKNOWLEDGMENTS
PREAMBLE: SOME INITIAL INTUITIONS
ON FINANCIAL FRAGILITY AND THE FICKLE
NATURE OF CONFIDENCE
PART I
Financial Crises: An Operational Primer
1
Varieties of Crises and Their Dates
Crises Defined by Quantitative Thresholds:
Inflation, Currency Crashes, and Debasement
Crises Defined by Events: Banking Crises
and External and Domestic Default
Other Key Concepts
2
Debt Intolerance: The Genesis of Serial Default
Debt Thresholds
Measuring Vulnerability
Clubs and Regions
Reflections on Debt Intolerance
3
A Global Database on Financial Crises
with a Long-Term View
Prices, Exchange Rates, Currency Debasement,
and Real GDP
Government Finances and National Accounts
Public Debt and Its Composition
Global Variables
Country Coverage
PART II
Sovereign External Debt Crises
4
A Digression on the Theoretical
Underpinnings of Debt Crises
Sovereign Lending
Illiquidity versus Insolvency
Partial Default and Rescheduling
Odious Debt
Domestic Public Debt
Conclusions
5
Cycles of Sovereign Default on External Debt
Recurring Patterns
Default and Banking Crises
Default and Inflation
Global Factors and Cycles of Global External Default
The Duration of Default Episodes
6
External Default through History
The Early History of Serial Default:
Emerging Europe, 1300–1799
Capital Inflows and Default: An “Old World” Story
External Sovereign Default after 1800: A Global Picture
PART III
The Forgotten History of Domestic Debt and Default
7
The Stylized Facts of Domestic Debt and Default
Domestic and External Debt
Maturity, Rates of Return, and Currency Composition
Episodes of Domestic Default
Some Caveats Regarding Domestic Debt
8
Domestic Debt: The Missing Link Explaining
External Default and High Inflation
Understanding the Debt Intolerance Puzzle
Domestic Debt on the Eve and in the
Aftermath of External Default
The Literature on Inflation and the “Inflation Tax”
Defining the Tax Base: Domestic Debt or the Monetary Base?
The “Temptation to Inflate” Revisited
9
Domestic and External Default:
Which Is Worse? Who Is Senior?
Real GDP in the Run-up to and the Aftermath of Debt Defaults
Inflation in the Run-up to and the Aftermath of Debt Defaults
The Incidence of Default on Debts Owed to
External and Domestic Creditors
Summary and Discussion of Selected Issues
PART IV
Banking Crises, Inflation, and Currency Crashes
10
Banking Crises
A Preamble on the Theory of Banking Crises
Banking Crises: An Equal-Opportunity Menace
Banking Crises, Capital Mobility, and Financial Liberalization
Capital Flow Bonanzas, Credit Cycles, and Asset Prices
Overcapacity Bubbles in the Financial Industry?
The Fiscal Legacy of Financial Crises Revisited
Living with the Wreckage: Some Observations
11
Default through Debasement:
An “Old World Favorite”
12
Inflation and Modern Currency Crashes
An Early History of Inflation Crises
Modern Inflation Crises: Regional Comparisons
Currency Crashes
The Aftermath of High Inflation and Currency Collapses
Undoing Domestic Dollarization
PART V
The U.S. Subprime Meltdown and the
Second Great Contraction
13
The U.S. Subprime Crisis: An International
and Historical Comparison
A Global Historical View of the Subprime
Crisis and Its Aftermath
The This-Time-Is-Different Syndrome and the
Run-up to the Subprime Crisis
Risks Posed by Sustained U.S. Borrowing from the
Rest of the World: The Debate before the Crisis
The Episodes of Postwar Bank-Centered Financial Crisis
A Comparison of the Subprime Crisis with
Past Crises in Advanced Economies
Summary
14
The Aftermath of Financial Crises
Historical Episodes Revisited
The Downturn after a Crisis: Depth and Duration
The Fiscal Legacy of Crises
Sovereign Risk
Comparisons with Experiences from the
First Great Contraction in the 1930s
Concluding Remarks
15
The International Dimensions of the Subprime Crisis:
; The Results of Contagion or Common Fundamentals?
Concepts of Contagion
Selected Earlier Episodes
Common Fundamentals and the Second Great Contraction
Are More Spillovers Under Way?
16
Composite Measures of Financial Turmoil
Developing a Composite Index of Crises: The BCDI Index
Defining a Global Financial Crisis
The Sequencing of Crises: A Prototype
Summary
PART VI
What Have We Learned?
17
Reflections on Early Warnings, Graduation,
Policy Responses, and the Foibles of Human Nature
On Early Warnings of Crises
The Role of International Institutions
Graduation
Some Observations on Policy Responses
The Latest Version of the This-Time-Is-Different Syndrome
DATA APPENDIXES
A.1. Macroeconomic Time Series
A.2. Public Debt
A.3. Dates of Banking Crises
A.4. Historical Summaries of Banking Crises
NOTES
REFERENCES
NAME INDEX
SUBJECT INDEX
TABLES
1.1
Defining crises: A summary of quantitative thresholds
1.2
Defining crises by events: A summary
2.1
External debt at the time of default: Middle-income countries, 1970–2008
2.2
External debt at the time of default: Frequency distribution, 1970–2008
2.3
Risk and debt: Panel pairwise correlations, 1979–2007
3.1
Countries’ share of world GDP, 1913 and 1990
6.1
The early external defaults: Europe, 1300–1799
6.2
External default and rescheduling: Africa, Europe, and Latin America, nineteenth century
6.3
Default and rescheduling: Africa and Asia, twentieth century to 2008
6.4
Default and rescheduling: Europe and Latin America, twentieth century to 2008
6.5
The cumulative tally of default and rescheduling: Africa and Asia, year of independence to 2008
6.6
The cumulative tally of default and rescheduling: Europe, Latin America, North America, and Oceania, year of independence to 2008
7.1
Interest rates on domestic and external debt, 1928–1946
7.2
Selected episodes of domestic debt default or restructuring, 1740–1921
7.3
Selected episodes of domestic debt default or restructuring, late 1920s–1950s
7.4
Selected episodes of domestic debt default or restructuring, 1970–2008
8.1
Debt ratios at the time of default: Selected episodes
8.2
Inflation and domestic public debt: Selected episodes, 1917–1994
9.1
Output and inflation around and during debt crises
9.2
Who gets expropriated, residents or foreigners? Preliminary tests for the equality of two proportions (binomial distribution), 1800–2006
10.1
Debt and banking crises: Africa and Asia, year of independence to 2008
10.2
Debt and banking crises: Europe, Latin America, North America, and Oceania, year of independence to 2008
10.3
Frequency of banking crises: Africa and Asia, to 2008
10.4
Frequency of banking crises: Europe, Latin America, North America, and Oceania, to 2008
10.5
Summary of the incidence and frequency of banking crises, 1800 (or independence) to 2008
10.6
Summary of the incidence and frequency of banking crises, 1945 (or independence) to 2008
10.7
The effect of a capital flow bonanza on the probability of a banking crisis in a sixty-six country sample, 1960–2007
10.8
Cycles of real housing prices and banking crises
10.9
Creative accounting? Bailout costs of banking crises
11.1
Expropriation through currency debasement: Europe, 1258–1799
11.2
Expropriation through currency debasement: Europe, nineteenth century
12.1
“Default” through inflation: Asia, Europe, and the “New World,” 1500–1799
12.2
“Default” through inflation: Africa and Asia, 1800–2008
12.3
“Default” through inflation: Europe, Latin America, North America, and Oceania, 1800–2008
13.1
Post–World War II bank-centered financial crises in advanced economies
14.1
Fiscal deficits (central government balance) as a percentage of GDP
15.1
Global banking crises, 1890–2008: Contagion or common fundamentals?
16.1
Indexes of total building activity in selected countries
16.2
Unemployment rates for selected countries, 1929–1932
17.1
Early warning indicators of banking and currency crises: A summary
17.2
Institutional Investor ratings of sixty-six countries: Upgrade or demotion, 1979–2008
A.1.1
Prices: Consumer or cost-of-living indexes
A.1.2
Modern nominal exchange rates
A.1.3
Early silver-based exchange rates
A.1.4
The silver content of currencies
A.1.5
Index of nominal and real gross national product and output
A.1.6
Gross national product
A.1.7
Central government expenditures and revenues
A.1.8
Total exports and imports
A.1.9
Global indicators and financial centers
A.1.10
Real house prices
A.1.11
Stock market indexes (equity prices)
A.2.1
Public debentures: External government bond issues
A.2.2
Total (domestic plus external) public debt
A.2.3
External public debt
A.2.4
Domestic public debt
A.3.1
Banking crisis dates and capital mobility, 1800–2008
A.4.1
Banking crises: Historical summaries, 1800–2008
FIGURES
P.1
Sovereign external debt, 1800–2008: Percentage of countries in external default or restructuring weighted by their share of world income
2.1
Ratios of external debt to GNP: Defaulters and nondefaulters, 1970–2008
2.2
Definition of debtors’ clubs and external debt intolerance regions
5.1
Sovereign external debt: Countries in external default or restructuring, unweighted, 1800–2008
5.2
Sovereign external debt: Countries in external default or restructuring, weighted by share of world income, 1800–2008
5.3
Proportion of countries with banking and external debt crises: All countries, 1900–2008 (unweighted)
5.4
Inflation crises and external default, 1900–2007
5.5
Commodity prices and new external defaults, 1800–2008
5.6
Net capital flows from financial centers and external default, 1818–1939
5.7
Duration of external default episodes, 1800–2008
6.1
Spain: Defaults and loans to the Crown, 1601–1679
7.1
Domestic public debt a
s a share of total debt: All countries, 1900–2007
7.2
Domestic public debt as a share of total debt: Advanced economies, 1900–2007
7.3
Domestic public debt as a share of total debt: Emerging market economies, 1900–2007
7.4
Share of domestic debt that is long term: All countries and Latin America, 1914–1959
7.5
Sovereign domestic debt: Percent of countries in default or restructuring, 1900–2008
8.1
Ratios of public debt to revenue during external default: Eighty-nine episodes, 1827–2003
8.2
Ratios of public debt to revenue during external default: Frequency of occurrence, 1827–2003
8.3
Ratios of public debt to revenue during external default: Cumulative frequency of occurrence, 1827–2003
8.4
The run-up in government domestic and external debt on the eve of external default: Eighty-nine episodes, 1827–2003
8.5
Domestic public debt outstanding: China, 1895–1949
9.1
Real GDP before, during, and after domestic and external debt crises, 1800–2008
9.2
Domestic and external debt crises and GDP, three years before crisis and year of crisis, 1800–2008
9.3
Consumer prices before, during, and after domestic and external debt crises, 1800–2008
9.4
Domestic and external debt crises and inflation, three years before crisis and year of crisis, 1800–2008
9.5
Who is expropriated, residents or foreigners? The probability of domestic and external default, 1800–2006
This Time Is Different: Eight Centuries of Financial Folly Page 1