The Euro crisis has re-entered a phase which makes turning on the news slightly nerve-wracking – and I’m not even a policy maker. So I turned off the radio and picked up once again that indispensable reference book, [amazon_link id=”0691152640″ target=”_blank” ]This Time Is Different[/amazon_link] by Carmen Reinhart and Kenneth Rogoff. Their argument of course is that every time during the past eight centuries an economy has been in a financial bubble, people have deluded themselves that it will all end well this time.
Looking at their conclusions on managing out of a debt crisis, however, it’s hard to escape the sinking feeling that the scale of the challenge this time around *is* absolutely unprecedented. They note:
1. It is vital to have a full picture of all government indebtedness, not just external, and include the contingent liabilities such as future pensions. (Has anybody done this for Spain or Italy with their rapidly ageing and shrinking populations?)
2. We must remember that very, very few economies grow their way out of a debt crisis, and the realisation that this hope is delusional often brings about a sudden halt to all capital inflows.
3. “Many governments have succumbed to the temptation to inflate away domestic debt.”
4. Banking crises are protracted.
I’m not a macroeconomist, and have been watching the tennis match between pro-stimulus and pro-austerity macro people with the same bemusement as the general population. So although I appreciate that very eminent economists insist there is no danger of inflation given the current weakness of growth, and that it is naive to say QE will result in inflation, I’m still going to turn my thoughts to index-linked and real assets when it comes to pension planning. I suspect I’ll be competing with all those Greeks, Italians, Spaniards and Portuguese looking to park their savings outside their own economies.
[amazon_image id=”0691152640″ link=”true” target=”_blank” size=”medium” ]This Time Is Different: Eight Centuries of Financial Folly[/amazon_image]