Reinhart and Rogoff at it again - Warnings on debt crises

Carmen Reinhart and Ken Rogoff are at it again with their new IMF working paper, "Financial and Sovereign Debt Crises: Some lessons learned and those forgotten". Their paper is an extension of their earlier work on debt crises. Of course, those were the pair that were blasted of excel errors in their work on debt and growth. Their results still showed that high debt levels will impair economic growth. Their new paper suggests that ideas that advanced countries can implement some simple austerity programs and avoid debt crises is just not practical. Emerging markets have always resorted debt restructuring and conversions, higher inflation, capital controls and other forms of financial repression. The historical record shows that advanced economies are not immune to those types of policies. There will be a cost to creditors to clean-up excessive debt. There is no getting around this issue.

The numbers are stacked against advanced economies relative to emerging markets. Consequently, we should expect that advanced economies will have to use a painful toolbox of policies to get this problem under control. 

Governments will have to resort to more aggressive financial repression. The post-WWII period of financial repression was also a period of less crises. Allowing financial liberalization coupled with run away government debt will lead to crises. Now governments will have to determine how to clean-up the mess.