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A DECADE OF DEBT
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On Friday 19 October 2012 the CPB and KVS organized the Netherlands Economists Day (NED). This day provided all Dutch economists the opportunity to present recent work and/or to discuss relevant economic themes. The day was concluded by the Tinbergen lecture, that this year was given by Prof.dr. Carmen Reinhart (Harvard University, University of Maryland and PIIE), e.g. co-author of 'This Time is Different: Eight Centuries of Financial Folly' (with Kenneth Rogoff).

Prof. Reinhart delivered the lecture 'A Decade of Debt' by which she addressed the variations on debt themes such as debt overhang, deleveraging, unemployment and double dips in most advanced economies, the European risks from financial crash to debt crisis and more restructurings, the 'capital inflow problem' of the major emerging markets and a global issue of the return of financial repression. Countries have strong claims on other countries. Some of those claims are never refunded. That is annoying, unfair and unethical and that failure affects the bargaining power of the EU towards the Greeks. But that is not the fact on the table. Remission is the only option. The longer you wait, the more people moving away and the longer the investment in the deficit countries fails. And thus may ultimately be less refunded.

This pattern repeats itself from debt crisis: first, creditors want to know nothing of remission. But at some point, the ultimate question will come on the table: what do you want, little or nothing? Then the answer is almost always: now, give me but something.


In the heavily regulated financial markets of the Bretton Woods, restrictions facilitated a sharp and rapid reduction in public debt/GDP ratios from the late 1940s to the 1970s. Low nominal interest rates reduced debt servicing costs while a high incidence of negative real interest rates liquidated the real value of government debt.
Recognized are recurring themes of the past as business cycles (gone sour), a global—North-South scope and lessons from the past. Shown and discussed was gross central government debt as a percent of GDP, gross total (public plus private) external debt as a percent of GDP, and private domestic credit as a percent of GDP.

20 Of the 26 episodes lasted more than a decade.Real per capita GDP growth rates are significantly lower during the decade following severe financial crises and the synchronous world-wide shocks. In the ten-year window following severe financial crises, unemployment rates are significantly higher than in the decade that preceded the crisis. In ten of the fifteen post-crisis episodes, unemployment has not fallen back to its pre-crisis level, not in the decade that followed… Deleveraging is often delayed and is a lengthy process lasting about seven years. The decade that preceded the onset of the 2007 crisis fits the historic pattern. If deleveraging of private debt follows the tracks of previous crises, credit restraint will damp employment and growth for some time to come.

Throughout history, debt/GDP ratios have been reduced by economic growth, fiscal adjustment/austerity, explicit default or restructuring, a sudden surprise burst in inflation; and a steady dosage of financial repression that is accompanied by an equally steady dosage of inflation.
(Options (iv) and (v) are only viable for domestic-currency debts).