Revisiting, "This Time Is Different"

Efforts to justify the most recent market melt-up following the election of Donald Trump are difficult to comprehend if you are one of those already skeptical of this market. A read of the 2009 bestselling book titled, "This Time Is Different" did little to convince me that this time is different. It chronicles eight centuries of financial follies in which financial meltdowns have typically followed real-estate bubbles, rising indebtedness, and gaping deficits. Many of us see a strong similarity between what is happening today and prior financial meltdowns. 

A read of the pdf file rather than the 2009 bestselling book titled, "This Time Is Different" delves into the history of economic bubbles. Sadly, periods of rapid credit expansion always end the same way and that is in default. The book written in 2009 by Carmen Reinhart and Kenneth Rogoff  makes a solid case that despite many economists being enthralled with our newfangled Modern Monetary Theory, also known as MMT, we should still question just how well debt cycles can be managed.  

The failures and meltdowns that are chronicled include state failures, bank crises, currency crashes and destabilizing outburst of inflation. Several interesting points leaped out to me while I was reading the file. One concern was the strong link found that indicated countries experiencing sudden large capital inflows are at a high risk of having a debt crisis.  The preliminary evidence over a much broader sweep of history suggests this is often the case. Surges in capital inflows tend to precede external debt crises at the country, regional, and global level since 1800 if not before. Also, periods of high international capital mobility have repeatedly produced international banking crises, this is not only true during the last one hundred years but historically.

The charts contained in the working file were frightening and a strong reminder that debt has consequences. One thing that stands out as you read the file is that a clear pattern and similarity exists between many of the defaults that have occurred throughout history. The same situation is developing today as debt grows at an incredible rate globally. Much of this is the result of MMT. This economic theory details the procedures and consequences of using government-issued tokens as the unit of money.

Note Trend Of Growth In Intangibles

  

According to MMT, governments with the power to issue fiat currency are always solvent which means they can afford to buy anything for sale in their domestic unit of account even though they may face inflationary and political constraints. In short MMT enthusiast feel empowered to avoid future crashes. Of course, looking at the vast amounts of historical data on the past financial failures that have taken place, we naysayers voice reason for concern. MMT and what is known as the "Fed put" are part of what is fueling the growth in intangible assets.

 

Even the distinction of whether the debt was held internally by its citizens or externally by others did not alter the outcome and things still ended by default. The varieties of economic crisis extend to Ponzi-type schemes that finally collapse in upon themselves creating contagion and resulting in a destructive domino effect. The massive derivatives market that is touted as one of our modern financial tools is often sighted as having the potential to wreak havoc in this way. 

 

Some important lessons can be garnered from the book that elevated Reinhart and Rogoff as close to celebrity status as a couple of economists can ever come. Over the last 800 years of financial history we see time and time again how high government debt ratios lead to slow economic growth. Today we are seeing deficit spending and borrowing surge as never before. It is safe to say everyone involved in shaping economic policy should own a copy of  "This Time Is Different" and open it when things seem to be going well because the read brings with it a blast of badly needed seriousness and reality.

 

Sadly, periods of rapid credit expansion always end the same way and that is in default. Global debt has surged since 2008, to levels that should frighten any sane investor because debt has always had consequences. The massive debt load hanging above our heads in 2008 has not receded or gone away it has merely been transferred to the public sector where those in charge of such things feel it is more benign. A series of off-book and backdoor transactions by those in charge has transferred the burden of loss, however, shifting the liability from one sector to another does not alleviate the problem.

Efforts to justify the lofty levels of today's markets, especially just a few stocks, are sometimes difficult to comprehend. Part of this is tied to the trend of passive investing coupled with the ability to leverage up and plow into speculative investments. Unfortunately, this has been deemed a good thing because it drives the wealth effect forward and bolsters the notion that pension funds will be able to keep their promises to retirees. Adding to our current market euphoria is the recent bout of financial engineering evident in companies buying back stock. All of these should be enough to give us pause, should markets falter and the wealth effect shift into reverse, the economy would be left in a world of hurt.

Despite mankind's unbridled confidence that the future will be better and our ability to blindly follow our leaders, the elevated markets of today may be placing our future at risk. Even the few people that care about such matters as the overall economy tend to be seek out easy and painless answers even if they are loosely rooted in reality. This again has raised the important issue of whether this time is really different. If not, what happens when the bubble bursts?

 

(Republishing this article is permitted with reference to Bruce Wilds/AdvancingTime Blog)