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Rogoff:“Incredibly Cynical About Governments”

Posted by Larry Doyle on February 6, 2012 1:55 PM |

I first referenced Kenneth Rogoff here at Sense on Cents in early 2009.

As I navigate the global economic landscape I look for this Sense on Cents Economic All Star often. Why?

I ALWAYS learn something when I read Rogoff’s work and I love the way he thinks. On that note, I got a real pleasure this weekend in reading Lunch with the FT: Kenneth Rogoff. Let’s navigate………

A few days ago I wrote “Administration Officials Don’t Really Want Housing Program to Work”, and referenced,

I find myself in a daily battle not to write cynically about our economy and the political dynamic within our nation. 

I am well aware that many others in the blogosphere share my cynicism but who else finds it easy to be cynical about our government? The esteemed Mr. Rogoff and his esteemed colleague Carmen Reinhart. As the FT attests,

Game theory is also helpful in understanding how governments are likely to behave during a debt crisis. The key, Rogoff argues, is to ignore everything that governments say and instead to concentrate on the incentives that drive their behaviour. “One of the reasons that Carmen Reinhart and I hit it off, is that we are both incredibly cynical about governments.” 

Incredibly cynical, you say? Me too!!

I was first introduced to game theory and the accompanying Prisoner’s Dilemma early in my undergraduate years. I utilized the thought process behind these theories throughout my career.

I am convinced that in the midst of our current crisis, we should work hard to discount the noise emanating from so many of our politicians, policy makers, and central bankers and embrace the wisdom provided by those who understand the “theory” while simultaneously appreciating how the “game” is played. Kenneth Rogoff is the master. What else does he have to say in his interview with the FT?

Many think the worst is over. Rogoff is more cautious: “There will be more drama ahead,” he predicts. The historical studies that he has done with Reinhart, his long-time collaborator, who is now a fellow at the Peterson Institute in Washington, DC, suggest that the debt levels of several European countries are simply unsustainable without some sort of “restructuring”.

So the tortured negotiations that are being conducted in Greece will be repeated in other countries such as Portugal and Ireland. “Portugal only looks good in comparison with Greece,” he says drily. “We’re not in the endgame, we’re in the middle-game.”

Additionally, we learn,

The financial crisis has made many of Rogoff and Reinhart’s observations a central part of the debate about sovereign debt. Their finding that recoveries from debt-driven recessions are slower than recoveries from business cycle recessions is regularly cited. The two authors are also associated with the idea that when a state’s debts exceed 90 per cent of gross domestic product, they will reduce the economic potential of the country.

I suggest that the US is still comfortably short of this level – but am swiftly corrected. If you count federal and state debts and, crucially, add in unfunded debts in the social security system, then Rogoff thinks that America’s debt levels are well over 120 per cent of GDP.

So how long will it take for the US and Europe to “deleverage” and get their debt crises under control, I ask. “The US still has a few years to go – and the EU could have a decade,” he replies.

Really!! Another decade of economic pain and anguish within the EU? Put away the pom-poms!!

Thus, many may care to look at last Friday’s employment report and feel excessively ebullient. I would encourage those who truly care to understand what is going on along our economic landscape to follow the work of Kenneth Rogoff rather than the pundits and cheerleaders.

The road in front of us remains VERY long.

Navigate accordingly and while you do look for Kenneth Rogoff in your travels.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets, our economy, and our political realm so that meaningful investor confidence and investor protection can be achieved.






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