Ken Rogoff en-us Sat, 27 Dec 2014 11:05:12 -0500 Sat, 27 Dec 2014 11:05:12 -0500 The latest news on Ken Rogoff from Business Insider Business Insider A New IMF Paper Shreds Reinhart & Rogoff's Claim That High Debt Levels Slow Growth Fri, 14 Feb 2014 06:08:00 -0500 Matt Clinch <p><img style="float:right;" src="" border="0" alt="shredded paper" width="480" /></p><p>A new report commissioned by the <a href="" target="_self" class="inline_asset" data-nodeid="43047739">International Monetary Fund (IMF)</a> has refuted claims made by Harvard economists Carmen Reinhart and Kenneth Rogoff that high government debt levels stifle economic growth.</p> <p>The new research released on Thursday by IMF researchers Andrea Pescatori, Damiano Sandri and John Simon states that they find no evidence that there is any particular debt threshold above which medium-term growth prospects are dramatically compromised.</p> <p>"We find no evidence of threshold effects over any but the shortest-term horizons....the remaining relationship between debt and growth is relatively muted and the magnitude is much smaller than the dramatic figures suggested in earlier studies," the three economists said in the report.</p> <p>(<em>Read More</em>: <a href="" target="_self" class="inline_asset" data-nodeid="101307602">1930s-style debt defaults likely, says IMF research</a>)</p> <p>"Furthermore, we find the debt trajectory can be as important as the debt level in understanding future growth prospects, since countries with high but declining debt appear to grow equally as fast as countries with lower debt."</p> <p>In 2010, an academic paper called "Growth in a Time of Debt" released by Reinhart and Rogoff argued that there is a threshold effect, meaning debt above 90 percent of a country's <a href="" target="_self" class="inline_asset" data-nodeid="44505017">GDP (gross domestic product)</a> is associated with dramatically worse growth outcomes.</p> <p>Their research is frequently cited as one of the inspirations for austerity measures, with high-profile advocates including the Olli Rehn, the European Union's Commissioner for Economic and Monetary Affairs, citing it during key debates about the need for euro zone budgetary tightening.</p> <p>In April 2013, "Growth in a Time of Debt" came under attack from an economics doctoral student and two professors at the University of Massachusetts who claimed it contained a mathematical error. Reinhart and Rogoff responded three times to the research paper, accepting the error but rebutting allegations that the error stemmed from "selective exclusion" and explained that it didn't change the key theme of their research.</p> <p>(<em>Read More</em>: <a href="" target="_self" class="inline_asset" data-nodeid="100648042">Reinhart-Rogoff Error Sparks Austerity Debate</a>)</p> <p>Thursday's paper firmly belongs to the opposing camp, attempting to throw cold water on Reinhart and Rogoff's claims. It also advances the view that the priority for governments should be increasing growth rather than reducing debt and, consequently, that much less short-term fiscal austerity is appropriate.</p> <p>Using a different way of analyzing the data and a sizeable dataset, the IMF paper says that the association between debt and medium-term growth becomes rather weak at high levels of debt. Countries with high but declining levels of debt have historically grown just as fast as their peers, it adds.</p> <p>The paper is not without its warnings, however. It concedes that it still doesn't establish what the underlying structural relationship between debt and growth is. It also states that high levels of debt are weakly associated with higher output volatility which would suggest an association with market pressure or fiscal and monetary policy actions that could destabilize growth.</p> <p>(<em>Read More</em>: <a href="" target="_self" class="inline_asset" data-nodeid="100698106">Reinhart, Rogoff: Austerity Is Not the Only Answer</a>)</p> <p>"The fact that there is no clear debt threshold that severely impairs medium term growth should not, however, be interpreted as a conclusion that debt does not matter," the report said.</p> <p>"For example, we have found some evidence that higher debt appears to be associated with more volatile growth. And volatile growth can still be damaging to economic welfare."</p> <p>&mdash;<em>By's Matt Clinch; Follow him on Twitter</em> <a href="" target="_self" class="inline_asset"><strong style="outline: none;">@</strong><strong style="outline: none;">mattclinch81</strong></a></p><p><a href="">Join the conversation about this story &#187;</a></p> KEN ROGOFF: The Bloggers Are On A 50s McCarthyism Witch Hunt Over My Spreadsheet Error Wed, 23 Oct 2013 09:19:00 -0400 Steven Perlberg <p><img style="float:right;" src="" border="0" alt="ken rogoff" width="480" /></p><p>Remember back in April when a <a href="">UMass graduate student</a> found <a href="">a major Excel error</a> in the foundational pro-austerity paper of the post-financial crisis era?</p> <p>Well one of the authors of <a href="">that foundational paper</a> &ndash; Harvard economist Ken Rogoff &mdash; is <a href="">still upset</a> over what he calls a "witch hunt" propelled by "left bloggers."</p> <p>If you recall, after Ph.D candidate Thomas Herndon found the error in the math behind "Growth in the Time of Debt," a paper from which governments have drawn austerity-based policies, Rogoff (and his co-author Carmen Reinhart) kind of <a href="">pooh-poohed the whole thing</a>.&nbsp;</p> <p>Economists (and bloggers!) like <a href="">Paul Krugman</a> and <a href="">Dean Baker</a> piled on, the thought being that Rogoff and Reinhart were at best being nearsighted and at worst actively disingenuous. Plus, the whole thing just festered even more because R&amp;R's central thesis (that high debt to GDP ratios leads to long periods of slow growth) had been co-opted by many austerious governments looking for an economic bitter pill.</p> <p>Here we are months later, and Rogoff has given&nbsp;<a href="">an interview</a> to the <a href="">German magazine Capital</a><span style="line-height: 1.5em;">&nbsp;(<a href="">picked up by Naked Capitalism</a>). Here are some nuggets from the interview (translated):</span></p> <ol> <li><span style="line-height: 1.5em;">He now defends himself: The story is an orchestrated attack from left bloggers, "<strong>as in the the 50s under McCarthy</strong>."</span></li> <li><span style="line-height: 1.5em;"><span>His opponents had "distorted and consciously falsely interpreted and polemicized his work."</span><br /></span></li> <li><span style="line-height: 1.5em;"><span><span>"The main point is, after all the polemical heat that my main result is: Very high debt is associated with lower growth,&rdquo; he says. And: "If anyone thinks that record debt in order, then he is wrong. The history shows the opposite," said Rogoff.</span></span></span></li> </ol> <div><span style="line-height: 22.5px;"><span>Yves Smith of Naked Capitalism calls the interview "remarkable tripe," adding that "t</span></span><span style="line-height: 22.5px;">he reaction was strong because the paper was so prominent and the authors had resisted releasing the underlying data to economists who thought the results looked wrong."</span></div> <div><span style="line-height: 22.5px;"><br /></span></div> <div><a href=""><span style="line-height: 22.5px;">Read the full post at Naked Capitalism &raquo;&nbsp;</span></a></div><p><a href="">Join the conversation about this story &#187;</a></p> Ken Rogoff Takes A Swipe At Econ-Bloggers For Misinterpreting His Work On Debt And GDP Fri, 04 Oct 2013 17:29:14 -0400 Rob Wile <p><img style="float:right;" src="" border="0" alt="ken rogoff" width="480" /></p><p>Earlier this year, a group of researchers led by UMass-Amherst's Thomas Herndon <a href="">found an error</a> in <a href="">a seminal paper</a> by Harvard economists Carmen Reinhart and Ken Rogoff regarding debt and GDP.</p> <p>Reinhart and Rogoff had asserted that at the 90% debt-to-GDP ratio, the&nbsp;<span style="line-height: 1.5em;">median growth rate among the countries they surveyed dropped by 1%, and that the mean growth rate dropped even further.</span></p> <p><span style="line-height: 1.5em;">But Team Herndon discovered the pair had left out several countries whose history of debt versus GDP, they claim, would have shown <a href="">nothing special happens at the 90% level</a>.&nbsp;</span></p> <p><span style="line-height: 1.5em;">The reason why all this matters is because, in the wake of the financial crisis, <a href="">lots of people cited Reinhart and Rogoff's findings</a>&nbsp;to argue&nbsp;</span><span style="line-height: 1.5em;">in favor austerity, <a href="">including in the U.S</a></span><a href=""><span style="line-height: 1.5em;">.</span></a></p> <p><span style="line-height: 1.5em;">And as we now know, austerity has seen <a href="">extremely</a> <a href="">mixed</a> results.</span></p> <p><span style="line-height: 1.5em;">Now, in a new post on his website, </span><a href="">Rogoff has produced another response in the form of a Frequently Asked Questions article.</a></p> <p>It's mostly a summary of past arguments that he and Reinhart have made: that everyone was drawing incorrect conclusions from their initial findings.</p> <p style="padding-left: 30px;">"We very explicitly state that our results should not be interpreted as saying that a country would suddenly experience a significant change in expected growth as it crossed the 90% threshold," he writes.</p> <p><span style="line-height: 1.5em;">Rogoff also confirms Team Herndon's findings that there were omissions, but argues they are "</span><span style="line-height: 1.5em;">of minor quantitative significance and hardly central to the debate."</span></p> <p><span style="line-height: 1.5em;">But Rogoff unexpectedly sideswipes the econo-blogo-sphere for having perpetuated misleading interpretations of their findings.</span></p> <p style="padding-left: 30px;"><strong>"The terms &ldquo;threshold&rdquo; and &ldquo;nonlinearity&rdquo; in economic research by no means imply there has to be a sharp break (<span style="color: #ff0000;">no matter how much some bloggers incorrectly make that claim</span>).</strong> Our more nuanced and&nbsp;perfectly conventional meaning is also clear in the context of the large literature in international finance that our paper builds on."<span style="line-height: 1.5em;">&nbsp;</span></p> <p>The bloggers in question remain unnamed.</p> <p>But it does provide some insight into the tiff-riddled world of economics blogging, where the bloggers also frequently <a href="">happen</a> <a href="">to</a> <a href="">be</a> <a href="">economists</a>, and even <a href="">Harvard colleagues.</a></p><p><a href="">Join the conversation about this story &#187;</a></p> America Needs An Unorthodox Central Banker To Save Us From Deflation Sun, 04 Aug 2013 13:48:00 -0400 Kenneth Rogoff <p><img style="float:right;" src="" border="0" alt="romer geithner barack obama lawrence larry summers" width="480" /></p><p>CAMBRIDGE &ndash; The battle is on to replace current US Federal Reserve Chairman Ben Bernanke. One might expect the Fed chairmanship &ndash; arguably the second most powerful official position in the United States, and certainly the world&rsquo;s most powerful financial position &ndash; to be determined by a conclave of central bankers. In fact, the choice is largely at the discretion of the US president. So let us consider two of the leading candidates, Lawrence Summers, a former US treasury secretary, and current Fed Vice Chair Janet Yellen.</p> <p>Both Summers and Yellen are brilliant scholars with extensive experience in public service. Whereas the mainstream press seems intent on exploring their candidacies as a contest of contrasting personalities, the fact is that both candidates are extremely well qualified. Moreover, both have a reputation for believing that the Fed should not place excessive weight on price stability relative to unemployment. Normally, this dovish bias would be a handicap; nowadays, it is an advantage.</p> <p data-line-id="f6618a02217098340556c407">The importance of technical competence in monetary policy has been proved repeatedly by central banks around the world. According to <a href="" target="_blank">research published in 2003</a> by the economists Christina Romer and David Romer, the quality of monetary policy depends critically on whether central bankers have a clear and nuanced understanding of policy making and inflation. The 1920&rsquo;s, 1930&rsquo;s, and 1970&rsquo;s are replete with examples of central bankers who did not understand the basics, and whose economies paid the price.</p> <p data-line-id="f6618a02217098340557c407">What this means is not just competence in setting interest rates, but also competence in regulatory policy. Some are criticizing Summers&rsquo;s ardent pursuit of financial deregulation during the 1990&rsquo;s, when he headed the US Treasury under President Bill Clinton. But these critics overlook his role in helping to fight that decade&rsquo;s sovereign-debt crises, and his insistence that the US begin issuing inflation-indexed bonds.</p> <p class="inline " data-line-id="f6618a02217098340558c407">In a complex and ever-changing policy setting, it is almost impossible to get every call right, and the important thing is to learn from one&rsquo;s mistakes. Winston Churchill famously regretted overseeing the United Kingdom&rsquo;s catastrophic return to the gold standard in 1925, when he was Chancellor of the Exchequer. His performance, needless to say, improved in later years.</p> <p data-line-id="f6618a02217098340559c407">As for Yellen, it is true that she was President of the San Francisco Federal Reserve during the last years of the massive US housing bubble &ndash; which was particularly acute in her district. But Yellen&rsquo;s speeches on financial risks showed more foresight than those of most of her peers.</p> <p class="inline " data-line-id="f6618a0221709834055ac407">Typically, one looks to the head of the central bank to serve as a bulwark against political pressure to push down interest rates and raise inflation. My own <a href="" target="_blank">research in 1985 on inflation and central-bank independence</a> showed that, in normal times, one generally wants a central banker who places greater emphasis on price stability relative to unemployment than an ordinary informed citizen might do. Installing a &ldquo;conservative&rdquo; central banker helps to keep inflation expectations in check, thereby holding down long-term interest rates and mitigating upward pressure on wages and prices.</p> <p class="inline " data-line-id="f6618a0221709834055bc407">For the past 25 years, the mantra of &ldquo;inflation targeting&rdquo; (introduced in my 1985 paper) has served as a mechanism for containing inflation expectations by reassuring the public of the central bank&rsquo;s intentions. But excessive emphasis on low inflation targets <a href="">can be counterproductive</a> in the aftermath of the worst financial crisis in 75 years.</p> <p data-line-id="f6618a0221709834055cc407">Rather than worrying about inflation, central bankers should focus on reflating the economy. The real problem is that they have done such a good job convincing the public that inflation is the number-one evil that it is difficult for them to persuade anyone that they are now serious about reflation. That is why appointing a &ldquo;dove&rdquo; would not be a bad thing at all.</p> <p class="inline " data-line-id="f6618a0221709834055dc407">Yellen has already developed a reputation as a dove within the Fed, with speeches consistently showing <a href="" target="_blank">strong concern</a> about today&rsquo;s high unemployment. And, though many on the left regard Summers as suspiciously conservative, that is hardly the case when it comes to inflation. His <a href=";uid=2129&amp;uid=2&amp;uid=70&amp;uid=4&amp;uid=3739256&amp;sid=21102498545831" target="_blank">1991 paper</a> on monetary policy is widely cited as among the first to make the case for avoiding very low inflation targets, in part to give the central bank more room to lower interest rates. Back then, Summers clearly viewed himself as a monetary-policy dove: &ldquo;I would support having someone in charge of monetary policy who is more inflation-averse than I.&rdquo;</p> <p data-line-id="f6618a0221709834055ec407">But now Summers&rsquo;s dovishness is not a problem. In the face of downward nominal-wage rigidity, higher inflation would facilitate sectoral adjustment and achieve a small but useful impact on reducing debt burdens.</p> <p data-line-id="f6618a0221709834055fc407">If normal times call for a conservative central banker who helps to anchor inflation expectations, now is the rare time when we need a more unorthodox central banker who will fight <em>deflation</em> expectations. A central-bank version of the Vatican&rsquo;s papal conclave would have a hard time deciding whether to send up the <em>fumata bianca</em> for Yellen or for Summers &ndash; or perhaps for someone else (another former Fed vice chair, Donald Kohn, now appears to be in the mix) with similar inclinations.</p><p><a href="">Join the conversation about this story &#187;</a></p> It's A Mistake To Worry About Inflation Sat, 08 Jun 2013 15:30:39 -0400 Kenneth Rogoff <p>CAMBRIDGE &ndash; The world&rsquo;s major central banks continue to express concern about inflationary spillover from their recession-fighting efforts. That is a mistake. Weighed against the political, social, and economic risks of continued slow growth after a once-in-a-century financial crisis, a sustained burst of moderate inflation is not something to worry about. On the contrary, in most regions, it should be embraced.</p> <p data-line-id="2aa3dc02217098680decced7">Perhaps the case for moderate inflation (say, 4-6% annually) is not so compelling as it was at the outset of the crisis, when I first <a href="">raised the issue</a>. Back then, against a backdrop of government reluctance to force debt write-downs, along with massively over-valued real housing prices and excessive real wages in some sectors, moderate inflation would have been extremely helpful.</p> <p data-line-id="2aa3dc02217098680dedced7">The consensus at the time, of course, was that a robust &ldquo;V-shaped&rdquo; recovery was around the corner, and it was foolish to embrace inflation heterodoxy. I thought otherwise, based on research underlying my 2009 book with Carmen M. Reinhart,<em> This Time is Different</em>. Examining previous deep financial crises, there was every reason to be concerned that the employment decline would be catastrophically deep and the recovery extraordinarily slow. A proper assessment of the medium-term risks would have helped to justify my conclusion in December 2008 that &ldquo;It will take every tool in the box to fix today&rsquo;s once-in-a-century financial crisis.&rdquo;</p> <p data-line-id="2aa3dc02217098680deeced7">Five years on, public, private, and external debt are at record levels in many countries. There is still a need for huge relative wage adjustments between Europe&rsquo;s periphery and its core. But the world&rsquo;s major central banks seem not to have noticed.</p> <p data-line-id="2aa3dc02217098680defced7">In the United States, the Federal Reserve has sent bond markets into a tizzy by signaling that quantitative easing (QE) might be coming to an end. The proposed exit seems to reflect a truce accord among the Fed&rsquo;s hawks and doves. The doves got massive liquidity, but, with the economy now strengthening, the hawks are insisting on bringing QE to an end.</p> <p data-line-id="2aa3dc02217098680df0ced7">This is a modern-day variant of the classic prescription to start tightening before inflation sets in too deeply, even if employment has not fully recovered. As William McChesney Martin, who served as Fed Chairman in the 1950&rsquo;s and 1960&rsquo;s, once quipped, the central bank&rsquo;s job is &ldquo;to take away the punch bowl just as the party gets going.&rdquo;</p> <p data-line-id="2aa3dc02217098680df1ced7">The trouble is that this is no ordinary recession, and a lot people have not had any punch yet, let alone too much. Yes, there are legitimate technical concerns that QE is distorting asset prices, but bursting bubbles simply are not the main risk now. Right now is the US&rsquo;s best chance yet for a real, sustained recovery from the financial crisis. And it would be a catastrophe if the recovery were derailed by excessive devotion to anti-inflation shibboleths, much as some central banks were excessively devoted to the gold standard during the 1920&rsquo;s and 1930&rsquo;s.</p> <p data-line-id="2aa3dc02217098680df2ced7">Japan faces a different conundrum. Haruhiko Kuroda, the Bank of Japan&rsquo;s new governor, has sent a clear signal to markets that the BOJ is targeting 2% annual inflation, after years of near-zero price growth.</p> <p data-line-id="2aa3dc02217098680df3ced7">But, with longer-term interest rates now creeping up slightly, the BOJ seems to be pausing. What did Kuroda and his colleagues expect? If the BOJ were to succeed in raising inflation expectations, long-term interest rates would necessarily have to reflect a correspondingly higher inflation premium. As long as nominal interest rates are rising because of inflation expectations, the increase is part of the solution, not part of the problem.</p> <p data-line-id="2aa3dc02217098680df4ced7">The BOJ would be right to worry, of course, if interest rates were rising because of a growing risk premium, rather than because of higher inflation expectations. The risk premium could rise, for example, if investors became uncertain about whether Kuroda would adhere to his commitment. The solution, as always with monetary policy, is a clear, consistent, and unambiguous communication strategy.</p> <p data-line-id="2aa3dc02217098680df5ced7">The European Central Bank is in a different place entirely. Because the ECB has already been using its balance sheet to help bring down borrowing costs in the eurozone&rsquo;s periphery, it has been cautious in its approach to monetary easing. But higher inflation would help to accelerate desperately needed adjustment in Europe&rsquo;s commercial banks, where many loans remain on the books at far above market value. It would also provide a backdrop against which wages in Germany could rise without necessarily having to fall in the periphery.</p> <p data-line-id="2aa3dc02217098680df6ced7">Each of the world&rsquo;s major central banks can make plausible arguments for caution. And central bankers are right to insist on structural reforms and credible plans for balancing budgets in the long term. But, unfortunately, we are nowhere near the point at which policymakers should be getting cold feet about inflation risks. They should be spiking the punch bowl more, not taking it away.</p><p><a href="">Join the conversation about this story &#187;</a></p> BLACKROCK: Policy Makers And Investors Ignore Reinhart And Rogoff At Their Peril Thu, 09 May 2013 04:59:00 -0400 Sam Ro <p><img style="float:right;" src="" border="0" alt="russ koesterich" /></p><p>The economic world is still digesting the fact that one of the most popular economic papers of the last decade contained a math error.</p> <p>We're talking about Ken Rogoff and <a class="hidden_link" href="">Carmen Reinhart</a>'s paper that argued heavy government debt loads are correlated to decelerations in economic growth.</p> <p>It's worth noting that the basic findings of their paper still hold.&nbsp; It's just the debt threshold has been raised.</p> <p>Anti-austerians have piled on.&nbsp; But <a class="hidden_link" href="">BlackRock</a>'s Russ Koesterich warns that it would be a mistake to disregard Reinhart and Rogoff.</p> <p>"While Reinhart and Rogoff have publicly admitted mistakes in their methodology, their paper&rsquo;s basic conclusion still holds: Excessive government debt is likely to be an impediment to a country&rsquo;s growth," he argues.</p> <p>In a new post on <a href="">BlackRock's iShares blog</a>, Koesterich notes that the U.S. continues to be in Reinhart and Rogoff's danger zone, which means debt is so high that growth will take a hit.</p> <p>And all of this is bad news for corporate profits and stocks.</p> <p>"A 1% drop in economic growth would have enormous implications for US corporate earnings," warned Koesterich. "In fact, top-line corporate growth is largely a function of economic growth."</p> <p>"[I]n a world in which developed market debt now averages roughly 100% of developed country GDP, both policy makers and investors ignore Reinhart and Rogoff&rsquo;s paper at their own peril."</p> <p>Read more at <a href=""></a>.</p><p><strong>SEE ALSO:&nbsp;<a href="" >ROSENBERG: The Fed Is Trying Like Crazy, But Nothing It's Doing Can Save The Economy ></a></strong></p> <p><a href="">Join the conversation about this story &#187;</a></p> REINHART AND ROGOFF: The Attacks On Our Work And Credibility Are Just Sad Fri, 26 Apr 2013 04:49:00 -0400 Sam Ro <p><img style="float:right;" src="" border="0" alt="ken rogoff" width="400" /></p><p>Economists <a class="hidden_link" href="">Carmen Reinhart</a> and Ken Rogoff have been the targets of vicious attacks after UMass graduate students exposed an error in their research.</p> <p>Specifically, Thomas Herndon, Michael Ash and Robert Pollin found that Reinhart and Rogoff made a computational error in their 2010 paper&nbsp;<a href="">&ldquo;Growth in a Time of Debt.&rdquo;</a></p> <p>This paper has been used around the world by political leaders to advance austerity because it appeared to show that economic growth slowed significantly when debt-to-GDP exceeded 90%.</p> <p>Since the UMass paper was published, Reinhart and Rogoff have <a href="">furiously defended their work</a>, arguing that their basic conclusion connecting high debt with low growth is intact.</p> <p>In a new <a href="">op-ed in The New York Times, Reinhart and Rogoff</a> continue their defense.</p> <p>They address the topic of austerity head-on by noting that they never specifically made a call for austerity:</p> <p style="padding-left: 30px;">The politically charged discussion, especially sharp in the past week or so, has falsely equated our finding of a negative association between debt and growth with an unambiguous call for austerity.</p> <p style="padding-left: 30px;">We agree that growth is an elusive goal at times of high debt. We know that cutting spending and raising taxes is tough in a slow-growth economy with persistent unemployment. Austerity seldom works without structural reforms &mdash; for example, changes in taxes, regulations and labor market policies &mdash; and if poorly designed, can disproportionately hit the poor and middle class. Our consistent advice has been to avoid withdrawing fiscal stimulus too quickly, a position identical to that of most mainstream economists.</p> <p style="padding-left: 30px;">In some cases, we have favored more radical proposals, including debt restructuring (a polite term for partial default) of public and private debts. Such restructurings helped deal with the debt buildup during World War I and the Depression. We have long favored write-downs of sovereign debt and senior bank debt in the European periphery (Greece, Portugal, Ireland, Spain) to unlock growth.</p> <p>So, while you may criticize them for their Excel error, you should be careful not to associate all of the world's ills with their work.</p> <p>Indeed, Reinhart and Rogoff write that the attacks have gone too far.</p> <p style="padding-left: 30px;">Our research, and even our credentials and integrity, have been furiously attacked in <a href="">newspapers</a> and on <a href="">television</a>. Each of us has received hate-filled, even threatening, e-mail messages, some of them blaming us for layoffs of public employees, cutbacks in government services and tax increases. As career academic economists (our only senior public service has been in the research department at the International Monetary Fund) we find these attacks a sad commentary on the politicization of social science research. But our feelings are not what&rsquo;s important here.</p> <p>Read the whole Op-Ed at <a href=""></a>.</p><p><strong>SEE ALSO:&nbsp;<a href="" >12 Basic Shortcuts That Will Make You An Excel Guru And Add Hours To Your Life ></a></strong></p> <p><a href="">Join the conversation about this story &#187;</a></p> JIM O'NEILL: That Reinhart-Rogoff Paper Was Problematic Long Before Anyone Discovered A Math Error Mon, 22 Apr 2013 12:02:00 -0400 Sam Ro <p><img style="float:right;" src="" border="0" alt="jim o'neill" width="401" height="300" /></p><p>In recent weeks, economists <a class="hidden_link" href="">Carmen Reinhart</a> and Ken Rogoff have taken a lot of heat for a computational error in their paper relating economic growth with debt-to-GDP ratios.</p> <p>However, <a class="hidden_link" href="">Goldman Sachs</a> economist Jim O'Neill reiterates that the spreadsheet error isn't even the biggest problem with the paper.</p> <p>Rather, it was the suggestion that you could simply compare varying economies just using a handful of leverage ratios.</p> <p>From <a href="">O'Neill's latest Viewpoints note</a> (emphasis added):</p> <p style="padding-left: 30px;">According to a number of media reports, central bankers at the interim IMF meetings in Washington, D.C. admitted that they don&rsquo;t really know what is going on in developed economies, nor the consequences of their current policies. While, no doubt, many observers will be worried about these rather frank admissions, in my view they are rather welcome. From my own education in economics, it has been clear for a long time that it is a social science, and certainly not close to a pure science. So, of course, economists shouldn&rsquo;t know what is going on. They can have a degree of confidence, but one might argue that one of the reasons why the 2008-09 crisis happened could be that too many people were too confident about their knowledge of economic relationships. Anyhow, to add to the mix, there has been particular attention on the research by <a class="hidden_link" href="">Kenneth Rogoff</a> and Carmen Reinhart, published in 2010, which has been highly influential in many circles in the past three years. According to media reports, a group at the University of Massachusetts reproduced the Rogoff and Reinhart research and, using the same data set, reached very different conclusions. Rogoff and Reinhart appeared to show that countries with a public debt-to-GDP ratio of 90% or more showed persistently lower growth than other countries, and inferred that to boost growth, debt reduction was a major necessity. Perhaps somewhat more than they might have recommended, some countries and observers have used this research to justify fiscal austerity. Following the attention the Massachusetts paper has received, Rogoff and Reinhart have apparently admitted their results were not quite as strong on re-analysis of the dataset. Coming soon after an admission by the IMF that they had underestimated the negative cyclical effects of fiscal tightening, this is seen as a victory for Keynesian-biased thinkers who have obviously articulated that growth would be restrained by fiscal tightening, irrespective of potential supply- side benefits of lower public debt.</p> <p style="padding-left: 30px;">Linked to my earlier comments about economics being merely a social science, <strong>it would seem reasonably obvious that grouping countries together in terms of their debt levels and concluding that the economic consequences are the same is quite a tricky path to tread. Even to apply such arguments about balance of payments current accounts, which to some degree are more of an accounting identifying and therefore less subjective, is tricky, but countries with high debt levels usually share very little else with each other</strong>. As a result, the remedy for the debt reduction and, more importantly, economic development and growth are probably very different. I doubt that the right economic policy for Greece, for example, could be applied to Japan.</p> <p style="padding-left: 30px;">What is almost definitely the case as a result of this attention is the fact that accelerated fiscal tightening is unlikely in countries where real GDP growth continues to struggle.</p> <p>Read more at <a href=""></a>.</p><p><strong>SEE ALSO:&nbsp;<a href="" >Sobering Presentation Reveals The Two Economies In America ></a></strong></p> <p><a href="">Join the conversation about this story &#187;</a></p> The Grad Student Who Took Down Reinhart And Rogoff Explains Why They're Fundamentally Wrong Mon, 22 Apr 2013 09:08:00 -0400 Thomas Herndon <p><br /><em>Ed note: The following is a guest post from University of Massachusetts grad student Thomas Herndon. Herndon shook the economics world last week by <a href="">debunking</a> an&nbsp;<a href=";rct=j&amp;q=&amp;esrc=s&amp;source=web&amp;cd=2&amp;cad=rja&amp;sqi=2&amp;ved=0CDoQFjAB&amp;;ei=njx1Ua3WF4nX0gGliYGgAw&amp;usg=AFQjCNFrz5AA4y9-rtdtYUl3GM-gs3Gf8A&amp;sig2=0qCHvBV5ASuyVjw81rAy6w&amp;bvm=bv.45512109,d.dmQ">influential paper</a> from Harvard econ professors <a class="hidden_link" href="">Carmen Reinhart</a> and Ken Rogoff that claimed countries with debt to GDP above 90% experience much lower growth.</em></p> <p><em>Herndon's paper showed an Excel coding flaw was partly to blame for the result. </em></p> <p><em>After the paper came out, <a href="">Reinhart and Rogoff admitted the error, but said that their core point remained valid. </a></em></p> <p><em>In this post, Herndon responds to their response, and says the core point does not remain sound, and that his work does not show that debt-to-GDP above a certain threshold makes a meaningful impact on growth.</em></p> <p class="p1">I would like to thank <a class="hidden_link" href="">Business Insider</a> for inviting me to reflect on the media coverage of the recent paper I co-authored, and to clear up any misconceptions I felt remained.</p> <p class="p1">Overall I think the media coverage has been very fair and supportive. I want to thank the many journalists and media outlets that helped facilitate discussion about this important policy issue, and who have shown a young graduate student, with little media experience, the utmost respect and courtesy.&nbsp;</p> <p class="p1">I want to address here what I feel are the major misinterpretations of&nbsp; our work, which will in part require engaging with the claim&rsquo;s made in Reinhart&rsquo;s and Rogoff&rsquo;s <a href="">response</a>. First, we categorically did not impute any negative motives to the authors; and second, our results are not consistent with and do not confirm their findings.&nbsp;</p> <p class="p1">I want to start by stating in the strongest possible terms that the purpose of our paper was not to imply that the selective omissions and unconventional weighting were, as R&amp;R asserted in response to us, &ldquo;intentionally used to bias the results.&rdquo; The purpose of our paper was strictly to ascertain the veracity of their results.&nbsp; We know nothing whatsoever about their motives, and did not speculate on this at all in our paper. Throughout our paper we assume that their errors were honest mistakes. We also have honest differences over the appropriate methods for calculating average GDP growth figures.</p> <p class="p1">We did use the terms &ldquo;selective&rdquo; and &ldquo;unconventional&rdquo; to describe the problems we saw with their paper, and we believe these are accurate characterizations.&nbsp; &ldquo;Selective&rdquo; is an appropriate description because the data were &ldquo;selected&rdquo; for exclusion. This does not imply that dishonest motives were at play, only that selection criterion needs to be clearly and transparently presented, so that their work is easily replicable.&nbsp;</p> <p class="p1">&ldquo;Unconventional&rdquo; is appropriate in describing their averaging technique.&nbsp; To use a baseball analogy, suppose we had a team with two players, and we want to find the team&rsquo;s overall batting average. The first player has 100 at bats, is successful one-fifth of the time, and therefore has a .200 batting average. The second player has a single at bat, but gets on base in this one at-bat, and so has a perfect 1.000. If we use the Reinhart-Rogoff method, we would equally weight the .200 and 1.000 batting averages, and thus find that the team has an overall .600 batting average. If we used conventional methods of calculating the team&rsquo;s batting average, it would more or less remain .200.&nbsp;</p> <p class="p1">The underlying problem is not that their method is necessarily wrong, but that it is particularly sensitive to outliers. This contributed to the &ldquo;perfect storm&rdquo; of errors whose combined effect caused the large decline in average GDP. If the only problem was the weighting, this would not have been sufficient to cause a drastic decline in average GDP growth.&nbsp; However, it was the combination of the weighting system with the exclusion &ndash; for whatever reason &ndash; that combined to cause the most significant fall in average GDP growth. There is nothing inherently wrong with their weighting system. However it is unusual and it is their obligation to be open and clear in explaining why they used this unusual methodology.</p> <p class="p1">Reinhart and Rogoff make the claim that their unconventional averaging method is easily observable in Table 1, which covers the larger time period 1800-2009, and that their calculations over this longer period are free from error.</p> <p class="p1"><img src=" t 1.png" border="0" alt="reinhart rogoff table 1" /></p> <p class="p1">Unfortunately, the spreadsheet error actually extends to this table as well, which makes it impossible to ascertain their method from the table. In terms of my own research process, early on in the project I actually asked the very question of whether they had averaged country mean GDP growth rates instead of including each year&rsquo;s growth experience for each country equally. In a meeting with one of my co-authors, we investigated this very possibility by simply averaging the means provided in the table (in Excel). The computed average GDP growth rate is 2.0, and the median is 2.2, which does not match the average reported by R&amp;R of 1.7 percent, and a median growth figure of 1.9 percent. At the time we thought that this implied that they did not use the country-averaging method.&nbsp; But it is now clear that the figures they reported resulted from their spreadsheet error.&nbsp;</p> <p class="p1">Additionally, in Table 1 from the AER publication there appears to be a transcription error. Spain&rsquo;s average GDP growth in Table 1 is recorded at 2.2 percent. However, in the spreadsheet the published average of 1.7 percent is calculated with Spain&rsquo;s average GDP growth at 2.8 percent. The correct average and median GDP growth from the spreadsheet are 2.1 percent and 2.3 percent respectively.</p> <p class="p1">Moreover, their spreadsheet error also extends to the entire rest of the summary page of their spreadsheet. Specifically, the error extends to both 1946-2009 and 1800-2009 time periods, mean and median growth, and mean and median inflation. For the entire 1946-2009 sample, rows 30-44 were used, and for the 1800-2009 sample, the rows 5-19 were used. The same countries, Australia, Austria, Belgium, Denmark and Canada, are removed in both samples.&nbsp; R&amp;R write that Table 1, &ldquo;does not have the same issues,&rdquo; but this is not accurate.&nbsp; Moreover, these computational errors also compromise other calculations on their spreadsheet.&nbsp;</p> <p class="p1">R&amp;R state that the results of our paper are consistent with, or confirm their&nbsp; finding&mdash;that, even with our criticisms of their work, we nevertheless still&nbsp; observe economic growth declining significantly when public debt relative to GDP rises above the 90 percent threshold. This is not our interpretation of our work, and indeed the purpose of the second half of our paper is to argue this point. In Table 4 we show that differences in average GDP growth in the categories 30-60 percent, 60-90 percent, and 90-120 percent cannot be statistically distinguished.</p> <p class="p1"><img src="" border="0" alt="herndon ash table 4" width="620" /></p> <p class="p1">In Table 5 we refute their claim that this relationship applies to a wide range of times and places by showing that it weakens as we move forward in time.</p> <p class="p1"><img src="" border="0" alt="herndon table 5" width="620" /></p> <p class="p1">Indeed, in the most recent period of 2000-2009, which in almost all cases will be the most relevant set of experiences with respect to current policy debates, average GDP growth when public debt is above 90 percent of GDP is higher than when the public debt/GDP ratio&nbsp; is between 60 and 90 percent.&nbsp; &nbsp; The findings in our paper are clearly not consistent with the notion that we consistently observe a sharp fall-off in economic growth when the public debt/GDP ratio exceeds 90 percent. &nbsp; As for the misconceptions concerning causality, I encourage people to <a href="">read the contribution by my professor Arin Dube.</a> His treatment of the topic is highly readable and offers strong evidence that causality runs from slow growth to high debt.</p> <p class="p1">There is not one word in our paper which suggests that a high level of government indebtedness is never a problem.&nbsp; It would be absurd to think that governments never have to worry about their level of indebtedness.&nbsp; The aim of our paper was much more narrowly focused.&nbsp; We show that, contrary to R&amp;R, there is no definitive threshold for the public debt/GDP ratio, beyond which countries will invariably suffer a major decline in GDP growth. The implication for policy is that, under particular circumstances, public debt can play a key role in overcoming a recession. The current historical moment, with historically high rates of mass unemployment in both the U.S. and Europe &nbsp; and with interest rates on U.S. Treasury bonds at historic lows, &nbsp; is precisely the set of circumstances under which we would expect public borrowing to have large positive effects, with comparably fewer costs. Moreover, it is precisely the set of circumstances under which we expect austerity to have substantial negative effects.&nbsp;</p> <p class="p1"><a href=""><em>Click here to read Herndon's full paper &gt;</em></a></p> <h2><strong>Now Watch:</strong> Everything You Need To Know About Chained CPI, The President's Stealth Cut To Social Security<br /><br /></h2> <script src="" type="text/javascript"></script> <div id="ooyalaplayer" style="width: 618px; height: 347px;">&nbsp;</div> <script type="text/javascript">// <![CDATA[ OO.ready(function() { OO.Player.create('ooyalaplayer', 's2NXMwYjqVlE2W-zumbNa54FSaLvNPes'); }); // ]]></script> <noscript>&amp;amp;lt;div&amp;amp;gt;Please enable Javascript to watch this video&amp;amp;lt;/div&amp;amp;gt;</noscript><p><a href="">Join the conversation about this story &#187;</a></p> Austerity Is A Consequence — Not A Punishment Sat, 20 Apr 2013 08:04:00 -0400 John Mauldin <div style="line-height: 19px; text-align: left; font-size: 16px; font-family: Arial;"> <div style="margin: 0;"> <p><a href="">The Bang! Moment</a><br /> <a href="">The Purpose of Debt</a><br /> <a href="">Austerity Is a Consequence, Not a Punishment</a><br /> <a href="">San Francisco, Carlsbad, Tulsa, Nashville, and Brussels</a></p> </div> <p>Two seemingly different questions and comments from readers and friends crossed my path the last few days, but I saw a definite connection between them. The first question was, Why do we pursue austerity when it seems not to work? And then many readers wrote to ask this week, What do I think about the real problems that are surfacing in the Rogoff and Reinhart assertion that debt above a ratio of 90% debt to GDP seems to slow economic growth by 1% (especially since I have quoted that data more than a few times)? We&rsquo;ll deal with each question separately and then see if we can connect the dots.</p> <p>The first question comes from correspondence I have had with Ms. Aga Barberini, who works in the investment world in Milan, Italy. She came there from Poland some 20 years ago. The first part of her note contains the question on austerity, but I&rsquo;ll pass along more of her letter, as I think it will give us all some insight into the seeming chaos that voters are facing in choosing a path for Italy. (And I hope my editors leave some of the charming grammar in her letter. You can almost hear the musical tones of her Italian English.)</p> <p style="margin-left: .5in;">I am worried for Italy, too. When I came here 20 years ago Italy was beautiful and rich; it was very good for a girl from Eastern Europe. Nowadays a lot of Italians go to Poland and settle down.</p> <p style="margin-left: .5in;">I guess it&rsquo;s going to get worse, the austerity will be tighter. Please tell me why should we go ahead with austerity when IMF last month came out&nbsp; saying that for every point of tax lifting in Italy we lose 2.5 points of GDP? First they said that the tax lifting would produce only 0.5 points of GDP slip, now they say they were wrong.</p> <p style="margin-left: .5in;">The political chaos is lasting. My husband says, why don't we vote for the comedian in June (as it is almost sure we are going to vote again soon)? Sure, Grillo is right in a lot of things and would clean the politics a lot. (By the way, did you know that the oldest bank in the world, <a href="" target="_blank">Monte dei Paschi di Siena</a>&rsquo;s mess is reaching 20 billion euros? They took away the money doing ... the bank transfers ;-) The Banka d'Italia didn't see; CONSOB, the Italian <a class="hidden_link" href="">SEC</a>, didn't see...). But how can a serious person vote for the comedian?</p> <p style="margin-left: .5in;">But I say sometimes the one who is good for the revolution isn't necessarily good to rule the country.&nbsp; Do you remember the guy called Lech Walesa? Thanks to him the communism [in Poland] was fallen &ndash; we all agree. Polish people were so thankful to him that we appointed him for the first democratic president. Than we found that he didn't have enough background to rule the country and enough culture to represent us on the international stage.</p> <p style="margin-left: .5in;">I will vote Berlusconi again. I can't stand communists even if they call themselves &ldquo;the left.&rdquo;</p> <p>(Sidebar:&nbsp; I was in Siena last summer and visited the ancestral home of the bank mentioned above, the world&rsquo;s oldest, founded in 1472. I marveled that any bank could last so long. At the <a>Palio</a> <cite>last summer we met one of the senior managers of the bank.</cite> It turns out that it was local politicians who ran the board of the bank, and now the authorities are saying management hid the problems from them.)</p> <p>So let me try to answer you, Aga.</p> <p>Austerity has come to have a rather bad name of late. The complaint is that it just doesn&rsquo;t work. Which is somewhat like complaining that the roof is leaking because someone else hassn&rsquo;t fixed it. If by &ldquo;working&rdquo; we mean that austerity is supposed to produce growth, then of course it doesn&rsquo;t work. By definition, austerity means you are reducing a fiscal deficit, and doing so will reduce growth in the short term. That begs the question, why would you want to do that? Don&rsquo;t we want growth? Let&rsquo;s look at why a country might need to endure austerity.</p> <p>&ldquo;Austerity&rdquo; is now the name we give to the situation where a government has to limit its spending during an economic downturn or recession. The governments of the developed world amassed huge sovereign debts in the course of what is known as the Debt Supercycle. As interest rates fell, borrowing to finance consumption and spending became easy. But now that decades-long supercycle has ended.</p> <p>One way of looking at the problem of swollen sovereign debt is to tsay that it goes back to Keynes (although one cannot actually blame the current problems on his economic theory). Keynes argued (roughly) that when there is a normal business-cycle recession a government should spend money to counterbalance the private-economy slowdown. That means that the government should borrow money and run fiscal deficits to help boost spending and the economy. According to his theory, this would make the recession not as deep and help bring the economy back to recovery sooner.</p> <p>This was tried after World War II in numerous countries in the developed world, and it seemed to work. "We are all Keynesians now" is a famous phrase uttered by Milton Friedman and attributed to US President Richard Nixon. It is popularly associated with the reluctant embrace of Keynesian economics in a time of financial crisis, by individuals such as Nixon, who had formerly favored less interventionist policies. (The phrase was first attributed to Milton Friedman in the December 31, 1965, edition of <em>Time</em> magazine. In the February 4, 1966, edition, Friedman wrote a letter clarifying that his original statement was, "In one sense, we are all Keynesians now; in another, nobody is any longer a Keynesian.") (<a href="" target="_blank">Wikipedia</a>)</p> <p>The problem that arose was that most countries rarely followed through on the second part of Keynes&rsquo;s prescription, which was to pay back the debt when times were good. Rather, the debt just continued to accumulate. But, because interest rates were dropping, the size and cost of the debt became less of an issue.</p> <br /> <p><a name="13e2743d7faeebd8_bang"></a><strong>The <em>Bang!</em> Moment</strong></p> <p>And, as Rogoff and Reinhart showed through their massive data collection and work on sovereign debt crises, published in <a href="" target="_blank"><em>This Time Is Different</em></a> and elsewhere, debt is not a problem until it becomes one. And then it reaches a critical mass and you have what they called the <strong><em>Bang!</em></strong> moment.</p> <p>I want to review some of their work, which will help us understand the reasons for austerity, but first let&rsquo;s deal with the controversy of the moment. There has been some considerable debate this week among economists about a paper Rogoff and Reinhart published <em>after</em> they wrote their book. Recent detailed work suggests the analysis in that paper is flawed and that there are actual programming errors in their spreadsheets. My inbox almost exploded the last two days as friends and colleagues sent me links to multiple sources talking about the problems with Rogoff and Reinhart&rsquo;s work and asked for my thoughts. Given that I find <em>This Time Is Different</em> one of the more important books of the last decade, let me provide some context.</p> <p>In 2010, economists <a class="hidden_link" href="">Carmen Reinhart</a> and <a class="hidden_link" href="">Kenneth Rogoff</a> released a paper, <a href="" target="_blank">"Growth in a Time of Debt."</a>&nbsp;Their main result was that &ldquo;&hellip; median growth rates for countries with public debt over 90 percent of GDP are roughly one percent lower than otherwise; average (mean) growth rates are several percent lower." The work suggested that countries with debt-to-GDP ratios above 90 percent have a slightly negative average growth rate.</p> <p>This has been one of the most cited stats&nbsp;in the public debate during the Great Recession. <a class="hidden_link" href="">Paul Ryan</a>'s Path to Prosperity budget states that their study "&hellip; found conclusive empirical evidence that [debt] exceeding 90 percent of the economy has a significant negative effect on economic growth." The <em><a class="hidden_link" href="">Washington Post</a></em> editorial board takes the R&amp;R conclusion as an economic consensus view, <a href="" target="_blank">stating that</a> "&hellip; debt-to-GDP could keep rising &ndash; and stick dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth."&nbsp;(from the Next New Deal site and many other links sent to me)</p> <p>Next New Deal (<a href="" target="_blank"></a>) had this analysis:</p> <p style="margin-left: .5in;">In a new paper, <a href="" target="_blank">"Does High Public Debt Consistently Stifle Economic Growth? A Critique of Reinhart and Rogoff,"</a>&nbsp;Thomas Herndon, Michael Ash, and Robert Pollin of the University of Massachusetts, Amherst successfully replicate the results. After trying to replicate the Reinhart-Rogoff results and failing, they reached out to Reinhart and Rogoff, and they were willing to share their data spreadhseet. This allowed Herndon et al. to see how how Reinhart and Rogoff's data was constructed.</p> <p style="margin-left: .5in;">They find that three main issues stand out. First, Reinhart and Rogoff selectively exclude years of high debt and average growth. Second, they use a debatable method to weight the countries. Third, there also appears to be a coding error that excludes high-debt and average-growth countries. All three bias in favor of their result, and without them you don't get their controversial result.</p> <p style="margin-left: .5in;">(You can get further details at <a href="" target="_blank"></a>. And there are other sources <a href="" target="_blank">here</a> and <a href="" target="_blank">here</a>.)</p> <p>I and many others who are concerned about the growth of debt quoted that research. As we approach that 90% level in the US, it has become a prominent feature in certain circles. But I want to emphasize that The Rogoff and Reinhart paper mentioned above is a later work than their book. To my knowledge, no one is disputing the work in their book. Their book, <em>This Time Is Different,</em> is basically just an analysis of their very large and masterful accumulation of data about sovereign debt crises.</p> <p>For the last two weeks I have talked about economists and their use of data. I pointed out that inflation as measured by the CPI is an average for the country and not reflective of any one person&rsquo;s actual experience.</p> <p>Something similar can be said about the later work of Rogoff and Reinhart. Yes, there was an unfortunate formula in one cell of their rather complex spreadsheet; but more importantly, they made assumptions about what is important and what is not in creating their analysis, and the assumptions in their model gave one set of results. If you make different assumptions, you get other results that show that 90% is not all that bad. Just as economists argue about how we should compute inflation, there will now be arguments about what the debt-to-GDP numbers really mean. I am willing to bet that by this time next year we will see several studies, all arriving at different conclusions.</p> <p>But in any case, whether in their original work or in the later paper, R&amp;R describe a problem with excessive debt that is true <em>on average.</em> Actual experience shows that in some countries debt will create a problem at quite low levels, while Japan climbs toward 250% debt to GDP (and will get there all too soon) and hardly anyone blinks. Different pokes for different folks.</p> <p>I&rsquo;m going to toss in a quick note as I sit here in Hong Kong waiting for my next plane. I read the <em>Financial Times</em> while on the way up here from Singapore. There were several articles that seemed to rejoice in the fact that Rogoff and Reinhart&rsquo;s later paper has some flaws. They jumped on those errors to discredit the whole idea of austerity, the association between too much debt and a lack of growth, and the need to bring one&rsquo;s fiscal house into order. Why pursue austerity when it does not lead to growth, which everyone knows is the only real way to deal with debt?</p> <p>You can almost hear the critics wanting to dismiss Rogoff and Reinhart&rsquo;s entire book, which clearly establishes the link between excessive debt and sovereign debt crises &ndash; a pattern that has played out some 266 times over the last few centuries, if I remember correctly. The point is that there is no magic number that says &ldquo;This far and no farther.&rdquo; There is a mythical line where confidence and trust is lost, but no one knows where that line of demarcation is until it is crossed. And right up until the last minute, there are always those who look for ways to add more debt, who assure us, &ldquo;This time is different.&rdquo; But it never is. A country <em>can</em> restore its fiscal house to order, pay back its debt, and grow its way out of the problem over time; there are numerous examples. But continuing to grow that debt-to-GDP number is to court a disaster that looms right in front of you.</p> <p>If politicians want to keep the borrow-and-spend party going &ldquo;just one more election cycle&rdquo; and if no one takes away the punchbowl, the <strong><em>Bang!</em></strong> moment will most certainly arrive. That is the clear lesson of history. It is almost irrelevant whether that number is 90% or 120% or 80%. It will be a different number for each country, depending on the confidence that investors have in the ability of a country to pay back its debt. Investors in sovereign debt are almost by definition the most risk-averse investors there are. You do not invest in a country&rsquo;s debt to increase your risk exposure; you expect to get paid. There are other factors at play in determining the critical threshold, too: What was the purpose of the debt? How fast is the economy growing?</p> <p>Can Italy, beset by recession, high unemployment, and a political crisis, grow its debt-to-GDP to Japan&rsquo;s 240% level? I think any serious observer would say no. Can it get to 130%? 140%? Maybe. We will not know until it&rsquo;s too late whether Italy or any other country (Spain, Japan, France, or the US) has more debt than the market is willing to absorb. But that is a line any politician should want to avoid crossing.</p> <p>To cobble together an understanding of why Italy needs to deal with austerity &ndash; and to give Aga a good answer &ndash; we first need to revisit something I wrote in my own book, <em>Endgame.</em> One of the most important sections of <em>Endgame</em> is a chapter in which I review (and compare with other research) <em>This Time is Different</em> and include part of an interview I did with Rogoff and Reinhart. This chapter turned into a real economic epiphany for me, because the R&amp;R data confirms other research about how things seem to go along swimmingly, and then the end comes all at once &ndash; the<strong><em> Bang! </em></strong>moment. Let&rsquo;s review a few paragraphs from my book, starting with a paragraph from the interview I did:</p> <p style="margin-left: .5in;">KENNETH ROGOFF: It&rsquo;s external debt that you owe to foreigners that is particularly an issue. Where the private debt so often, especially for emerging markets, but it could well happen in Europe today, where a lot of the private debt ends up getting assumed by the government, and you say, but the government doesn&rsquo;t guarantee private debts, well no they don&rsquo;t. We didn&rsquo;t guarantee all the financial debt either before it happened, yet we do see that. I remember when I was first working on the 1980&rsquo; Latin Debt Crisis and piecing together the data there on what was happening to public debt and what was happening to private debt, and I said, gosh the private debt is just shrinking and shrinking, isn&rsquo;t that interesting. Then I found out that it was being &ldquo;guaranteed&rdquo; by the public sector, who were in fact assuming the debts to make it easier to default on.</p> <p style="margin-left: .5in;">Now back to the book [quoting Rogoff and Reinhart]:</p> <p style="margin-left: 1.0in;">If there is one common theme to the vast range of crises we consider in this book, it is that excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom. Infusions of cash can make a government look like it is providing greater growth to its economy than it really is.</p> <p style="margin-left: 1.0in;">Private sector borrowing binges can inflate housing and stock prices far beyond their long-run sustainable levels, and make banks seem more stable and profitable than they really are. Such large-scale debt buildups pose risks because they make an economy vulnerable to crises of confidence, particularly when debt is short-term and needs to be constantly refinanced. Debt-fueled booms all too often provide false affirmation of a government&rsquo;s policies, a financial institution&rsquo;s ability to make outsized profits, or a country&rsquo;s standard of living. Most of these booms end badly. Of course, debt instruments are crucial to all economies, ancient and modern, but balancing the risk and opportunities of debt is always a challenge, a challenge policy makers, investors, and ordinary citizens must never forget.</p> <p>And the following is key. Read it twice (at least!):</p> <p style="margin-left: 1.0in;">Perhaps more than anything else, failure to recognize the precariousness and fickleness of confidence &ndash; especially in cases in which large short-term debts need to be rolled over continuously &ndash; is the key factor that gives rise to the this-time-is-different syndrome. Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when <em>bang!</em> &ndash; confidence collapses, lenders disappear, and a crisis hits.</p> <p style="margin-left: 1.0in;">Economic theory tells us that it is precisely the fickle nature of confidence, including its dependence on the public&rsquo;s expectation of future events, which makes it so difficult to predict the timing of debt crises. High debt levels lead, in many mathematical economics models, to &ldquo;multiple equilibria&rdquo; in which the debt level might be sustained &ndash; or might not be. Economists do not have a terribly good idea of what kinds of events shift confidence and of how to concretely assess confidence vulnerability. <strong>What one does see, again and again, in the history of financial crises is that when an accident is waiting to happen, it eventually does.</strong> When countries become too deeply indebted, they are headed for trouble. When debt-fueled asset price explosions seem too good to be true, they probably are. But the exact timing can be very difficult to guess, and a crisis that seems imminent can sometimes take years to ignite.</p> <p style="margin-left: 40.5pt;">How confident was the world in October of 2006? John was writing that there would be a recession, a subprime crisis, and a credit crisis in our future. He was on Larry Kudlow&rsquo;s show with <a class="hidden_link" href="">Nouriel Roubini</a>, and Larry and John Rutledge were giving him a hard time about his so-called &ldquo;doom and gloom.&rdquo; &ldquo;If there is going to be a recession you should get out of the stock market,&rdquo; was John&rsquo;s call. He was a tad early, as the market proceeded to go up another 20% over the next 8 months. And then the crash came.</p> <p>But that&rsquo;s the point. There is no way to determine when the crisis comes.</p> <p>As Reinhart and Rogoff wrote:</p> <p style="margin-left: 1.0in;">Highly indebted governments, banks, or corporations can seem to be merrily rolling along for an extended period, when <strong>bang!</strong> &ndash; confidence collapses, lenders disappear, and a crisis hits.</p> <p style="margin-left: .5in;"><strong><em>Bang!</em></strong> is the right word. It is the nature of human beings to assume that the current trend will work itself out, that things can&rsquo;t really be that bad. The trend is your friend &hellip; until it ends. Look at the bond markets only a year and then just a few months before World War I. There was no sign of an impending war. Everyone &ldquo;knew&rdquo; that cooler heads would prevail.</p> <p style="margin-left: .5in;">We can look back now and see where we have made mistakes in the current crisis. We actually believed that this time was different, that we had better financial instruments, smarter regulators, and were so, well, modern. Times were different. We knew how to deal with leverage. Borrowing against your home was a good thing. Housing values would always go up. Etc.</p> <p style="margin-left: .5in;">Until they didn&rsquo;t, and then it was too late. What were we thinking? Of course, we were thinking in accordance with our oh-so-human natures. It is all so predictable, except for the exact moment when the crisis hits. (And during the run-up we get all those wonderful quotes from market actors, which then come back to haunt them.)</p> <p><a name="13e2743d7faeebd8_purpose"></a><strong>The Purpose of Debt</strong></p> <p>Countries and governments, small and large, can go into debt for numerous reasons. As noted above, Keynes advocated going into debt during business contractions.&nbsp; But there are different types of debt.</p> <p>There is debt that is used to build productive assets such as roads, airports, bridges, schools, and civic centers.</p> <p>Then there is debt that is used for current consumption. When debt creates assets, future generations at least get some benefit when they have to participate in paying the loan back. In the case of current consumption, they get none. In essence, debt applied to consumption is spending today rather than spending in the future. You are borrowing money to spend on goods and services in the &ldquo;now,&rdquo; with the promise to pay for that consumption later.</p> <p>Next week, if all goes right, I am going to borrow money to buy two apartments in a high-rise in Dallas that will become, after we do a little remodeling, my future home. I will get an asset that I hope to pay off in about ten years. If I am lucky, that asset will then be worth more than I paid for it.</p> <p>That is different from borrowing money to go on a vacation or to buy food or other goods that will have no future value.</p> <p><a name="13e2743d7faeebd8_austerity"></a><strong>Austerity Is a Consequence, Not a Punishment</strong></p> <p>But borrowing against the futureis what Italy has essentially done, Aga. Just like other countries all over the world, Italy borrowed for consumption and ran up a rather large debt. And then the crisis came, and lenders were not as willing to provide Italy money at low rates. That is the nature of investors who buy government bonds: if they perceive higher risk, they want higher rates.</p> <p>The crisis arrived, and Italy lost cheap access to the bond market. The ECB had to step in and begin to buy bonds to lower their rates. But Italy had to promise to lower its deficits, and the way to do that is called austerity.</p> <p>Italy is in a currency union called the Eurozone. A currency union cannot allow its members to run up debts beyond what the market is willing to finance, or the whole currency union will collapse. The central bank (in this case the ECB) can only print so much money before inflation and valuation becomes an issue. If the ECB allows Italy to run whatever debt it wants to, then it must allow everyone else the same privilege.</p> <p>Eurozone officials may elect to help a smaller state like Greece paper over some of its problems, but at the end of the day countries must be able to handle their own debts you are going to keep your currency union up and running.</p> <p>Italy must deal with austerity because if they don&rsquo;t they will lose access to the bond market. They ran up a huge debt and now must figure out how to pay it back. They borrowed money to spend, on the pledge that future generations would pay for it. Unfortunately, the future is now.</p> <p>Yes, Germany and other countries could lend the Italians money, but they have their own problems. Egan Jones, the only truly independent rating agency, downgraded Germany this week. The Dutch too are having &ldquo;issues,&rdquo; as my kids would say. Europe in general seems to be slipping into recession.</p> <p>Some would argue that the ECB should just fire up the presses and print money, as Japan is going to do. Outright monetization. But that approach is highly problematic. Why should Finland want to see that happen if they are not also running large deficits? What about countries with lower debt ratios? The documents everyone signed when they joined the euro dictated that each country would be responsible for its own debt and that the ECB would not monetize debt.</p> <p>It is one thing for a country to fall on hard times and for its fellow currency-union members to agree to help, but it is another thing to make that help open-ended. Italy has come a long way toward getting back to a sustainable fiscal situation in the last few years. I know it has been hard. I have always maintained that Italy has its own fate in its own hands. Aga, if you just cut the number of cars and drivers you provide to every small-time politician, you could eliminate about 20% of your deficit. Everyone in Italy knows there is a lot of waste and corruption. That is why a comedian like Grillo can get almost 25% of the vote!</p> <p>The neo-Keynesians are right about this. In the short term, austerity will result in less growth. All but the mathematically challenged will agree with that. The scholarly literature seems to suggest that the short term is about 4-5 quarters, but that estimate is based on averages for a number of countries. Whether the actual interval is longer or shorter, it means that austerity will not produce growth in the short term. And if you have to cut 1-2% a year for several years, then that means little or no growth for those years. But the reason you have to do it is that you did not reduce your debt during the good times.</p> <p>Austerity is a consequence, not a punishment. A country loses access to cheap borrowed money as a consequence of running up too much debt and losing the confidence of lenders that the debt can be repaid. Lenders don&rsquo;t sit around in clubs and discuss how to &ldquo;punish&rdquo; a country by requiring austerity; they simply decide not to lend. Austerity is a result of a country&rsquo;s trying to entice lenders into believing that the country will change and make an effort to restore confidence.</p> <p>If Italy or any other country does not inspire confidence, then it must suffer the consequences when it loses access to the credit markets. Sure, the ECB or the IMF could lend you money, but their members are essentially investors as well. If there was unlimited money available, I can think of a country or two that might choose to run 10% and then 20% deficits. Why choose to tax when you can borrow and not repay? That is what politicians would all love to be able to promise.</p> <p>Argentina has pursued such a policy for almost a century. After multiple devaluations, their currency is now a fraction of one billionth of a cent of what it was 100 years ago. It is rather hard to operate as an investor or businessperson in such an environment. One of the reasons why Italians wanted to get into the euro, Aga, was to take away from your politicians the opportunity to run up large debts and then devalue. The lira was a byword for fleeting value, not a currency for long-term investment.</p> <p>You avoid austerity by not borrowing and consuming in the first place. After the market loses confidence, your choices are rather stark. If you default, then you are clearly out of the market for some time and suffer a very quick and deep recession as the government loses its ability to pay the salaries of government workers, provide healthcare, etc. If you elect to try to keep borrowing, you will have to implement a change in policy that will restore confidence &ndash; or find someone who will lend you money on better terms. Bluntly speaking, Germany and the EU might do that for Italy for a while but not unless they see the country actually controlling its deficit.</p> <p>The problem Italy now faces is that any government that is elected will have to make hard choices. Trying to reverse the austerity already agreed to will almost certainly result in loss of access to the bond market. Is it possible to develop a plan to cut spending at a slower pace? Sure, if you can get the rest of the EU to agree, at the same time that Spain, Portugal, Greece (and soon France) all want the same policies.</p> <p>If Italy were in control of its currency, might it make sense to print a little in the meantime, as the US, Great Britain, and Japan are doing? There is certainly a school of thought that says yes. But in a currency union of multiple countries that are all at different places on the economic journey, it is almost impossible to have a one-size-fits-all monetary policy. If the spigot is opened for Spain, Italy, et al., then Germany and others get inflation. That is a tough sell to German and Finnish voters (among others).</p> <p>You cannot force the rest of Europe to fund your deficits. You can negotiate with them to try to lessen the severity of the crisis, but there is no pain-free path ahead from where Italy is today, Aga. Your debt to GDP is 126% and rising. Without ECB support, you would have already lost access to the bond market. If you want to stay in the euro, you just have to deal with it.</p> <p>By the way, leaving the euro would be a VERY expensive option. The &ldquo;new lira&rdquo; would drop in value like a stone in Lake Como (Italy&rsquo;s deepest lake, for those not familiar with it, and one of the most beautiful lakes in the world). The cost of borrowing would skyrocket. The banks would be bankrupt overnight, requiring massive infusions of new currency that would further drive the lira down. You are frustrated with politicians now, Aga? What would it be like in the chaos of a depression? No one can manage well in such an environment. There would be no good choices, only a choice among disasters.</p> <p>Tiny Cyprus might choose in the next few weeks to exit the euro. With bank accounts frozen and the economy shutting down, they might feel they have no choice. Pay close attention to what happens; it will not be pretty. (As an aside, I am seriously tempted to go to Cyprus in late June, just to see the country firsthand. I will be in Europe between speaking gigs and have not yet decided where to go.)</p> <p>Italy must first of all choose a government. Cleaning up its political corruption and wasteful spending would be a good move, but even clean new politicians (if there is such a thing) will be faced with the same economic choices. Which, I should note, is roughly the same choice voters everywhere are faced with.</p> <p>The US is also approaching an uncomfortably high debt level. It was less than ten years ago that I was writing about what the US investment market would look like with no government debt. Yes, that possibility now seems a distant memory, but we were paying down the US debt that fast. And then came the Iraq war and larger deficits and a Republican Congress that got drunk on spending increases. Cheney told them that deficits don&rsquo;t matter, and they took it to heart. They doubled down on debt.</p> <p>If the US had entered the 2008 crisis with little or no debt, we could have spent that $1 trillion a year (or even several trillion and made Krugman and McCulley ecstatic), and no one would have really cared, from a total debt perspective. (We would have cared what the money was spent on). But we didn&rsquo;t. We squandered our surplus with new programs and spending. We borrowed and consumed. We wasted the good times by running up even more debt. And now we are close to paying a price.</p> <p>So, Aga, I don&rsquo;t have any easy words for you, but I do think Italy will pull through. I will visit your country again and again in the future, because I love Tuscany. But if you can take comfort in the company of others in similar situations, then there are a host of countries in the developed world that are going to have to face austerity in one form or another. That is just what happens when you reach the end of the Debt Supercycle. You are no longer left with merely difficult choices; they are more like very tough, bad, and disastrous. The worst choice is not dealing with the problems as soon as possible. I only hope my own country can make the difficult choices soon, before we too are faced with a crisis.</p> <p><a name="13e2743d7faeebd8_carlsbad"></a><strong>San Francisco, Carlsbad, Tulsa, Nashville, and Brussels</strong></p> <p>I finish this letter in the Singapore airport before I begin the rather long journey back to San Francisco, where I will rest and recover from jet lag at the Fairmont, one of my favorite hotels over the years. I speak in SF Monday morning before heading back to Dallas and my &ldquo;home hotel&rdquo; for a week. As noted above, I am buying a property as my primary residence and had to move out of my leased home early, so I&rsquo;m between places. As I have promised, when the deal for the new place gets done, I will write about my experience &ndash; the terms and negotiations and why I decided to buy now after all these years.</p> <p>This is a bit of a first for me, as I fly to Hong Kong to catch a plane to San Francisco. I will leave very early Friday morning and arrive late on Thursday night, crossing the international date line and arriving the &ldquo;day before&rdquo; I left, getting back the day I lost coming here.</p> <p>My Strategic Investment Conference is almost here. I am so looking forward to catching up with old friends. And I&rsquo;m just as excited about the exchange of views we will have on how to navigate the coming economic transitions. It seems everyone is on the &ldquo;short Japan&rdquo; side of the boat, including me. Is the boat listing, or is there still room for others? The debate on whether there is a bubble in the US bond market will be intense. Europe will be a hot topic. China, too. Will the US see 3% growth this year or fall further behind?</p> <p>And underlying our discussions will be an intense debate about the future of world growth and stability. I have purposely sought out thought leaders who steer independent courses. <a class="hidden_link" href="">Kyle Bass</a>, <a class="hidden_link" href="">Niall Ferguson</a>, Nouriel Roubini, Drs. Lacy Hunt and Gary Shilling, <a class="hidden_link" href="">David Rosenberg</a>, Charles and Louis Gave, Anatole Kaletsky, and Paul McCulley will all be there, among others. You can see the entire line-up for the May 1-3 conference (co-sponsored with Altegris Investments) <a href="" target="_blank">right here</a>, plus see highlights from last year&rsquo;s conference. There are still a few spots left, so I encourage you to register and join me and my friends as we think about our future. I think this is clearly the best investment conference of its kind this year, and I, along with Jon Sundt and his team at Altegris, am proud to be able to offer it to you.</p> <p>I continue to be impressed with Singapore. This city/country just works. I was able to take a few hours and tour their magnificent <a href="" target="_blank">Garden Domes</a>. The entire place is a marvel of human engineering and vision. I want to return for an extended visit and explore the amazing variety of plants and trees they have assembled from the world&rsquo;s cloud forests. They built an indoor, 115-foot-high waterfall system and replicated a cloud forest that you can walk through.</p> <p>Every time I come here there are new towering buildings and projects to reclaim land from the ocean. A sustainable future is a constant theme. Low taxes and a climate that is ideal for business have made this nation a center for commerce. Issues here and there? Sure, this is a human enterprise, and we come with built-in issues, but the problems are positive ones.</p> <p>They are calling my flight, so it is time to hit the send button. Charley &amp; Lisa Sweet, my long-suffering editors, will have extra work cleaning up this week&rsquo;s letter, but I don&rsquo;t think the plane will wait for me to go through it one more time.</p> <p>Have a great week, and come see me in Carlsbad.</p> Your ready to read on the way home analyst, <p><br /> <a class="hidden_link" href="">John Mauldin</a><br /> <a href="" target="_blank"></a></p> <p>Copyright 2013 John Mauldin. All Rights Reserved.</p> </div><p><a href="">Join the conversation about this story &#187;</a></p> JOURNAL EDITOR: The Famous Reinhart-Rogoff Debt Paper Did Not Go Through The Normal Refereeing Process Thu, 18 Apr 2013 09:35:00 -0400 Rob Wile <p class="p1"><img style="float:right;" src="" border="0" alt="carmen reinhart" /></p><p>How did Reinhart and Rogoff's now-infamous (ok, in economics circles) Excel error make it through a peer-reviewed journal?</p> <p class="p1">Answer: it wasn't a peer-reviewed journal &mdash; or at least, the edition their work appeared in wasn't.</p> <p class="p1">If you're new to this story, economic professors <a class="hidden_link" href="">Carmen Reinhart</a> and Ken Rogoff <a href="">published a paper</a> called "Growth in a Time of Debt" in the American Economic Review in 2010.</p> <p class="p1">They argued that high debt levels lead to low growth for countries, and at 90 percent debt levels, growth goes negative.</p> <p class="p1">Everyone wrote this up <a href="">at the time</a>, and the study has been repeatedly <a href="">cited by many deficit hawks.</a></p> <p class="p1">But many had misgivings about their findings, because lots of people had trouble re-creating them using the data Reinhart and Rogoff cited. (There was also a lot of skepticism about whether the relationship between high debt and low growth was causal)</p> <p class="p1">This week, a group of UMass economists published a paper saying they think they figured out, in part, why: the pair made an error in Excel that caused an entire subset of countries to be excluded from their data set. Finance blogger Mike Konczal was among the first to <a href="">notice the new paper.</a></p> <p class="p1">By Wednesday, Reinhart and Rogoff had <a href="">fully owned up</a> to the Excel oversight.&nbsp;</p> <p class="p1">Still, many are wondering how could it have gone unnoticed by the Review.</p> <p class="p1">We spoke with Virginia economics professor William R. Johnson, who edited the edition of the Review in which the paper first appeared.&nbsp;</p> <p class="p1">This annual edition, "Papers and Proceedings," differs from all others in that the papers come out of presentations made at the yearly meeting of the American Economic Association, he said.</p> <p class="p1">The papers are personally selected by the AEA's president-elect, in consultation with a &nbsp;committee.</p> <p class="p1">As a result of these unusual circumstances, Johnson said, the editing of "Proceeding" papers is less rigorous.</p> <p class="p1">"Normal peer review doesn't happen for these papers in the way of other issues of the AER."</p> <p class="p1">Here, is what he's talking about. From the introductory section of the edition:</p> <p class="p1"><img src="" border="0" alt="reinhart rogoff AER section" style="font-size: 15px; line-height: 1.5em;" /></p> <p class="p1">The data must still be replicable.</p> <p class="p1">But author prestige also comes into play, Johnson said, adding that that was true for all AER papers, not just the ones that appear in "Proceedings."&nbsp;</p> <p class="p1">And it's not necessarily the referees' responsibility to replicate the findings.</p> <p class="p1">"A lot of this is based on trust and people's reputations. The main mechanism for finding an error is after publication &mdash; someone tries to replicate it."</p> <p class="p1">It's possible that if the paper had gone through the normal refereeing process it would have been caught, Johnson said, but he's not confident.</p> <p class="p1">"If it's&nbsp;some internal data error, that's very hard to detected without replication," he said.</p> <p class="p1">Reinhart and Rogoff are standing by their conclusions, despite the error.</p> <p class="p1">But Arindrajit Dube (<a href="">via Felix Salmon</a>) has now <a href="">made a convincing case</a> that Reinhart and Rogoff have their causality reversed: rather than large debt driving slow growth, slow growth leads to large debts.</p> <p class="p1">This is probably not over. &nbsp;</p><p><strong>SEE ALSO:&nbsp;<a href="" >10 Countries Getting Slammed By Gold's Collapse ></a></strong></p> <p><a href="">Join the conversation about this story &#187;</a></p> How To Avoid The Excel Mistake That May Have Ruined The Global Economy Thu, 18 Apr 2013 07:50:00 -0400 Ritchie King <p>Whoops.</p> <p>An&nbsp;<a href="" title="Fixing this Excel error transforms high-debt countries from recession to growth">apparent error</a>&nbsp;in <a class="hidden_link" href="">Carmen Reinhart</a> and Kenneth Rogoff&rsquo;s&nbsp;<a href="">influential study</a>&nbsp;of government debt was the result of a simple mistake in <a class="hidden_link" href="">Microsoft</a> Excel that all spreadsheet jockeys fear.&nbsp;<a href="">Here it is</a>:</p> <p><img class="aligncenter size-full wp-image-75087" src=";h=419&amp;maxX=630&amp;maxY=623" border="0" alt="reinhart_rogoff_coding_error_0" width="630" height="623" /></p> <p>The cells outlined in dark blue&nbsp;contain the data points that Reinhart and Rogoff used to reach their conclusion that countries with a debt-to-GDP ratio of 90% or higher see average growth of -0.1%. As you can see,&nbsp;they failed to include Denmark, Canada, Belgium, Austria, and Australia. Including those countries&mdash;and making a few other adjustments&mdash;makes the growth rate 2.2%, according to new research.</p> <p><strong>The Excel mistake could have been avoided with a few simple tricks.</strong></p> <p>As an example, here&rsquo;s a spreadsheet with some figures from Apple&rsquo;s first quarter earnings this year:</p> <p><img class="aligncenter size-full wp-image-75123" src=";h=601" border="0" alt="Spreadsheet example - Apple's earnings" width="630" height="370" /></p> <p>The totals for revenue and expenses are calculated in the spreadsheet by adding up the numbers above those cells, and the value for net income is determined by subtracting total expenses from total revenue. Now, to make sure you typed in the formula for net income correctly, you can double-click on the cell: Not only will Excel reveal the formula, but it will also highlight all of the other cells involved.</p> <p><img class="aligncenter size-full wp-image-75272" src=";h=596" border="0" alt="Excel-with-double-click" width="630" height="367" /></p> <p>That basic technique will save you most of the time. But for complicated spreadsheets&mdash;if you have a cell with a formula that involves another cell with a different formula that involves yet another cell, and so on&mdash;you might want to trace your math back a few steps. Excel has a feature for that called &ldquo;trace precedents.&rdquo; (Below, I&rsquo;ve highlighted where you can find the &ldquo;trace precedents&rdquo; button on Microsoft Excel 2011 for Mac. If you use a PC, you can&nbsp;<a href="">find instructions here</a>.)</p> <p><img class="aligncenter size-full wp-image-75130" src=";h=162" border="0" alt="Trace-Precedents-highlighted" width="630" height="127" /></p> <p>If you highlight the cell with the net income value and then click &ldquo;trace precedents,&rdquo; two blue arrows will show you that the value depends on the total revenue and total expenses.</p> <p><img class="aligncenter size-full wp-image-75125" src=";h=600" border="0" alt="Excel spreadsheet example--precedents1" width="630" height="370" /></p> <p>Now, if you click the &ldquo;trace precedents&rdquo; button again, Excel will show you all of the cells that total revenue and total expenses depend on&mdash;in this case, all of the cells that ultimately affect the net income.</p> <p><img class="aligncenter size-full wp-image-75127" src=";h=599" border="0" alt="Excel spreadsheet example--precedent2" width="630" height="369" /></p> <p>Voil&agrave;! Never falsely justify global austerity measures again.</p> <p><strong>More from Quartz:</strong></p> <ul> <li><a href="">The mysterious survey that seems to be trying to find out whether Herbalife is a pyramid scheme</a></li> <li><a href="">India's nascent VC sector is facing a funding crunch</a></li> <li><a href="">20th Century Fox could soon be a subsidiary 21st Century Fox</a></li> </ul> <p><em><a href="" target="_blank">Click here</a>&nbsp;to sign up for the Quartz Daily Brief and start your day with the latest intelligence on the new global economy.</em></p><p><a href="">Join the conversation about this story &#187;</a></p> CARMEN REINHART: This Table Proves That Critics Of Our Debt Paper Actually Agree With Us Tue, 16 Apr 2013 16:32:00 -0400 Rob Wile <p>The big scandal in the world of economics today is a <a href="">new paper</a> attempting to refute claims put forth by Harvard econ professors&nbsp;<a class="hidden_link" href="">Carmen Reinhart</a> and Ken Rogoff that high levels of government debt result in slower growth.</p> <p><a href="">We already posted a response from Reinhart and Rogoff,</a> which essentially says that the critique is overblown, and that ultimately the critics corroborate the essence of the paper, which is that high debt does result in slower growth.</p> <p>We just got the following chart from Professor Carmen Reinhart, which further clarifies the &nbsp;statement she sent out with Ken Rogoff.</p> <p>It shows that Herndon, Ash et. al. (the other papers authors) got almost the exact same results as she and Rogoff did in their original paper, "Growth in a Time of Debt" &mdash; namely, that higher debt resulted in slower growth.</p> <p>The key thing to look at is the MEAN column under HAP (2013) which shows that as debt/GDP increases, mean GDP growth does decline.</p> <p>Still there's a difference. HAP's mean is 2.2%, whereas Reinhart and Rogoff's mean growth at the above 90% debt/GDP level is -0.1% for the years 1945-2009.</p> <p>Here is Reinhart's (brief) correspondence in full. We've also spotlighted the main sections in red:</p> <p style="padding-left: 30px;"><span>Further to our very preliminary reaction. I attach a table to help clarify the discussion.</span></p> <p><img src="" border="0" alt="reinhart table" width="620" /></p><p><strong>SEE ALSO:&nbsp;<a href="" >Reinhart and Rogoff fire back ---></a></strong></p> <p><a href="">Join the conversation about this story &#187;</a></p> REINHART AND ROGOFF FIRE BACK: Critique Of Our Work Still Confirms What We've Found On High US Debt Tue, 16 Apr 2013 15:48:00 -0400 Rob Wile <p>The world of economics is in meltdown mode over <a href="">a new paper</a> claiming professors Ken Rogoff and <a class="hidden_link" href="">Carmen Reinhart</a> were using improper data to make the case that large public debt is a terrible idea for economic growth.</p> <p>Their full response is below.</p> <p>Here are their main points:</p> <ul> <li>We were only arguing association, not causality.</li> <li>Herndon, Ash et. al. (the critique's authors) still ostensibly got the same growth results for given levels of debt.</li> <li>The authors argue that a 1% growth differential between countries of high and low debt levels is small. That is "utterly misleading."<span style="font-size: 15px; line-height: 1.5em;">&nbsp;&nbsp;</span></li> <li><span style="font-size: 15px; line-height: 1.5em;">They have published a separate paper, with Vincent Reinhart, that addresses some of the data the authors accuse Rogoff and Reinhart of leaving out.&nbsp;</span></li> </ul> <div><span style="line-height: 22.5px;">The statement does not explicitly take on a charge in Herndon, Ash that they mis-entered some of their data into Excel.&nbsp;</span></div> <p><span style="font-size: 15px; line-height: 1.5em;"></span></p> <hr /> <p><span style="font-size: 15px; line-height: 1.5em;">We literally&nbsp; just received this draft comment, and will review it in due course.&nbsp;&nbsp; On a cursory look, it seems that that Herndon Ash and Pollen also find lower growth when debt is over 90% (they find 0-30 debt/GDP , 4.2% growth;&nbsp;&nbsp; 30-60, 3.1 %;&nbsp; 60-90, 3.2%,;&nbsp; 90-120, 2.4% and over 120, 1.6%).&nbsp; These results are, in fact, of a similar order of magnitude to the&nbsp;</span><em style="font-size: 15px; line-height: 1.5em;">detailed country by country</em><span style="font-size: 15px; line-height: 1.5em;">&nbsp;results we present in table 1 of the&nbsp;</span><em style="font-size: 15px; line-height: 1.5em;">AER&nbsp;</em><span style="font-size: 15px; line-height: 1.5em;">paper, and to the median results in Figure 2.&nbsp; And they are similar to estimates in much of the large and growing&nbsp; literature,&nbsp; including our own attached August 2012&nbsp;</span><em style="font-size: 15px; line-height: 1.5em;">Journal of Economic Perspectives paper</em><span style="font-size: 15px; line-height: 1.5em;">&nbsp;(joint with Vincent Reinhart) .&nbsp; However, these strong similarities are not what these authors choose to emphasize.</span></p> <p><span style="font-size: 15px; line-height: 1.5em;">The&nbsp; 2012&nbsp;</span><em style="font-size: 15px; line-height: 1.5em;">JEP</em><span style="font-size: 15px; line-height: 1.5em;">&nbsp;paper largely anticipates and addresses any concerns about aggregation (the main bone of contention here), The&nbsp;</span><em style="font-size: 15px; line-height: 1.5em;">JEP</em><span style="font-size: 15px; line-height: 1.5em;">&nbsp;paper&nbsp; not only provides individual country averages (as we already featured in Table 1 of the 2010&nbsp;</span><em style="font-size: 15px; line-height: 1.5em;">AER&nbsp;</em><span style="font-size: 15px; line-height: 1.5em;">paper)&nbsp; but it goes further and provide episode by episode averages.&nbsp; Not surprisingly, the results are broadly similar to our original 2010 AER table 1 averages and to the median results that also figure prominently..&nbsp; It is hard to see how one can interpret these tables and individual country results as showing that public debt overhang over 90% is clearly benign.</span></p> <p>&nbsp;</p> <p>The JEP paper with Vincent Reinhart looks at all public debt overhang episodes for advanced countries in our database, dating back to 1800.&nbsp; The overall average result shows that public debt overhang episodes (over 90% GDP for five years or more) are associated with 1.2%&nbsp; lower growth as compared to&nbsp; growth when debt is under 90%.&nbsp; (We also include in our tables the small number of shorter episodes.)&nbsp; Note that because the historical public debt overhang episodes last an average of over 20 years, the cumulative effects of small growth differences are potentially quite large.&nbsp;&nbsp;<em>It is utterly misleading to speak of a 1% growth differential that lasts 10-25 years as small.<span style="text-decoration: underline;"></span><span style="text-decoration: underline;"></span></em></p> <p>By the way, we are very careful in all our papers to speak of &ldquo;association&rdquo; and not &ldquo;causality&rdquo; since of course our 2009 book&nbsp;&nbsp;<em>THIS TIME IS DIFFERENT</em>&nbsp;showed that debt explodes in the immediate aftermath of financial crises.&nbsp; This is why we restrict attention to longer debt overhang periods in the JEP paper., though as noted there are only a very limited number of short ones.&nbsp;&nbsp; Moreover, we have generally emphasized the 1% differential median result in all our discussions and subsequent writing, precisely to be understated and cautious , and also in recognition of the results in our core Table 1 (AER paper).<span style="text-decoration: underline;"></span><span style="text-decoration: underline;"></span></p> <p>Lastly, our 2012&nbsp;<em>JEP</em>&nbsp;paper cites papers from the BIS, IMF and OECD (among others) which virtually all find very similar conclusions to original findings, albeit with slight differences in threshold, and many nuances&nbsp; of alternative interpretation..&nbsp; These later papers, by they way,&nbsp; use a variety of methodologies for dealing with non-linearity and also for trying to determine causation.&nbsp; Of course much further research is needed as the data we developed and is being used in these studies is new.&nbsp; Nevertheless, the weight of the evidence to date &ndash;including this latest comment -- seems entirely consistent with our original interpretation of the data in our 2010 AER paper.</p><p><strong>SEE ALSO:&nbsp;<a href="" >Read the full critique of "Growth in a Time of Debt" ></a></strong></p> <p><a href="">Join the conversation about this story &#187;</a></p> Singling Out The Fed For Missing The Financial Crisis Is Ludicrous Mon, 04 Feb 2013 13:46:00 -0500 Kenneth Rogoff <p>Critics of the US Federal Reserve are having a field day with embarrassing revelations of its risk assessments on the eve of the financial crisis. By law, the Fed is required to publish the transcripts of its Federal Open Market Committee (FOMC) meetings with a five-year lag.</p> <p>While the full-blown crisis did not erupt until the collapse of Lehman Brothers in September 2008, it was clear by the summer of 2007 that something was very wrong in credit markets, which were starting to behave in all sorts of strange ways. Yet many Fed officials clearly failed to recognize the significance of what was unfolding. One governor opined that the Fed should regard it as a good thing that markets were starting to worry about subprime mortgages. Another argued that the summertime market stress would most likely be a hiccup.</p> <p>Various critics are seizing on such statements as evidence that the Fed is incompetent, and that its independence should be curtailed, or worse. This is nonsense. Yes, things could and should have been done better; but to single out Fed governors for missing the coming catastrophe is ludicrous.</p> <p>The Fed was hardly alone. In August 2007, few market participants, even those with access to mountains of information and a broad range of expert opinions, had a real clue as to what was going on. Certainly the US Congress was clueless; its members were still busy lobbying for the government-backed housing-mortgage agencies Fannie Mae and Freddie Mac, thereby digging the hole deeper.</p> <p>Nor did the International Monetary Fund have a shining moment. In April 2007, the IMF released its famous &ldquo;Valentine&rsquo;s Day&rdquo; World Economic Outlook, in which it declared that all of the problems in the United States and other advanced economies that it had been worrying about were overblown.</p> <p>Moreover, it is misleading to single out the most misguided comments by individual governors in the context of an active intellectual debate over policy. It is legitimate to criticize individual policymakers who exercised poor judgment, and they should have a mark on their record. But that does not impugn the whole FOMC, much less the entire institution.</p> <p>Central banks&rsquo; state-of-the-art macroeconomic models also failed miserably &ndash; to a degree that the economics profession has only now begun to acknowledge fully. Although the Fed assesses many approaches and indicators in making its decisions, there is no doubt that it was heavily influenced by mainstream academic thinking &ndash; including the so-called real business cycle models and New Keynesian models &ndash; which assumed that financial markets operate flawlessly. Indeed, the economics profession and the world&rsquo;s major central banks advertised the idea of the &ldquo;great moderation&rdquo; &ndash; the muting of macroeconomic volatility, owing partly to monetary authorities&rsquo; supposedly more scientific, model-based approach to policymaking.</p> <p>We now know that canonical macroeconomic models do not adequately allow for financial-market fragilities, and that fixing the models while retaining their tractability is a formidable task. Frankly, had the models at least allowed for the possibility of credit-market imperfections, the Fed might have paid more attention to credit-market indicators as a reflection of overall financial-market conditions, as central banks in emerging-market countries do.</p> <p>Last but not least, even if the Fed had better understood the risks, it would not have been easy for it to avert the crisis on its own. The effectiveness of interest-rate policy is limited, and many of the deepest problems were on the regulatory side.</p> <p>And calibrating a response was not easy. By late 2007, for example, the Fed and the US Treasury had most likely already seen at least one report arguing that only massive intervention to support subprime loans could forestall a catastrophe. The idea was to save the financial system from having to deal with safely dismantling the impossibly complex contractual edifices &ndash; which did not allow for the possibility of systemic collapse &ndash; that it had constructed.</p> <p>Such a bailout would have cost an estimated $500 billion or more, and the main beneficiaries would have included big financial firms. Was there any realistic chance that such a measure would have passed Congress before there was blood in the streets?</p> <p>Indeed, it was precisely this logic that me led to give a very dark forecast in a widely covered speech in Singapore on August 19, 2008, a month before Lehman Brothers failed. I argued that things would not get better until they got much worse, and that the collapse of one of the world&rsquo;s largest financial firms was imminent. My argument rested on my view that the global economy was entering a major recession, and I had the benefit of my quantitative work, with Carmen Reinhart, on the history of financial crises.</p> <p>I was not trying to be sensational in Singapore. I thought that what I was saying was completely obvious. Nevertheless, my prediction gained bold front-page headlines in many major newspapers throughout the world. It gained headlines, evidently, because it was still far from a consensus view, although concerns were mounting.</p> <p>Were concerns mounting at the Fed as well in the summer of 2008? We will have to wait until next year to find out. But, when we do, let us remember that hindsight is 20-20.</p><p><a href="">Join the conversation about this story &#187;</a></p> ROGOFF: Hopefully The Next Few Years Won't Be As Bad As The Last Few Wed, 23 Jan 2013 05:33:42 -0500 Henry Blodget <p><img style="float:right;" src="" border="0" alt="ken rogoff" /></p><p>Harvard professor <a class="hidden_link" href="">Kenneth Rogoff</a>, who made one of the most accurate economic predictions in history a few years ago, has issued a new outlook.</p> <p>Professor Rogoff, you might recall, co-wrote a landmark book about the aftermath of financial crises with his collaborator <a class="hidden_link" href="">Carmen Reinhart</a>.</p> <p>The book, "<a href="">This Time It's Different</a>," examined dozens of financial crises similar to the one the U.S. experienced in 2008-2009.</p> <p>Reinhart and Rogoff's conclusion after analyzing these crises was the the global economy would experience a long period of slow growth.</p> <p>And so it has.</p> <p>In the past several years, the US economy has grown at about 1%-2% per year, a far cry from the 3%-4% growth rates that had come to feel normal.</p> <p>So, what do Reinhart and Rogoff think will happen next?</p> <p>Professor Rogoff was getting a coffee this morning at the <a class="hidden_link" href="">Davos</a> conference at the same time that I was getting a tea.</p> <p>So I asked him.</p> <p>"Hopefully not as bad [as the last few years]," he said.</p> <p>He brought up the theme of this year's conference: "Resilient Dynamism."</p> <p>"I see the resilience," he said.&nbsp; "But not the dynamism."</p> <p>So, in Professor Rogoff's view, it sounds like we're in for another okay-but-kinda-crappy few years.</p><p><a href="">Join the conversation about this story &#187;</a></p> CHART: Inflation Since 1775 And How It Took Off In 1933 Sun, 06 Jan 2013 08:44:00 -0500 Sam Ro <p><img style="float:right;" src="" border="0" alt="declaration of independence" width="400" /></p><p>Yesterday at the American Economic Association's <a href="">2013 Annual Meeting</a>, <a href="" class="hidden_link">Carmen Reinhart</a> and Ken Rogoff offered a paper titled <a href=""><em><span class="paperTitle">Shifting Mandates: The Federal Reserve&rsquo;s First Centennial</span></em></a>.</p> <p>The paper included a cool chart of inflation since 1775.&nbsp; The authors argue that inflation didn't take off until the U.S. went off the gold standard in 1933.&nbsp;</p> <p>From the <a href="">paper</a>:</p> <p style="padding-left: 30px;">It is probable that in 1913, while financial panics were not uncommon, high inflation was still largely seen by the founders of the Fed as a relatively rare phenomenon associated with wars and their immediate aftermath. Figure 1 plots the US price level from 1775 (set equal to one) until 2012. In 1913 prices were only about 20 percent higher than in 1775 and around 40 percent lower than in 1813, during the War of 1812. Whatever the mandates of the Federal Reserve, it is clear that the evolution of the price level in the United States is dominated by the abandonment of the gold standard in 1933 and the adoption of fiat money subsequently.&nbsp;&nbsp; &nbsp;One hundred years after its creation, consumer prices are about 30 times higher than what they were in 1913. This pattern, in varying orders of magnitudes, repeats itself across nearly all countries.</p> <p><img src="" border="0" alt="inflation 1775" width="610" /></p><p><strong>SEE ALSO:&nbsp;<a href="" >Wall Street's Biggest Geniuses Reveal Their Favorite Charts Of 2012 ></a></strong></p> <p><a href="">Join the conversation about this story &#187;</a></p> Economists Reinhart And Rogoff Took A Huge Shot At Mitt Romney's Economists Today Tue, 16 Oct 2012 13:13:00 -0400 Rob Wile <p><img style="float:right;" src=";maxY=300" border="0" alt="carmen reinhart" width="400" height="300" /></p><p>Last night,&nbsp;<a href="" class="hidden_link">Carmen Reinhart</a> and Ken Rogoff <a href="">published a white paper</a> showing the recovery could have been a whole lot worse.</p> <p>They argue that the U.S. did not experience a normal crisis, but rather a "systemic financial" one.</p> <p>That's only happened four other times in our history:&nbsp;<span>1873, 1892, 1907, and 1929.</span></p> <p>So compared with those crises, our recovery looks pretty rosy:&nbsp;</p> <p><img src="" border="0" alt="reinhart rogoff chart" width="590" /></p> <p>Today in <a href="" class="hidden_link">Bloomberg</a>, the pair <a href="">double down</a> on their argument by taking issue with economists who've signed on to Mitt Romney's campaign and have argued our recovery is different, and worse:</p> <p style="padding-left: 30px;"><span>...a few op-ed writers have argued that, in fact, the U.S. is &ldquo;different&rdquo; and that international comparisons aren&rsquo;t relevant because of profound institutional differences from one country to another. Some of these&nbsp;</span>authors<span>, including&nbsp;</span>Kevin Hassett<span>,&nbsp;</span><a href="" class="hidden_link">Glenn Hubbard</a><span>&nbsp;and&nbsp;</span><a href="" class="hidden_link">John Taylor</a><span>&nbsp;-- who are&nbsp;</span>advisers<span>&nbsp;to the Republican presidential nominee,&nbsp;</span><a href="" class="hidden_link">Mitt Romney</a><span>&nbsp;-- as well as Michael Bordo, who supports the candidate, have stressed that the U.S. is also &ldquo;different&rdquo; in that its recoveries from recessions associated with financial crises have been rapid and strong.&nbsp;</span></p> <p style="padding-left: 30px;"><strong>we have to take issue with gross misinterpretations of the facts</strong>&nbsp;</p> <p>Since they're looking at the wrong kinds of benchmark crises, Team Romney ends up using the wrong metrics, they say. Instead of focusing on <span>years to return to normal growth, they've fixed on&nbsp;<span>rate of recovery</span></span>.</p> <p><span>But for post- World War II systemic crises around the world, i</span>t's taken about four and a half years to fully recover. In 14 Great Depression episodes around the world (including the U.S.) it took 10 years on average.&nbsp;</p> <p>Team Romney misses this point:</p> <p style="padding-left: 30px;">Taylor<span>, for example, appears to show the recovery from the Great Depression as the strongest in U.S. history, even though it took about a decade to reach the same level of per capita income as at its starting point in 1929.</span></p> <p>No doubt, this will likely come off to many as a partisan response to another partisan assertion.</p> <p>But it seems like it's impossible to avoid that kind of thing these days.</p> <p>(Via <a href="">FT Alphaville</a>)</p><p><a href="">Join the conversation about this story &#187;</a></p> More Proof That Bush, Paulson, Geithner, Bernanke, And Obama NAILED It In Dealing With The Financial Crisis Tue, 16 Oct 2012 05:45:00 -0400 Lucas Kawa <p><img style="float:right;" src=";maxY=303" border="0" alt="carmen reinhart" width="403" height="303" /></p><p><a href="" class="hidden_link">Carmen Reinhart</a> and <a href="" class="hidden_link">Kenneth Rogoff</a>, who wrote the book on the most recent financial crisis &ndash; <a href="" title="Amazon: This Time Is Different">&ldquo;This Time is Different&rdquo;</a> &ndash; released a white paper Sunday <a href="" title="This Time is Different, Again?">reviewing the economy since the financial crisis</a>.</p> <p>And overall, they had positive things to say about the U.S.</p> <p>"According to our (2009) metrics, the aftermath of the U.S. financial crisis has been quite typical of post-war systemic financial crises around the globe," they wrote.&nbsp; "If one really wants to focus just on United States systemic financial crises, <strong>then the recent recovery looks positively brisk</strong>."</p> <p>The authors highlight 1873, 1892, 1907, and 1929 as other systemic banking crises endured by the U.S. economy.</p> <p><img src="" border="0" alt="Real Per Capita GDP in Past Systemic Crises" width="622" height="473" /> <br />The chart above, provided in their research, shows that the recovery has been slightly better than in the past as measured by real GDP per capita levels.</p> <p>The two economists also demonstrate that the U.S. has seen a more significant improvement to real GDP per capita than other advanced economies that suffered a systemic banking crisis, as seen in the chart below. However, using this metric the U.S. has recovered less robustly than countries plagued by a borderline crisis&nbsp;&ndash; a less severe blow to a country&rsquo;s financial sector.</p> <p>&nbsp;<img src="" border="0" alt="Real Per Capita GDP in 2007 Systemic Crisis" width="609" height="445" /><br /><br /><a href="" class="hidden_link">Indeed</a>, the U.S. economic recovery has been sluggish compared to most recessions.&nbsp; But relative to recessions sparked by systemic crises, the recovery has been pretty remarkable.</p> <p>This is really a huge endorsement of the response that U.S. leaders took. George W. Bush, <a href="" class="hidden_link">Hank Paulson</a> (his Treasury secretary), <a href="" class="hidden_link">Ben Bernanke</a>, Barack Obama, and <a href="" class="hidden_link">Tim Geithner</a> have taken a lot of flack for how they handled the economic and financial crisis. People called on them to do all kinds of other things based on their pet ideas. But the economists' history seems clear now: Bailouts + easy money + fiscal stimulus is now the blueprint for future leaders.</p> <p>Download the whole paper at <a href=""></a>.</p> <p><strong>SEE ALSO: <a href="">FORGET GOLD: Here's Where Die-Hard Skeptics Are Storing Their Wealth &gt;</a></strong></p><p><a href="">Join the conversation about this story &#187;</a></p> ROGOFF: It's Strange That The Euro Has Been Rallying Fri, 27 Jul 2012 11:52:53 -0400 Max Nisen <p><img style="float:right;" src="" border="0" alt="Kenneth Rogoff" /></p><p>In a <a href="">wide ranging interview</a> with Tom Keene and Sarah Eisen Harvard Economics Professor Ken Rogoff made an interesting observation about <a href="">Mario Draghi's comments</a> yesterday.</p> <p>From <a href="">the interview:&nbsp;</a></p> <p style="padding-left: 30px;"><em>"It's kind of curious, if your talking about the value of the Euro, isn't it interesting that the head of the ECB comes in and says 'I'm going to do whatever it takes'. I have to say, in any other country when the central banker comes in and says that, the currency is going down, you think they're loosening monetary policy. <strong>But here people are so nervous about whether there's going to be a Euro that it actually goes up."</strong></em></p> <p>That comes in the context of his claim that the Eurozone is nowhere near out of the woods, and that it is unlikely that they'll be able to keep Greece in the common currency.&nbsp;</p> <p>The full discussion:&nbsp;</p> <script src=";video_pcode=oza2w6q8gX9WSkRx13bskffWIuyf&amp;embedCode=RmMTNpNTqqDPKC190V5xHR8SH0fJ6THF" type="text/javascript"></script> <p><strong>Don't miss: <a href="">The Best Advice From The Greatest Investors In History</a></strong></p><p><a href="">Join the conversation about this story &#187;</a></p>