Book Review – “This Time Is Different” by Carmen Reinhart and Kenneth Rogoff

My latest read was “This Time Is Different” by Carmen Reinhart and Kenneth Rogoff.  The only thing I really need to say is that if you’re looking for the definitive overview of centuries upon centuries of financial crises worldwide, this is it.  Instead of going specifically into one crisis, they go into a broad overview of worldwide financial crises from the past eight centuries.  This is a truly remarkable effort they’ve undertaken.  I don’t want to steal their thunder, and I’ll thus keep the book review in fairly broad terms.  I will say, however, that the main theme of the book is exposing the foolishness of believing the title because it never is different (in this context).  We just think it is.

Before we dive into the content, I'll say that the tone and writing style are both engaging.  It has an academic feel to it, obviously, but it's not that dry academic feel we get so often in books like this.  They actually spruce it up.

I’d also point out that this book is the source of several key data points we often hear about, including how government debt/GDP ratios above 90% increase the probability of danger.  There are some critical nuances regarding this measure that they highlight. 

Part 1 lays the ground rules for the rest of the book.  Chapter 1 explores how they define crises in the book.  In Chapter 2, they introduce the concept of debt intolerance and a discussion of how/why some countries may be more vulnerable to crises stemming from high levels of debt than others.  Chapter 3 discusses their database and methodology.

Part 2 focuses on sovereign debt crises.  This is when a government defaults on debts owed to foreigners.  Chapter 4 is a more high-level, theoretical, even abstract, look at this event and addresses several key nuances, such as the question of illiquidity versus insolvency and what exactly constitutes a default (many alterations to the initial deal, such as extending the duration or reductions in rates or balance, could be considered forms of default).  The next chapter examines the mechanics of external default and the chapter after that explores the history of such incidents. 

I will, however, single out Chapter 5’s exploration of Newfoundland in the late 1920’s.  This is a riveting tale of how external default basically forced Newfoundland into Canada.  It was a historically significant event in that democracy and sovereignty literally took a back seat to debt.  Few Canadians are even aware of this story.  In some ways, this mirrors what we’re seeing today with Greece, as their sovereignty is taking a clear back seat to their debt.  This is the exact opposite of how Iceland handled its problems recently, but these are a whole other story.

Moving on, Part 3 takes us on a journey through the world of domestic default.  Here, the government defaults on debts it owes to domestic entities.  Like Part 2, they first focus on the more theoretical aspects of the matter in Chapter 7 before moving onto a look at the mechanics and dynamics in Chapter 8 (which also explores the history of these events).  Unlike before, the last chapter focuses on the question of whether domestic or external default is worse and seniority in determining who is higher on the ladder for loss recovery.

Part 4 gets really meaty as it covers other types of crises.  Chapter 10 explores banking crises and shows that, while a nation may be able to graduate from the risks of sovereign external and domestic default, nobody has yet “outgrown” banking crises.  In banking crises, it’s not an issue of whether the government will default somehow, but some kind of issue with the banking system.  The key point is to differentiate between the government and the banking sector.

Chapter 11 explores a type of stealth default called currency debasement, in which a government defaults on its debt by weakening its currency.  In the days of yore, when we had metal-based currencies, the governments would just reduce the metal concentration and reissue currency, but the nominal debt remains the same.  More recently, central banks would fire up the figurative printing presses, but even that’s outdated because they just electronically increase the banks’ reserves today.  Chapter 12 takes currency debasement one step further and looks at inflation.  I’ve discussed many of these dynamics previously.

Part 5 is where they try to apply all this knowledge to the present day.  They examine our recent global crisis, which they called the Second Great Contraction (SGC) and is also commonly called the Great Recession, through the lens of history.  In Chapter 13, they explore the run-up to the SGC.  Chapter 14 then looks at the aftermath of previous global crises to give us a glimpse of where we may go with the SGC.  They follow in Chapter 15 with an exploration of contagion, which looks at what factors are involved in containing a crisis to just one nation or region versus a global issue.  Chapter 16 is the pinnacle of the book.  Here, they attempt to create a crisis index.

Part 6 attempts to string it all together.  Chapter 17 asks the question of what we should take away from history and the SGC for the future. 

This is a must-read for anybody who wants to understand financial crises on a broader scale.  It won’t tell you much about any one specific crisis (aside from the most recent one), but it will show you the commonalities underlying them.  Truth be told, I cannot recommend this book highly enough.