Sunday, August 29, 2010

Oh, I thought I was gonna have to post a retraction

A little googlin' of the phrase "debt intolerance rogoff" turned up this link --

Oh!, I thought, They do look at domestic debt! As I write this, my post-of-the-day is Growth in a time of icebergs. As the post points out, Reinhart and Rogoff's Growth in a Time of Debt is grossly incomplete because it ignores domestic private debt. Now I was thinking I might have to retract that post. Oh, well.

So I read R&R's Scribd paper. Here's what I found.

From the Abstract --

1. "Comparatively little is known about sovereign default on domestic debt." Ah yes, sovereign default. Government debt. I got a little less concerned for my iceberg post.

2. "First, domestic debt is big—for the 64 countries for which we have long time series, domestic debt accounts for almost two-thirds of total public debt." Okay. R&R refer to "domestic debt" but they mean domestic public debt.

3. "Domestic debt (a significant portion of which is long term and non-indexed) is often much larger than the monetary base in the run-up to high-inflation episodes." Again, by "domestic debt" they mean "domestic public debt." I think it shows gall to omit the word "public," as if domestic private debt is of no consequence whatsoever. But that's not the point I want to make here. What R&R are saying is that government debt "is often [of] much larger [significance] than the monetary base in the run-up to high-inflation episodes." This is an important point. It suggests that government debt is in some ways fundamentally similar to the monetary base -- and private-sector debt is not. I have long had a vague notion that public debt is "special" or different from private debt because it is more money-like in ways I cannot yet identify. Reinhart and Rogoff's remark supports this notion.

From the Introduction --

4. "Historical data on domestic (internal) government debt has been ignored for so long that many observers have come to believe that the issuance boom of the early 2000s is something entirely new and different." Oh I'm grinnin' now. R&R are complaining that domestic debt is ignored. I sympathize. I have the same complaint. Their concern is over public debt and mine is about private debt. And my complaint about their work is justified. But I'm starting to see where they're coming from.

5. (A reiteration of point 3 above) "Although domestic debt is largely ignored in the vast empirical literature on high and hyperinflation, we find that there are many cases where the hidden overhang of domestic public debt was at least the same order of magnitude as base money, and sometimes a large multiple."

6. By page 4 of the Scribd paper, I get the feeling that R&R are so caught-up in their quest for data on public debt that they do indeed forget the larger significance of the larger private debt.

7. On page 6, R&R present their Figure 1 with the title Domestic Public Debt as a Share of Total Debt in an eye-catching font. However, two pages earlier they say "Figure 1 plots the share of domestic debt in total public debt." (Emphasis added.) I don't think their method is purposefully deceptive, but I do find it deceptive.

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