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Transcription of interview with Kenneth Rogoff on October 15, 2012.
Douglas Goldstein, CFPÆ, Financial Planner & Investment Advisor
Kenneth Rogoff is a Professor of Economics at Harvard and former chief economist at the
International Monetary Fund.
He is also an avid chess player.
Douglas Goldstein, financial planner & investment advisor, interviewed Rogoff on Arutz Sheva
Radio.
Douglas Goldstein: Iíd like to talk about your recent book called This Time is Different:
Eight Centuries of Financial Folly and the title suggests itís really just a play on
the fact that this time isnít any different when we see the growth and the crash of any
economy.
Rich and poor countries have been lending and borrowing and crashing and recovering
and thereís nothing new under the sun.
If thatís true, is there something that we could look at from history right now and find
a really good investment?
Kenneth Rogoff: I think you can learn a lot from history about what the trajectory of
financial crisis looks like because thereís an amazing commonality over time, over history,
over legal systems, over political systems and economists havenít really done that very
much in recent years because thereís been so much interest in technical and mathematical
models and looking at historical data is very rewarding.
There are certainly investors over at the financial crisis who have looked at historical
data and claimed to have done very well by it but I canít tell if thatís really the
data or just innate genius.
Douglas Goldstein: When youíre talking about trends that repeat themselves through history,
are these so incredibly macroeconomic that you canít make any real practical decisions
based on that?
Kenneth Rogoff: I think there are very important practical decisions which is that when an
economy has been booming for a long time and a lot of it is driven by credit and borrowing
that you need to be aware both as a politician, as a regulator, but also as an investor.
I live in the United States and home prices went up 100% over five years in the early
2000s and there was just a frenzy.
I even have professor friends who invested all their retirement savings in buying a few
homes figuring that was just a big way to make money.
A lot of people did that.
You can say the same thing about the tech boom and you need to be a little bit careful
about those things.
Thereís a real tendency for small investors that sort of jump on the bandwagon when they
see something going up a lot and to jump off when they see itís going down a lot and needless
to say they often suffer versus professional investors.
Douglas Goldstein: Even
the professional investors or the economists, letís look for example at the United States
government itself which seems to use debt so vigorously to make sure that it continuous
growing and the economist, Paul Krugman himself who keeps talking about the ability of that
debt to help save the economy.
Is this just misguided?
Kenneth Rogoff: Itís a question of balance.
The United States has been borrowing like a [fiend], we have doubled our debt in the
last few years and the interest rates we pay are still very low.
I mean if somebody said weíre like the healthiest horse at the glue factory.
We look better than a lot of the other countries but I think itís actually very misguided
to think that itís a free lunch and you just keep borrowing and you donít worry.
One of the things Carmen Reinhart, my wonderful co-author and I find in our research is that
you can have these periods where the government borrows a lot and debt gets very high and
itís often followed for decades by slow growth because of course eventually you have to adjust.
I think thereís a ìthis time is differentî mentality to this.
ìEveryone wants to lend to the United States.
Letís just borrow until weíre blue in the face.î I mean weíre borrowing a lot and
I think a sober thing would be to sort to gradually try to wind it down and not double
up as Paul sometimes suggest.
Douglas Goldstein: It sounds very reasonable what youíre saying but Iím not sure thatís
really the direction weíre going.
What would be a reasonable guess?
What would happen if the US continues to borrow?
Kenneth Rogoff: I donít think thereís any question that if we continue to borrow at
this pace, the day of reckoning would come when financial markets would put pressure
on us and would be forced to adjust fairly sharply, maybe not like a grease.
I think the United States would have time to raise access, time to lower government
spending but thereís no question that eventually youíd be forced to adjust.
Nobody exactly knows where the ceiling is but we do know that itís very rare air to
be getting up as the kind of debt to income ratios that the United States has already
hit and where it seems to be heading so itís sort of a question of taking out insurance.
I mean you could just keep borrowing and it is better today, but thereís this risk that
the ultimate problem is going to come sooner rather than later and thatís why I think
you have to be a little bit cautious.
We can look at history, the world changes, nobody knows, but that is the essence of This
Time is Different theory that Carmen and I had thatís why people just every time, it
sounds like itís too good to be true.
People think up some story why itís too good to be true and inevitably thereís a bust.
The country goes bankrupt and the financial system cracks up.
It doesnít happen everyday.
It doesnít happen every decade but if you look over 800 years the way we did, it happens
in amazing amount of time.
It has happened in amazing number of times.
Douglas Goldstein: I want to touch on something what you said which is that you could perhaps
continue to do this borrowing for a long time if we are realistic about the fact that politiciansí
goal tends to be re-election and if they can constantly borrow and make things better for
the next few years, why would they possibly have any motivation to stop this borrowing?
Kenneth Rogoff: I talked to people in the United States and they all say, ìIím really
worried about the debt, Iím really worried and the government is spending moneyî and
then you ask, ìWould you like have higher taxes?î ìNo.î ìHow about the government
cuts some of these programs or trims social security?î ìNo.î They donít want to hear
about it and if youíre a politician and you come in and say something about posterity,
say something about trying to tighten your belt, you get your head chopped off.
Itís probably the case that itís only when markets really begin to push back that you
see something and if interest rates started rising on US debt, it would just be incredible
how it would affect our budget because every 1% is like a $150 billion, but itís true
that countries like Germany, United States, Great Britain that have a better long term
track record have a political dynamic where at least the discussion of doing something
starts earlier.
A lot of the more advanced countries have gotten in a pattern where they prophylactically
do something, they make smaller adjustments along the way.
It is part of being an advanced country.
In an emerging market, the political resistance is greater and they have more trouble doing
it.
Most countries just lurch from being bankrupt once every few decades to having it happened
again or even more often.
These countries that have been really successful like the United States have some built in
self control mechanisms and the political dialogue, ìI donít want to overstate itî
but I do think youíll see some adjustment it may not be enough.
Douglas Goldstein: Youíre talking in terms of decades.
Your book looked in terms of centuries and interestingly, your book came out in 2009
just around the time when this whole thing is unraveling.
Was that by design or by chance?
Kenneth Rogoff: It was chance.
We worked on the book for seven years first of all.
Of course when we started it, we thought it would take us a year and then we thought it
would take us two years, but we worked on financial crisis our whole lives and thatís
what we do as scholars.
It is a scholarly book and we got this idea that it would be possible, thanks to the internet
and other new ways of getting data that we could put together a data set on economic
history the likes of which had never been done to be able to study financial crisis.
Itís naturally what gripped us.
It wasnít, ìOh my gosh, thereís about to be a financial crisis in the US.
Weíve got to write a book about it.î We were writing a book about all financial crisis
and whatís been sort of amazing about this one is how much the United Statesí crisis,
Britainís crisis, Europeís crisis has fit these previous patterns which we laid down
quantitatively in our book.
Thatís a big innovation of our book is to look at them not just as what are the finance
ministers think, what does the president think but to look at hard data to the extent we
could find it.
Douglas Goldstein: Are there any practical lessons in todayís market a small investor
could walk away with?
Kenneth Rogoff: I think one thing to take note of is weíre not likely to see a booming
global economy for a long time.
I mean these things take a long time to work themselves out.
I think weíll be lucky if we have even mild growth for a sustained period in the advanced
countries.
I think thatís maybe the most likely scenario but it could be worse.
Weíre in a situation where I must say itís not very easy to be a small investor.
Most of the major countries paid practically zero interest rates and if you landed longer
term, you get a little bit but you donít know if itís going to get [inaudible 00:11:39]
away.
The stock market could be stagnant for a long time, housing might not do well.
Itís not an easy time to invest.
If I had to pick something, I would say real things like land, housing, commodities.
These have done better during these more stagnant times historically.
Douglas Goldstein: Many years ago, youíre a chess player.
Do you find that the experiences you had or the thought processes that you had in playing
chess have helped you in your career as an economist.
Kenneth Rogoff: Itís very indirect but first of all, itís very helpful in some on the
work Iíve done where I think about the economy from a strategic perspective instead of looking
at it like an engineer.
My maybe best known early work was on why you should have an independent central bank
and why that had strategic advantages within the economy also in international monetary
policy, but certainly when I was at the International Monetary Fund as chief economist, it was very
useful using chess analogies in my head about interacting and negotiations and about how
other people think.
Lastly, Iíd say it teaches you how to perform under stress.
You may not think of chess as stressful but believe me competitive chess is very stressful.
So after that, nothing seems stressful to me and I find that helpful at times.
Douglas Goldstein: How people can follow your work?
Kenneth Rogoff: Iím not hard to find.
You can look me up at Harvard University.
I have a website giving my popular writings as well as my academic writings and other
information that youíd probably never want to know.
Douglas Goldstein, CFPÆ, is the director of Profile Investment Services and the host
of the Goldstein on Gelt radio show (Monday nights at 7:00 PM on www.israelnationalradio.com.
He is a licensed financial professional both in the U.S. and Israel.
Securities offered through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, NFA,
SIFMA.
Accounts carried by National Financial Services LLC.
Member NYSE/SIPC, a Fidelity Investments company.
His book Building Wealth in Israel is available in bookstores, on the web, or can be ordered
at: www.profile-financial.com (02) 624-2788 or (03) 524-0942.
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