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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.
Disclaimer: This document is a transcription and/or an educational article. While it is
believed to be current and accurate, divergence from the original is to be expected. The original
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information and should not be used as the sole basis for making financial decisions.
The opinions rendered herein are those of the guests, and not necessarily those of Douglas
Goldstein, Profile Investment Services, Ltd., or Israel National News. Readers should consult
with a professional financial advisor before making any financial decisions. Please see
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