Cristina Fernández de Kirchner, Reinhart and Rogoff: “This time is different”
Thursday, November 21, 2013
By Claudio Loser
Cristina’s return to exercising power in Argentina after her convalescence has been surrounded by surprise and confusion. The designation of the young Marxist, Keynesian, heterodox Axel Kicillof in the Economy Ministry, and the replacement of the almost orthodox Central Bank President Marcó del Pont, indicate a deepening of the “model” – public spending, taking full advantage of the international tail wind, and a strong role of the state. The resignation of the most criticized Commerce Secretary Guillermo Moreno, suggests only the smoothing of the edges and sources of popular exasperation, and not a favorable change of direction toward recovery. The stock market immediately fell and the blue (parallel) market dollar shot up.
All these changes seem to suspend the so-necessary rapprochement with the international economic community: Paris Club, IMF, ICSID, associated with the World Bank, and the Inter-American Bank. Of at least equal importance, it complicates the dialogue and possible negotiation with the “holdouts” with the imminent closing of judicial options in the United States. Only the underlying resistance of the economy and, until a short time ago, high international prices have allowed Argentina not to fall into a heavy economic crisis but onto a trajectory of gradual impoverishment, but with serious structural consequences in the longer term.
The Argentine situation brings one to re-read the very well-known book by Kenneth Rogoff and Carmen Reinhart “This time is different” (2009). The book has been criticized because of very specific mistakes in estimation. Even still, it continues to be a brilliant and meticulous treatise of the centuries of financial lunacy (their words). It’s an indispensable book that lays out a sobering view of interminable booms and busts, using the movement of specific economic variables to predict financial and external crises.
Among the most relevant variables to predict crises, the authors mention the appreciation of the real exchange rate; the behavior of exports and the external current accounts; movements in international reserves and monetary expansion, fiscal deficit, movements of the stock markets, to which we can add the public and external debt. If one analyzes the behavior of these variables one could corroborate if there is or is not the high likelihood of crisis.
Without entering here into numerical details, by studying the relative deterioration of the variables of the last three years for the ten most important countries of the region, by far Argentina, together with Venezuela, show the greater quantity of weak performance indicators (in seven of the eight variables), presaging an almost inevitable crisis. For the majority of the readers this only corroborates their suspicions, by which, contrary to the official rhetoric, the situation THIS TIME IS NOT DIFFERENT.
These indicators are tentative and their predictive strength would improve if one includes other countries, inside and outside the region. Even still, the perhaps simplistic use of the study of Reinhart and Rogoff allows one to question the myths of interminable cycles of prosperity. Regrettably, and without being able to be original, we will see in the coming two years that “those who do not study the mistakes of the past are destined to repeat them.”