Carmen Reinhart has collaborated with Kenneth Rogoff for nine years now-they were both economists at the International Monetary Fund. They are the foremost experts on financial crises and their aftermath. The Wall Street Journal today carried a very informative interview with her about where we are in the financial crisis.
Ken and I have been arguing fairly forcefully that historically, following a wave of financial crises especially in financial centers, you get a wave of defaults. You go from financial crises to sovereign debt crises. I think we’re in for a period where that kind of scenario is very likely.
Her main point is that we could be in for a long period of deleveraging, and obviously some of that deleveraging could be accomplished through default.
Although direct parallels to the 1930s may be overdone, Reinhart makes the case that we haven’t seen anything similar to this in the investment careers of anyone around today.
We have not seen an economic downturn so synchronized, a downturn in trade so sharp and widespread, post-World War II. We have not seen this many economies in the advanced world, which accounts for the lions’ share of world GDP, simultaneously have financial crises since the 1930s. Nothing even close.
Viewed from that standpoint, what we are going through doesn’t have any easy comparisons. We’re somewhat in uncharted waters. We have a big downturn like the 1930s, yet the world is a very different place today. A more global, more tactical approach to investing might be required to navigate through these treacherous waters.
