Bubbles lurk in government debt

In today’s FT you can found superb article by former IMF chief economist Kenneth Rogoff. Reading this article was a pleasant surprise for me as it is very rare for main stream economist to refer to reflexive bubbles. In the article Rogoff points out that that the real issue is not whether conventional economic theory can rationalize bubbles but the real issue is to detect bubbles. I reckon that without a good theory this task is impossible and I think that economist toolbox will be soon extended by out of equilibrium tools like LPPL.

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This Time is Different: Eight Centuries of Financial Folly

Preview of new book by Reinhart and Rogoff is now available in Google Books (link here). I just read this book and i must say that Reinhard and Rogoff have compiled an impressive database, which covers eight centuries of government debt defaults from around the world. This historical study gives what they call a "panoramic view" of the unending cycle of boom and bust, showing how claims that "this time is different" are invariably proven wrong.

Reinhart and Rogoff shows that financial crash typically follow real-estate bubbles, rising indebtedness and gaping current-account deficits. It also shows that financial meltdowns are followed by state bailouts which led to deterioration in government finances. Must Read!!!

This book is an extended compilation of series of working papers (links to some of them you may find here 1 ,2 ,3 )

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