This Time is Different Summary (9/10)

…the most commonly repeated and most expensive investment advice ever given in the boom just before a financial crisis stems from the perception that “this time is different.”

This Time is Different places 200 years of financial crises under sharp scrutiny. Reinhard and Rogoff note that financial fallouts occur in clusters and with surprising consistency, intensity, and duration.

They examine the causes of currency crashes, hyperinflation, and government defaults (international and domestic debts). Some countries weather their financial storms better than others, but short memories make it too easy for crises to recur.

The advice, that the old rules of valuation no longer apply, is followed up by confident rhetoric by government leaders and financial professionals, that we are smarter and better than we were before.

The weight of evidence of this book suggests that we should be skeptical when we hear the words, “this time is different.” It almost never is.

Below is a list of the main themes that I found to be most important in This Time is Different with summaries of each.

External Debt Crises

External debt crisis is when a government defaults on its external debt obligations. Typically, but not always, this loan is denominated in a foreign currency, and held mostly by foreign creditors.

The largest default on record is held by Argentina. In 2001, it defaulted on more than $95 billion in external debt.

Full Summary

Debt Intolerance

Debt intolerance is a syndrome in which weak institutions and political systems make external borrowing a tempting prospect for governments, to avoid difficult decisions with regards to spending and taxing.

Full Summary

Domestic Debt

To stabilize inflation in the late 1980’s, the Mexican peso was tied to the U.S dollar via an official exchange rate band. It was a peg to the U.S dollar. In early 1994, the peso came under speculative pressure after the assassination of a Mexican presidential candidate Colosio.

Full Summary

Banking Crises

Countries can outgrow a history of repeated bouts with high inflation, but no country yet has graduated from banking crises.

Full Summary

Currency Collapses

Countries that experienced a prolonged period of inflation often experience dollarization (heavy use of foreign currency as transaction medium, unit of account, and store of value).

Practically, the use of foreign hard currency in trade, or the indexation of bank accounts and bonds is possible.

Full Summary

If you’re an entrepreneur and you want a quick guide to know what to think about before launching you business, check out The Myth of Entrepreneurship.

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