“Perhaps more than anythingelse, failure to recognize the precariousness and fickleness of confidence– especially in cases in which large short-term debts need to be rolledover continuously – is the key factor that gives rise to thethis-time-is-different syndrome. Highly indebted governments, banks, orcorporations can seem to be merrily rolling along for an extended period, when bang– confidence collapses, lenders disappear, and a crisis hits.
“Economic theory tells us thatit is precisely the fickle nature of confidence, including its dependence onthe public’s expectation of future events, which makes it so difficult topredict the timing of debt crises. High debt levels lead, in many mathematicaleconomics models, to “multiple equilibria” in which the debt level might besustained – or might not be. Economists do not have a terribly good ideaof what kinds of events shift confidence and of how to concretely assessconfidence vulnerability. What one does see, again and again, in the historyof financial crises is that when an accident is waiting to happen, iteventually does. When countries become too deeply indebted, they are headedfor trouble. When debt-fueled asset price explosions seem too good to be true,they probably are. But the exact timing can be very difficult to guess, and acrisis that seems imminent can sometimes take years to ignite.”
–From This Time Is Different, by Carmen Reinhart and Ken Rogoff
full article at source:http://www.mauldineconomics.com/frontlinethoughts/?utm_source=newsletter&utm_medium=email&utm_campaign=frontline
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