Home > Economics, Finance and money > Introducing the Reinoff scale

Introducing the Reinoff scale

In 2009 Reinhart & Rogoff wrote a mighty tome of a book called “This time is different” based on 800 years of data on financial crises covering more than 90 countries. It was a thorough and objective assessment of sovereign and banking crises, especially detailed on the last 200 years.

The book puts forward a causal model showing how regulatory conditions (of private credit creation) relate to the occurrence of banking crises and potential knock-on effects . Adapting their model (p. 271) we get a succession of crisis phases:

1) Financial liberalisation
2) Asset speculation
3) Banking crisis
4) Currency crash
5) Rising inflation
6) Sovereign Default
7) High inflation / currency collapse

For argument’s sake, let’s call this the Reinoff scale. Here’s an approximation of the course of events for the UK economy:

1) Financial liberalisation: 1997-2000
2) Asset speculation: 1999-2008
3) Banking crisis: 2007/8
4) Currency crash: 2008/9
5) Rising inflation: 2010-2011
6) Sovereign Default: 2012?
7) High inflation / currency collapse: 2013?

I’d place our current score on the Reinoff scale at about 5.1, Inflation is picking up momentum, and the Gvt is certainly making inroads to covertly “default” on various obligations (c.f. public sector pensions).

For chart lovers amongst you I’ll put this in to a time-line graph and publish shortly. I’ll also aim to track the UK, and maybe a few other countries too on an ongoing basis.

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  1. June 15, 2011 at 9:22 pm

    It would be interesting to use this model historically, ie to see how well it covers say the great depression; the inflation of Spanish currency following silver discovery in the New World; the South sea bubble; the Tulip bubble in Holland. Maybe there is an observable time pattern to these crises?

  2. June 16, 2011 at 7:56 am

    Jonathan

    That’s an interesting suggestion. It would certainly help to reinforce the message.

    Obtaining the data won’t be easy, though. Reinhart & Rogoff spent years assembling the data set for their book, and this probably does contain some of these episodes you mention. Unfortunately they haven’t released the data. However, on p271 of their book is reference to a couple of academic articles which support the construction of this model. So this isn’t a theory of theirs, it is already based on hard data.

    A good source for the episodes that you refer to is probably Charles Kindleberger’s Manias Panics and Crashes:

    http://www.amazon.co.uk/Manias-Panics-Crashes-History-Financial/dp/140393651X/ref=sr_1_1?s=books&ie=UTF8&qid=1308210718&sr=1-1

    There’s a new edition out soon which is on my Amazon Wish List!

  1. August 5, 2011 at 8:38 am

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