5 ideas
Each boom generation convinces itself that old valuation and debt rules no longer apply because of better policy, new technology, or stronger institutions. That belief is itself a warning sign, because it licenses the leverage buildup that precedes a crash. Treat confident talk of a new era as evidence of risk, not of safety.
Across eight centuries and 66 countries, sovereign default is recurrent rather than exceptional. Many now-advanced economies, including France and Spain, defaulted repeatedly while they were emerging, and some countries spend long stretches of their history in default. The idea that a country has 'graduated' from default risk usually rests on a short memory.
Historical research has long overlooked governments' internal debt, which is often large and poorly recorded. Leaving it out makes defaults and high-inflation episodes look irrational at the debt levels actually reported. Once domestic debt is counted, many inflations look like a way of quietly defaulting on it.
Crisis types tend to arrive together in a rough order. Capital inflows and credit booms push up asset prices, then banking crises hit, often alongside or before currency crashes. Sovereign default follows as governments absorb bank losses and revenues collapse. Watching for this chain, such as a banking crisis after rapid capital inflows, lets an observer anticipate the later stages.
Severe banking crises are followed by multi-year declines in output, employment, and housing prices. Real government debt rises by roughly 86 percent on average within three years, driven mainly by collapsing tax revenue rather than bailout costs. Recoveries from financial crises are therefore slower than recoveries from ordinary recessions.