I still don’t see many people citing the crucial flaw in the Reinhart & Rogoff paper that has now become the center of many discussions. The latest idea is that the paper is flawed because of a few misleading data omissions and an Excel error. That certainly diminishes the value of the work, but anyone who understands the modern monetary system would have disregarded the paper from its very start.

The paper lists currency using nations like those in Europe alongside currency issuing nations (like the USA) and makes no distinction between the monetary systems. This is a colossal error. It renders the paper largely useless. It’s like comparing the state of California or my household to the federal government in the USA. Of course, one has a central bank that can create currency while the other does not. The nations in Europe are users of a currency with a foreign central bank. This creates a very real solvency constraint that has proven to create substantial economic instability. Comparing these two types of monetary systems is an apples and oranges comparison

Of course, this doesn’t mean debt cannot ever be bad or that government spending can’t have negative ramifications on the economy, but comparing a currency using nation with a currency issuing nation is highly misleading as the fixed exchange rate currency using nations (like those in Europe) are at a severe disadvantage when responding to crises. Like my household, they can always “run out of money” creating solvency risk and exacerbating crises. The R & R paper isn’t flawed because it has Excel errors in it or data biases. It’s flawed because it makes no distinction regarding a crucial understanding of modern monetary systems.