A WORLD TOUR: WHO WILL FACE ENDGAME FIRST?
From a Bayesian standpoint, if you always observe a certain combination of information when X occurs, and never observe that same data when X is not present, then even if X is hidden under a hat, you would conclude that X is most likely there. If I see clowns walking around the grocery store buying peanuts, and there’s a big top tent with two unicycles in front of it in the middle of what is usually an open field, I’m sorry, I’m going to conclude that the circus is in town.
In the following sections of the book, we look at some of the more troubled countries in the world. Some of the countries are very small, and you may not know where to find them on the map. Others are large and well known. What they all have in common are extraordinary challenges of too much debt and large imbalances that need to be corrected.
Guessing which countries will have crises in advance is not as hard as it seems. There are a few factors that make countries vulnerable to debt crises and a few telltale signs that a country will have trouble down the line. On their own, each individual sign doesn’t mean much, but taken together, they are always present before financial crises.
Why is it that people are pretty good at spotting problems around them, but economists are very bad at seeing blowups before they happen? Let’s answer this practically. If you had a neighbor who was always running up credit card bills and who constantly borrowed ...