"In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could," Rogoff said Monday from Cambridge, Massachusetts, repeating a favorite line from Rudi Dornbusch, the German economist. (Rogoff sat in on Dornbusch`s class at MIT in 1977.)
Rogoff, who is a chess grandmaster, has made a career of studying financial crises. After the 2008 financial crisis, Rogoff co-authored "This Time Is Different," a seminal book that examined more than a century of financial crises.
Every financial crisis, he and his co-author, Carmen M. Reinhart, concluded, stems from the same simple problem: too much debt.
To understand the wild machinations of the stock market in recent days in the United States and abroad, you need to look no further than China`s astounding debt load and sputtering economy - and its ability to infect the rest of the world.
"China is the classic `This time is different` story," Rogoff said, rattling off all the different rationalizations for why the country convinced itself - and many others - that it could load up on debt but was somehow immune to the laws of economic gravity.
He cited the government`s control over the markets, the hundreds of millions of workers migrating to cities and the country`s saving rate of about 30 percent of disposable income as just some of the reasons that China was said to be impervious to a severe downturn.
"It`s very vulnerable," Rogoff added. "There is a lot of debt."
How much debt remains an open question given the opacity of China`s market.
The country`s debt load rose from $7 trillion in 2007 to $28 trillion by mid-2014, according to a report published earlier this year by the consulting firm McKinsey and Co., China.
"At 282 percent of GDP, China`s debt as a share of GDP, while manageable, is larger than that of the United States or Germany," said the McKinsey study. "Several factors are worrisome: Half of loans are linked directly or indirectly to China`s real estate market, unregulated shadow banking accounts for nearly half of new lending, and the debt of many local governments is likely unsustainable."
The question then becomes how interconnected China`s economy is to the rest of the world. That`s exactly what investors have been trying to determine over the past several weeks as China`s government has devalued its currency and tried - and failed - to stabilize its plummeting stock market. The drop has been exacerbated, in part, by debt as over-extended Chinese speculators who borrowed money to buy stocks are now being forced to sell, creating a vicious cycle.
"How does all that ricochet to emerging markets?" Rogoff said in discussing the effect of China`s slowdown on commodity producers like Brazil, whose economy is in a tailspin. "Look at Russia. It`s amazing they haven`t had a financial crisis yet."
Of course, Rogoff is not the first person to identify China as a potential risk. Earlier this year, this column highlighted the views of Henry Paulson, the former Treasury secretary and Sinophile, who said that "Frankly, it`s not a question of if, but when, China`s financial system will face a reckoning and have to contend with a wave of credit losses and debt restructurings." And the hedge fund manager James Chanos has been sounding the alarm on China for years, recently declaring, "Whatever you might think, it`s worse."
There are, of course, significant political reasons China needs to convince the world and its own citizens that it can manage its convulsing financial markets and slowing economy.
"Financial meltdown leads to a social meltdown which leads to a political meltdown," Rogoff said. "That`s the real fear."
Rogoff pointed to another factor that has contributed to China`s financial woes: "The crisis in Tianjin fed into the mix," he said, referring to the deadly explosion Aug. 12 in the port city that killed more than 100 people.
Rogoff said the explosion had undermined the credibility of the Chinese government because so many questions remained unanswered, and the response had been inadequate.
So does Rogoff believe that China is headed for a terrible "hard landing" that will lead to a global recession?
Well, despite the market tumult and his persistent warnings, Rogoff believes that the past several weeks have only raised the prospects of a meaningful crisis. But with China`s trillions of dollars in reserves, he thinks the country may have sufficient tools to prevent a calamity that spreads across the globe. "If you had to bet," Rogoff said, "you`d still bet they`d pull it out."
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