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Reinhart and Rogoff: ‘The Economy Can’t Grow’


What gets to me the most about the debt-ceiling debate, aside from the debt ceiling debate itself, is a pair of underlying assumptions: one, that if we raise the debt ceiling (in crisis mode, like everything that gets done in Washington these days), our problems will go away; two, that not raising the debt ceiling is the only thing that threatens our ability to keep borrowing money at relatively low interest rates. While I can see the interest rate risk associated with not raising the debt ceiling (I don’t think it’s as high as most people claim, but I could be wrong), I think there is an even bigger threat looming in our future. Sure, we can raise the debt ceiling right now and avoid the “possibility” of some short-term consequences, but it won’t address any of our long-term problems, including a looming increase in interest rates. Basically, we’re just kicking the can down the road once again.

On that point, economists Carmen Reihart and Ken Rogoff have a great piece today in Bloomberg View:

Indeed, there is a growing perception that today’s low interest rates for the debt of advanced economies offer a compelling reason to begin another round of massive fiscal stimulus. If Asian nations are spinning off huge excess savings partly as a byproduct of measures that effectively force low- income savers to put their money in bank accounts with low government-imposed interest-rate ceilings — why not take advantage of the cheap money?

Although we agree that governments must exercise caution in gradually reducing crisis-response spending, we think it would be folly to take comfort in today’s low borrowing costs, much less to interpret them as an “all clear” signal for a further explosion of debt.

Changing Interest Rates
Several studies of financial crises show that interest rates seldom indicate problems long in advance. In fact, we should probably be particularly concerned today because a growing share of advanced country debt is held by official creditors whose current willingness to forego short-term returns doesn’t guarantee there will be a captive audience for debt in perpetuity.

Those who would point to low servicing costs should remember that market interest rates can change like the weather. Debt levels, by contrast, can’t be brought down quickly. Even though politicians everywhere like to argue that their country will expand its way out of debt, our historical research suggests that growth alone is rarely enough to achieve that with the debt levels we are experiencing today.

While we expect to see more than one member of the Organization for Economic Cooperation and Development default or restructure their debt before the European crisis is resolved, that isn’t the greatest threat to most advanced economies. The biggest risk is that debt will accumulate until the overhang weighs on growth.

The question, then, is one of tradeoffs between a debt crisis today and a debt crisis tomorrow. I tend to think that it would be better to address our spending problem today rather than push it down the road for our children to deal with. I also tend to think that by not addressing the problem now we are making things worse. Others, however, seem to believe that if we avoid the crisis today, there will be enough political momentum to get our financial house in order in the near future before it is too late. I seriously doubt that.

I find this chart from NPR’s Planet Money, telling:


No good long-term deal is likely to come out of this debt-ceiling debate. When, then?


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