A black mark on Morgan Stanley

Reinharts, Rogoff See Huge Output Losses From High Debt

By Rich Miller

April 30 (Bloomberg) — The U.S. and other developed economies with high public debt potentially face “massive” losses of output lasting more than a decade, even if their interest rates remain low, according to new research by economists Carmen and Vincent Reinhart and Kenneth Rogoff.

In a paper published today on the National Bureau of Economic Research’s website, they found that countries with debts exceeding 90 percent of the economy historically have experienced subpar economic growth for more than 20 years. That has left output at the end of the period a quarter below where it would have been otherwise.

“The long-term risks of high debt are real,” they wrote. “Growth effects are significant” even when debtor nations are able to borrow “at relatively low real interest rates.”

In spite of those dangers, the economists said they are not advocating rapid reductions in government debt at times of “extremely weak growth and high unemployment.”

Carmen Reinhart is a senior fellow at the Peterson Institute for International Economics in Washington, while her husband, Vincent, works as chief U.S. economist for Morgan Stanley in New York. Rogoff is a professor at Harvard University in Cambridge, Mass., and a former chief economist at the Washington-based International Monetary Fund.

Their paper looked at 26 separate episodes in 22 countries since 1800 in which central government debt exceeded 90 percent of gross domestic product for at least five years. Advanced economies with such big liabilities grew on average 2.3 percent a year, compared with 3.5 percent in the lower debt period, they said. The high-debt period on average lasted 23 years, according to the study.

U.S. Debt

Gross federal U.S. debt has exceeded 90 percent of GDP for the last two years and is projected to remain above that level at least through 2017, according to the White House’s Office of Management and Budget.

Publicly-held debt, which excludes debt held by the Social Security Trust Fund and other government agencies, was 68 percent of GDP on Sept. 30, 2011, the OMB data show.

The lower level of publicly held debt should not be a source of comfort to the U.S. and other heavily-indebted nations because such trust funds generally are “woefully underfunded,” the Reinharts and Rogoff argued in their paper.

They also cautioned the U.S. and other developed nations against taking solace from low levels of interest rates on their debt. The yield on the 10-year U.S. Treasury note stood at 1.92 percent at 3:15 p.m.

‘Warning Signal’

“Contrary to popular perception, we find that in 11 of the 26 debt overhang cases, real interest rates were either lower or about the same as during the lower debt/GDP years,” the economists wrote. “Those waiting for financial markets to send a warning signal through higher interest rates that government policy will be detrimental to economic performance may be waiting a long time.”

Greece and Italy were the two countries in the study that experienced the most instances in which their debt exceeded 90 percent of GDP.

The economists warned that nations with excessive government liabilities now may even fare worse than history suggests because their private and foreign debts also are large.

“The fact many countries are facing ‘quadruple debt overhang problems’ — public, private, external and pension — suggests the problem could be worse than in the past,” they said.

Carmen Reinhart and Rogoff are co-authors of the book “This Time is Different: Eight Centuries of Financial Folly.” Carmen’s husband, Vincent, is a former director of the monetary affairs division at the Federal Reserve in Washington.

22 Responses

  1. I’d like to see a #1 New York Times bestseller called, “This Time Is Not Different: Governments Must Increase Their Debt to Achieve Economic Recovery”.

  2. Well, they got this part right:
    “Those waiting for financial markets to send a warning signal through higher interest rates that government policy will be detrimental to economic performance may be waiting a long time.”

  3. How much did Peterson pay Reinhart and Rogoff to write this garbage? Come to think of it, wonder how much Peterson would pay me to stop attacking Reinhart, Rogoff, Peterson, etc? I’ll send him an email right now.

      1. @Tom Hickey, Well, on that note, maybe Peterson would agree to fund social security if we’d agree to stop burdening everyone with FICA taxes. 🙂

  4. Warren, you always used to say Vince Reinhart knew what he was talking about. I took issue with this. He was on Fox many times while I was still there and I heard him say plenty of ridiculous things, like the Fed can go “bankrupt.”

    This proves Reinhart is no better than the rest of them: He’s a totally misguided snob getting a big paycheck from a major Wall Street firm. What else is new?

    1. Debt is a killer especially when it is due to poor spending on the part of the government and insufficient spending on developing real resources. @JBH,

  5. Why does anyone still listen to economists with fancy pedigrees? It’s going to be interesting to see what happens to China in the decades to come. I have this impression that Chinese leadership is very afraid of unemployment, and that is going to cause them to ‘do the right thing’. Maybe that will provide a model. In the West it looks sad, but maybe we are close to some sort of revolt in Europe … starting in Spain?

  6. Well, I wanted to read this paper, but you have to pay for it at NBER. Anyone know where one can get access?

  7. 4 High Debt : Public + Import/Export + Pension + Private ..

    after hard reforms of Monti (a man of GS like Mr. Bce) Italy have problem with Public + I/E.. but Pension are in equilibrium (sadly on the shoulders only of the future pensioners) and Private is not indebted but very rich (with strong discrimination)..

    Italy Aggregate Debt (300/350%) is better than US/Uk (400%/500%)..

    but Italy pay 4/5% while Us/Uk pay 1/2%..

    this 2/3% Spread accumulated along decades is very hard..


    three reason (for me) :

    1) Fed&Boe Print because are under Us/Uk State.. while Bce was under German that don’t want pay Inflation or EuroBond for the Piigs.. but I hope that the New Mr. Bce plus Financial Market Pressure will force German to change monetary policy

    2) Market Pressure are 20 Big Western Bank&Rating Agency.. quite all in Us&Uk.. and they have no interest to kill its own country.. with a slogan : “two mesaure for two wight”..

    3) Pil Growth is better in Us.. but this is due non only to productivity & technology.. but also to Lower Interest Rate (i.e. Printing Money).. and we with Bce have many constrains.. with a slogan :”a cat that bite its own tail”…

    Now some specialized news papers (with the silence of mass media and public opinion) are thinking this strong proposal :

    create a public fund backed by pubblic assets (i.e. real estate, but I don’t this stocks on strong Oil&Defence compnynies).. than FORCE italians to buy the Bonds (maturity 10 years) backed by this fund.. it’s anohter way to Adsorb Private Saving (quite a Tax).. but if people wouldn’t PERCEIVE this like a Tax this could have less recessionary impact.. and can change Mix Domestic/Foreign Public Debt to become more similar to Japan (20 years of stagnation but no risk default)…

    I finish with a question for Mr. Mosler :




    thaks as usual

    1. @Piero Italy,

      The reason UK and US can borrow more cheaply is that they go to debt by issuing money. First they spend what they need to spend and then they sell as many bonds as is required to allow central bank to hit it’s overnight interest rate target. Their situation is best understood as “currency issuer” while eurozone governments are “currency users” that really have to borrow from banks what they cannot rise in taxes.

      For currency issuers central bank sets the interest rates, both short term and long term, because long term rates are just exrapolated aggregates of expected future average short term rates.

      For currency users markets dictate terms on which they can borrow.

      Euro was ill-conveived conception build on faulty monetary theories. That is why many MMTers call for its dissolution.

    2. from a macro economic point of view, best to go back to the lira with a flex exchange rate policy.
      no telling what the lira might then do. could very well appreciate, for example, depending on subsequent fiscal policy and what’s happening in the rest of the world.

      See ‘My Big Fat Greek Exit Strategy’ on this website which applies to any euro zone member.

      The currently ‘problem’ is that Italy’s pension system ‘demands’ a large public sector fiscal deficit.
      This is not a problem when you have your own non convertible currency.
      But it’s a major problem under the current euro institutional structure.

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