BlackRock via YouTubeRuss KoesterichThe economic world is still digesting the fact that one of the most popular economic papers of the last decade contained a maths error.
We’re talking about Ken Rogoff and Carmen Reinhart’s paper that argued heavy government debt loads are correlated to decelerations in economic growth.
It’s worth noting that the basic findings of their paper still hold. It’s just the debt threshold has been raised.
Anti-austerians have piled on. But BlackRock’s Russ Koesterich warns that it would be a mistake to disregard Reinhart and Rogoff.
“While Reinhart and Rogoff have publicly admitted mistakes in their methodology, their paper’s basic conclusion still holds: Excessive government debt is likely to be an impediment to a country’s growth,” he argues.
In a new post on BlackRock’s iShares blog, Koesterich notes that the U.S. continues to be in Reinhart and Rogoff’s danger zone, which means debt is so high that growth will take a hit.
And all of this is bad news for corporate profits and stocks.
“A 1% drop in economic growth would have enormous implications for US corporate earnings,” warned Koesterich. “In fact, top-line corporate growth is largely a function of economic growth.”
“[I]n a world in which developed market debt now averages roughly 100% of developed country GDP, both policy makers and investors ignore Reinhart and Rogoff’s paper at their own peril.”
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