Economists Carmen Reinhardt And Ken Rogoff Explain Why Growth Won't Cure Debt

Right now a big debate is whether or not the U.S. should stimulate growth via another stimulus package or not, because our debt levels are already incredibly high (around 60% GDP).

Economists Ken Rogoff and Carmen Reinhardt, the authors of the famous book, “This Time Is Different,” (which argues essentially, it’s never different) have new research that they admit, of course, is flawed, but that essentially provides an argument against QE3 or more stimulus.

In an article in Bloomberg/BusinessWeek, they make 5 big points based on their research:

  • “The biggest threat to advanced economies is that debt will accumulate until the overhang weighs on growth”
  • “Growth alone is rarely enough to achieve debt reduction”
  • “Debt burdens above 90% are associated with 1% lower median growth”
  • Inflation might not be the endgame for debt
  • “At some point even advanced economies hit a ceiling where the pressure of rising borrowing costs forces policymakers to increase tax rates and cut government spending.”

They also poke fun at Keynesians asking:

“Those who remain unconvinced that rising debt levels pose a risk to growth should ask themselves why, historically, levels of debt of more than 90 per cent of GDP are relatively rare and those exceeding 120 per cent are extremely rare. Is it because generations of politicians failed to realise that they could have kept spending without risk?”

But the big thing here is that rather than stimulating growth and preventing a slowdown, their new research shows that if the U.S. opts for pumping more stimulus into the economy, it might stifle growth.

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