Is the U.S. headed the way of Zimbabwe, with endless central bank monetization of the central government’s debt?
In a non-firewalled op-ed for the Financial Times, World is right to worry about US debt, which is introduced by the Op-ed editors with the sentence “America must face up to its responsibilities, writes Kenneth Rogoff”, we get some plain talk from the co-author of “This Time Is Different: Eight Centuries of Financial Folly”. That book, which was begun long before Lehman Brothers collapsed and thus was unexpectedly timely when published early in 2009, was a study of major financial collapses throughout much of modern and semi-modern times. Herewith, some excerpts:
Many foreign observers look at the US budget shenanigans with confusion and dismay, wondering how a country that seems to have it all can manage its fiscal affairs so chaotically. The root problem is not just a hugely elevated level of public debt, or a patently unsustainable trajectory for old age entitlements…
America must shortly answer a series of fundamental questions…
… if the US were ever forced to surrender the mantle of world policeman to, say, China, foreigners may no longer have quite the same desire for its debt.
Productivity improvements in government services have been glacial compared with many other sectors of the economy. A visit to a primary school classroom in many US cities is the closest thing one can get to time travel…
…there is a wide chasm between those who see union domination of infrastructure as key to ensuring high-paying jobs versus those who want infrastructure built, but at reasonable rates. There is the joke about the visiting Chinese group that asks their New York tour guide how long it will take to finish the Second Avenue subway. On being told two years, the Chinese translator hesitates before conveying the response and asks: “Wait a second, you mean two weeks, right?
Perhaps my favorite:
The idea that one should just ignore all these problems and apply crude Keynesian stimulus is a dangerous one. It matters a great deal how the government taxes and spends, not just how much.
“Crude Keynesian stimulus”? Take that, Dr. Krugman!
Finally, he gets to the Japan analogy:
The US debt level is a constraint. A growing number of empirical studies, including my own joint work with Carmen Reinhart, suggest that the US has already reached a debt level that has been associated with slower growth in advanced countries. The fact interest rates are low today does not necessarily mean the US is an exception to this rule – take one look at stagnant Japan’s rates.
Dr. Rogoff’s research has shown that historically, full recoveries from systemic financial meltdowns have taken 10 years on average. Nonetheless, he is clearly calling for significant cuts in the fiscal deficit, with whatever effects on economic activity doing so would have.
Of course, he does not set policy. But he may be in the political mainstream, which in America has tended to have its views heard sooner or later.
Read More at The Daily Capitalist . By DoctoRx.
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