Nicely done, I have to say. Full disclosure: Ken Rogoff was a childhood neighbor of mine in Rochester, New York.
But, see here. What R&R are really advocating is a kind of soft austerity. They actually bring up the subject of “debt write-downs”, which maybe, I guess, would take the form of some across the board percentage. But if it doesn’t, then how exactly do R&R hope to accomplish debt write downs? The central bank will strong-arm certain players to do that? What if they won’t? What about the others, the ones the central bank doesn’t strong-arm? Who gets the strong arm and who doesn’t?
A lot more to that, methinks. Again, the law is involved, and it’s kind of amazing to see these very smart people at Harvard walk right up to that door and then leave it closed as if they’re terrified of what’s inside the next room.
If you’re not going to be “dismissive” of debt then to the extent you’re not writing debt down you’re advocating some version of austerity. This is what it means to be economically austere. Then again, aren’t R&R being dismissive of debt when they advocate that it should be increased?
A higher borrowing trajectory is warranted, given weak demand and low interest rates, where governments can identify high-return infrastructure projects. Borrowing to finance productive infrastructure raises long-run potential growth, ultimately pulling debt ratios lower. We have argued this consistently since the outset of the crisis.
And then there is this concern, and it has to do with interest rates:
No one fully understands why rates have fallen so far so fast, and therefore no one can be sure for how long their current low level will be sustained…Economists simply have little idea how long it will be until rates begin to rise. If one accepts that maybe, just maybe, a significant rise in interest rates in the next decade might be a possibility, then plans for an unlimited open-ended surge in debt should give one pause.
Why should it give us pause, R&R? Why shouldn’t people just be snapping up all the “free money”? This is a revealing quote. The concern, the “pause” is the risk to lenders from a rising interest rate environment. Their portfolio of low interest receivables gets decimated.
Why did rates fall “so far so fast”? It’s quite simple, really. The parasite has killed the host. The potential borrowers are all tapped out, they can’t borrow anymore, so there’s no demand for loans and rates descend in an effort to lure borrowers who no longer exist. The parasitical financial “industry” makes its money by making loans and they’ve made all the money they’re going to make. At least that way. At least from the same pool of borrowers anyway.
How long can it all go on? It’s been going on in Japan for nearly a quarter century. No reason to think we can’t meet or exceed that mark.
H/T my friend from across the pond, Frances Coppola.