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The Reinhart-Rogoff research indicating that there's a public-debt-to-GDP Rubicon was wholly discredited by grad students; turns out there is no relationship be

The Reinhart-Rogoff research indicating that there's a public-debt-to-GDP Rubicon was wholly discredited by grad students; turns out there is no relationship between debt-to-GDP and growth. http://darribas.org/WooWii/Assignments/OriginalPaper.pdf http://darribas.org/WooWii/Assignments/OriginalPaper.pdf The broader point is, if I issue money and then issue obligations on that money, there's no practical difference between the two issues. That is, public debt of countries that are sovereign in their currency, and only issue debt in their currency, cannot have public debt overhang. It's just a red herring, based on a false analogy between governments (currency issuers) and households (currency users).

rrggrr 9y ago
Historically, rates above 200% (eg. Argentina) lead to disorderly corrections (crisis). Michael Pettis regarding the research you cite states: "What is usually missing from such discussions, however, is an explanation of how too much debt leads to slower growth." ... "A country has too much debt when stakeholders begin behaving in ways that reduce growth. The controversy over the research by Rogoff and Reinhart should not be allowed to obscure the nature of the link between debt and economic performance." https://www.project-syndicate.org/commentary/the-misleading-correlation-between-public-debt-and-gdp-growth-by-michael-pettis https://www.project-syndicate.org/commentary/the-misleading-... So, absent a proven behavioral line in the sand, we have only measures of debt to try to surmise at what point debt impacts growth and stability. Its really chicken and egg.
- colorint 9y ago
  As I said, countries that are sovereign in their currency and don't hold any foreign-denominated debt cannot suffer debt overhang. Or put another way (to specifically address your link, though I only got four paragraphs), there is no involuntary default risk if we're talking about a country issuing money and then issuing liabilities denominated in that money. Regarding specific claims in your linked article: - Bond markets in such countries are subordinate to central banks; the most obvious case is Japan, where a greater-than-200% debt ratio is accompanied by, I believe, negative yields on public debt. Central banks (again, in countries that have nonconvertible sovereign currency) totally control short-term interest rates, and so indirectly control long-term rates. Creditors take the central bank's number and then risk-adjust and discount it for borrowers; for the government the risk is zero, so they just discount it. - Ricardian equivalence is a stupid model. Have you ever made consumption or investment decisions based on a belief that public deficits will result in higher tax rates at some point in the future? I certainly haven't. - "Workers organize to protect their jobs," but I guess the anti-union bent says a lot. Nevermind that spending equals income; a falling wage share is a far more plausible explanation for less-than-desirable growth in most situations. - "savers [...] withdraw their bank deposits" The loanable funds model is not how banking works, but that's a much lengthier discussion. Suffice it to say, it's still the case that central banks set interest rates. I assume this is the reason the author brings this up, because otherwise the question is---they withdraw their savings and do what? - Again, the only way the US government can default on US Treasury obligations is if Congress explicitly decides to do so. There's no mechanical or functional reason this might happen. Historically, countries have not been sovereign in their currency. You'd have to be more specific about Argentina, though its biggest debt crisis was because its currency was pegged to the US dollar. Likewise, the current troubles in the Eurozone come from a lack of currency sovereignty. These things are unfortunate, and will probably lead to a dissolution of the EMU at some point, but they have no bearing on the US.

rrggrr 9y ago

Historically, rates above 200% (eg. Argentina) lead to disorderly corrections (crisis). Michael Pettis regarding the research you cite states: "What is usually missing from such discussions, however, is an explanation of how too much debt leads to slower growth." ... "A country has too much debt when stakeholders begin behaving in ways that reduce growth. The controversy over the research by Rogoff and Reinhart should not be allowed to obscure the nature of the link between debt and economic performance." https://www.project-syndicate.org/commentary/the-misleading-correlation-between-public-debt-and-gdp-growth-by-michael-pettis https://www.project-syndicate.org/commentary/the-misleading-... So, absent a proven behavioral line in the sand, we have only measures of debt to try to surmise at what point debt impacts growth and stability. Its really chicken and egg.

colorint 9y ago
As I said, countries that are sovereign in their currency and don't hold any foreign-denominated debt cannot suffer debt overhang. Or put another way (to specifically address your link, though I only got four paragraphs), there is no involuntary default risk if we're talking about a country issuing money and then issuing liabilities denominated in that money. Regarding specific claims in your linked article: - Bond markets in such countries are subordinate to central banks; the most obvious case is Japan, where a greater-than-200% debt ratio is accompanied by, I believe, negative yields on public debt. Central banks (again, in countries that have nonconvertible sovereign currency) totally control short-term interest rates, and so indirectly control long-term rates. Creditors take the central bank's number and then risk-adjust and discount it for borrowers; for the government the risk is zero, so they just discount it. - Ricardian equivalence is a stupid model. Have you ever made consumption or investment decisions based on a belief that public deficits will result in higher tax rates at some point in the future? I certainly haven't. - "Workers organize to protect their jobs," but I guess the anti-union bent says a lot. Nevermind that spending equals income; a falling wage share is a far more plausible explanation for less-than-desirable growth in most situations. - "savers [...] withdraw their bank deposits" The loanable funds model is not how banking works, but that's a much lengthier discussion. Suffice it to say, it's still the case that central banks set interest rates. I assume this is the reason the author brings this up, because otherwise the question is---they withdraw their savings and do what? - Again, the only way the US government can default on US Treasury obligations is if Congress explicitly decides to do so. There's no mechanical or functional reason this might happen. Historically, countries have not been sovereign in their currency. You'd have to be more specific about Argentina, though its biggest debt crisis was because its currency was pegged to the US dollar. Likewise, the current troubles in the Eurozone come from a lack of currency sovereignty. These things are unfortunate, and will probably lead to a dissolution of the EMU at some point, but they have no bearing on the US.