Saturday, January 9, 2010

Reinhart & Rogoff score again

They are out with a new paper, good solid descriptive statistics of what has happened in the past when countries have gotten into a debt position like the US is in now. Here’s a link to the paper:

“Growth in a Time of Debt”

T or F: Debt-financed fiscal stimulus will create faster than average growth in this situation.

Bonus question: Future credit crises are (more) (less) likely given the government’s current tack. has a summary here. The WSJ’s comment:

In a new paper presented Monday at the annual meeting of the American Economic Association, Carmen Reinhart of the University of Maryland and Kenneth Rogoff of Harvard study the link between different levels of debt and countries’ economic growth over the last two centuries. One finding: Countries with a gross public debt exceeding about 90% of annual economic output tended to grow a lot more slowly. For advanced countries above the 90% threshold, average annual growth was about two percentage points lower than for countries with public debt of less than 30% of GDP.

The results are particularly relevant at a time when debt levels in the U.S. and other countries at the center of the financial crisis are rapidly approaching the 90% threshold. Gross government debt in the U.S., for example, stood at 85% of GDP in 2009 and will reach 108% of GDP by 2014, according to IMF projections. The U.K.’s gross government debt stood at 69% of GDP in 2009 and is expected to reach 98% of GDP by 2013.

“If history is any guide,” the rising government debt “is very troubling for the U.S. and other advanced economies,” says Ms. Reinhart.


  1. I thought Rodger Malcolm Mitchell had some good insight on this topic:

    "The Investopedia says, "The debt-to-GDP ratio indicates the country's ability to pay back its debt." This ratio often is quoted in stories predicting the demise of America if federal debt continues to rise and especially if the debt ever were to exceed GDP. This ratio is so important, the European Union once required, as a condition of membership, the ratio of gross government debt to GDP not to exceed 60% at the end of the preceding fiscal year. The Fed reportedly aims for a debt/GDP ratio in the 30%-70% range.
    But, how meaningful really is the federal debt-to-GDP ratio?. In August, 1971, we finally divorced from the last vestiges of the gold standard, giving the U.S. government the unlimited power to create money with which to service its debt. GDP has no affect on that. Even with zero GDP, the federal government could create unlimited money to pay its debts.
    Ah, but doesn't "printing money" cause inflation? Apparently not. In the past 50 years, every spike in debt growth has corresponded with a decrease in inflation. One reason for this counter-intuitive lack of expected correlation between inflation and money supply: Inflation has been affected more by the supply and demand for oil than by the supply and demand for money.
    Further, GDP is production-based, while inflation is consumption based--two significantly different measures. So in the Debt/GDP fraction, neither the numerator nor the denominator refers to inflation.
    And as for that artificial, consider these ratios: Japan's debt is 170% of its GDP. Italy's is 100%. "Wealthy" Russia's debt is only 6% of GDP. The U.S. is above 60% and growing. What does it all mean?
    Please click the cover to see excerpts from FREE MONEY. Questions? Ask the author, Rodger Malcolm Mitchell at:
    It means the oft-quoted Debt/GDP bogeyman measures nothing, evaluates nothing and predicts nothing. It is the classic apples/oranges comparison, effective only at scaring politicians and voters into making the wrong economic decisions.
    About the only meaningful statement one could make about federal debt vs. GDP is this: All nine recessions in the past 50 years, have been preceded by reductions in debt growth."


  2. Given how much worse the economy would have been in 2009 without the stimulus provided by Federal spending, I would conclude that it is working, but needs to be several magnitudes larger along with some tax cuts.

    If Congress doesn't stop living in fear of the 70s, we are all going to relive the 30s. The few people I have known who were adults in the 30s and had some comprehension of events then have no desire for a repeat.

    More emphasis needs to be on creating trickle-up by applying stimulus at the bottom. Recapitalizing the banks is pointless if no one wants to borrow money into existence. The Federal Reserve cannot force people to borrow money so some other method of getting money flowing is needed.

    Richard C. Cook proposes a National Dividend of $1000 a month to every citizen.

    Warren Mosler proposes suspending the FICA tax and offering everyone an $8 hour job. His proposal would likely be preferred over the Cook plan by those afflicted with jobism.

    Either would be preferable to the mindless stalemate.

    To be clear, my preference would be a conversion to a fiat monetary system with 100% reserve requirements where Congress would spend money into existence instead of borrowing it into existence.

    At present, we have debt(credit)-money system with a small fiat money component. The only true fiat money we have is coins, but since the Federal Reserve rebates the interest earned after expenses and a guaranteed 6% dividend to shareholders (member banks) Federal Reserve Notes almost function like fiat money.

    In a debt money sytem, the quantity theory of money does not hold since the public capacity for debt limits the amount of money the Fedral Reserve or any central bank can put into circulation. This is why the Fed correctly started buying Treasury issues directly.

    I much prefer the Fed to monetize the debt than China or other private borrowers since we get most of the interest on Federal Reserve Notes refunded to the Treasury. In 2008, the Fed paid the Treasury 31.6 billion after expenses and a dividend of 1.1 billion.

    At this point in time the best proposal on the table is Stephen Zarlenga's American Monetary Act ( As I previosly pointed out Kucinich will be introducing legislation based on that, but until we get that or similar passed, deficit spending is needed or we may as well accept being poor and go back on the gold standard which will insure that we are.

  3. Yes, we need to support the people at the bottom. Surely we need monetary reform, especially reform of our regulators.

    I view the collapse of effective aggregate demand as a side-effect of extreme income and wealth inequality. A ruling class manipulates the system, public and private, for its own benefit. America is being run like a banana republic.

    There are successful fiat money banking systems. If we hadn't deregulated and bailed out our biggest, greediest banks, we might have had one. Many honest bankers are angry at what a few greedy banks and Wall Street have done to the industry.

    As a first step toward reform we need to throw out the Whole Sick Crew of economic policymakers who brought us this mess.

    Values change and then legislation happens--if we can ever get honest politicians elected. Let's keep the basic idea in focus, that America fails if the basic American value of fairness is forsaken.

    Thanks for your comments. I will take a look at the references.

  4. Australian professor William Mitchell does as good a job as anyone explaining why we do not need to fear deficits.

    Hopefully this isn't too much like sitting in a class in college again.

  5. haven't I heard this somewhere before?

    I want my MTV (X 16) Now look at them yo-yo's that's the way you do it You play the guitar on the MTV That ain't workin' that's the way you do it Money for nothin' and your chicks for free Now that ain't workin' that's the way you do it Lemme tell ya them guys ain't dumb Maybe get a blister on your little finger Maybe get a blister on your thumb We gotta install microwave ovens Custom kitchen deliveries We gotta move these refrigerators We gotta move these color TV's (See the little faggot with the earring and the makeup Yeah buddy that's his own hair That little faggot got his own jet airplane That little faggot he's a millionaire) Gotta install microwave ovens Custom kitchen deliveries We gotta move these refrigerators Gotta move these color TV's I shoulda learned to play the guitar I shoulda learned to play them drums Look at that mama, she got it stickin' in the camera Man we could have some And he's up there, what's that? Hawaiian noises? Bangin' on the bongos like a chimpanzee That ain't workin' that's the way you do it Get your money for nothin' get your chicks for free We gotta install microwave ovens Custom kitchens deliveries We gotta move these refrigerators We gotta move these color TV's Look a' here That ain't workin' that's the way you do it You play the guitar on your MTV That ain't workin' that's the way you do it Money for nothin' and your chicks for free Money for nothin' and chicks for free Money for nothin' and your chicks for free Look at that, look at that Money for nothin' and your chicks for free I want my, I want my, I want my MTV Money for nothin' and chicks for free (Fade) I want my, I want my, I want my MTV

  6. Seriously, what this kind of thinking does is to trivialize the very idea of money--it's free, you just print it, deficits don't matter. I get that. But this approach ignores the most important function of money, to provide *reliable* price signals to the real economy. Once money becomes unstable--and you can be assured that inflation is not a uniform process and will introduce significant relative price and social distortions [just watch the US]--the level of uncertainty created will stifle economic activity. Uncertainty is the greatest enemy of enterprise. And unfortunately, history teaches that war is the certainty that weak-minded humans often choose to get out of the trap of depression and uncertainty.

  7. At my age, checks for free would probably be a better idea.

    Charles Walters, a past President of National Organization for Raw Materials (see and, and my preferred mentor in all matters economic and agronomic for over thirty years wrote in October 2008:

    "Now that the spin-artists and speculative economists have had their day and era, perhaps a new administration will return us to a physical economy based on gifts from nature, then structural balance between sectors, and have done with the conceit of creating money from thin air without refernce to real production, real employment and real national security based on feeding the people properly."

    I doubt it will be this administration but perhaps a Kucinich or Mosler one could achieve that.

    Mitchell or Mosler are not advocating deficit spending beyond that needed to sustain full employment. Mitchell defines that as 2% or less. As I said my preference is to create it without any debt and the resultant usury but I think Mitchell and Mosler both do a great service in educating folks that deficit spending is not the evil that some would have us believe.

    I lean toward Richard Cook's Social Credit ideas with a National Dividend and Compensated Price because I am not sure that in the age of machines and computers that there is enough drudgery left to go around. To sustain that level of employment would likely wind up producing a lot more throwaway junk that most of us thankfully don't really need to live a satisfying life.

    The problem isn't so much that people are unemployed as that they don't have any money. The Cook Plan ( would solve that and the deficit problem at the same time.

    It does appear that the weak-minded humans most vocal against deficit spending in general have no problem with it if it financing war. You possibly saw the year-end Bill Moyers show where he said his book of the year for 2009 was 2007 book Nemesis by Chalmers Johnson.

    There is great interview with Chalmers here:

  8. As far as providing price signals, I think Clarence Ayres had great insight in his book The Theory of Economic Progress. Available free here:

    He is considered an American institutionalist economist as opposed to the classical tradition which includes Adam Smith, Marx, Hayek and other Austrians among others which all accept the utilitarian criterion of judgment and and the price theory of valuation.

    Supply and demand is ultimately a pretty stupid way to determine the optimum price.

    Heresy! I know.

  9. You'd have to be able to give me a three minute intuitively plausible explanation of what your monetary theory is. Just saying deficits don't matter says to me debts don't have to be repaid, either through inflation or explicit default. Also, saying markets are stupid doesn't tell me what works better (nothing, IMHO, but markets do not a social contract make).

    Philosophically we seem to be on the same page, with respect to Social Dividend, war and generally more egalitarian conditions, I just don't get the monetary part.

    I will check out the Moyers piece, thanks.

  10. Pardon if I gave the impression that deficits don't matter. I just think that, without real monetary reform along the lines of that recommended by Stephen Zarlenga, Richard C. Cook and Ellen Brown ( that running deficits is preferable to the deflationary depression that would be caused by attempting to balance the Federal budget. Perhaps we will have to experience it to actually get a fair monetary system where, as Michael Hudson recently wrote, 90% of the people are not paying compound interest to the other 10%.

    I am unsure that I could distill 35 years of study into 3 minutes but I will work on it when time allows. I was hoping to encourage study on your own.

    A few lines from Charles Walters in his foreward to the Nature Of Wealth ( will likely help tie all the pieces together better than I could:

    "Therefore, when the total annual production of goods and services flow through the economy at their 100% natural par value, (the intrinsic value rather than the perceived value of a product or service), then sufficient income is created along the way to distribute and consume those same products and services every year without creating excessive debt in the process. Thus a failure within the pricing system at the raw materials stage of production is especially harmful because it is duplicated each time the raw material flows through another stage of the economy. Since this price deficit is fed into the economy at the first point of sale, it distorts the value of all goods and services and eventually forces entire economies to cut back their national level of income below that dictated the state of the art."

    I agee with your thesis that recessions are caused by aggregate demand falling. That falls under out present monetary sytem because of a lack of earned income or willingness to take on debt to replace that lack.

    We tried a par economy from 1942-1952 and it worked. It worked so well that bankers were making very few loans as most laborers and farmers had adequate earned income as a better pricing method caused income to rise and the need to borrow to fall. The bankers and free-traders then began a concerted effort to destroy earned income in order to force debt assumption and import invasion - a process still continuing today.

    That par economy came about as a result of two laws one of which is still on the books but is ignored by Tom Vilsack as well as as most previous Secretaries of Agriculture.

    Steagall Amendment of 1941 (also called Steagall Commodity Credit Act), Pub. L. 77-144, ch. 270, 55 Stat. 498 (1941)

    Signed into law July 1, 1941. [This law] required support for many nonbasic commodities at 85% of parity or higher. In 1942, the minimum rate was increased to 90% of parity and was required to be continued for 2 years after the end of World War II (see parity definition under 1936 act, page 2). The "Steagall commodities" include hogs, eggs, chickens (with certain exceptions), turkeys, milk, butterfat, certain dry peas, certain dry edible beans, soybeans, flaxseed and peanuts for oil, American-Egyptian cotton, potatoes, and sweet potatoes.

    Agricultural Adjustment Act of 1938, Pub. L. 75 430, 52 Stat. 31

    Signed into law February 16, 1938. The law was the first to make price supports mandatory for corn, cotton, and wheat to help maintain a sufficient supply in low production periods along with marketing quotas to keep supply in line with market demand. It also established permissive supports for butter, dates, figs, hops, turpentine, rosin, pecans, prunes, raisins, barley, rye, grain sorghum, wool, winter cover crop seeds, mohair, peanuts, and tobacco for the 1938 40 period. The 1938 Act is considered part of permanent legislation. Provisions of this law are often superseded by more current legislation. However, if the current legislation expires and new legislation is not enacted, the law reverts back to the 1938 Act (along with the Agricultural Act of 1949).

    The AAA of 1938 is presently codified as 7 USC 601-602

  11. Of course the question of whether we as a society should allow goods and services that are harmful to be "demanded" could take several lifetimes to debate.

    Ultimately, government is religion applied to economics.

    Government as the employer of last resort as recommended by Wray-Mosler-Mitchell is a step in the right direction of achieving a quaranteed minimum income which was last seriously proposed under the Nixon administration.

    What I don't like about their overall proposals is they would still allow private banks and corporations to create legal tender outside of democratic control, which just enables monopolies and monopsonies.

    I have no problem with private monetary systems that anyone wants to create and freely participate in - I just think our government should be the only one allowed to create legal tender as specified by our Constitution.

    Not that I am a big fan of the original fascist intent to make the country safe for business that drove the replacement of the original Articles of Conferderation.

    If it hadnt been for a bunch of unruly farmers, we likely would not have gotten the Bill of Rights added as an amendment.

    But I digress...

    Some material that might be helpful:

    Our American Heritage by farm economist Carl Wilken, 1962:

    Social Credit by Major Clifford Hugh Douglas was the founding document of the Social Credit movement of the 30s which arose under conditions similar to those we face today:

  12. Right, but the the problem now with running gigantic deficits is that we already have way too much debt (see

    Therefore the distribution has to be attacked directly, through guaranteed incomes (and the negative income tax was proposed by George McGovern in the 1972 campaign; and I don't believe Nixon ever really backed it).

  13. This comment has been removed by a blog administrator.