Economists See No Crisis With U.S. Debt as Economy Gains – Bloomberg 03-21-13

Salient to Investors:

Economic data disproves the claim that the US national debt is hurting the economy. Economists across the political spectrum dispute the Rogoff-Reinhart conclusion that countries with debt loads greater than 90 percent of GDP grow more slowly.

With borrowing costs near record lows, the cost of paying off the national debt as a percent of GDP is lower than in the year Ronald Reagan left the White House.

Guy LeBas at Janney Montgomery Scott said heavy debt loads do not slow economic growth because weak economic conditions encourage deficit spending, leading to more US debt being issued, not the other way around. Two French economists in 2012 concluded that growth rates increased as the debt-to-GDP ratio passed 115 percent.

Joseph Gagnon at the Peterson Institute for Intl Economics said the Rogoff-Reinhart 90 percent is not a threshold for countries with control of the currency they borrow in, and financial markets are begging the government to borrow at negative real interest rates for 10-year maturities Gagnon said there is no way our debt is slowing us today. The IMF said the US passed the 90 percent mark in early 2010.

Rogoff-Reinhart says that debt above 90 percent of GDP reduces median growth rates by 1 percent for advanced countries, and notably lowers growth for advanced countries and emerging markets.

Douglas Holtz-Eakin says the debt has to be hurting us right now and testing the upper limit of debt sustainability would be foolish – our debt load could be $500 billion overnight because spreads move fast.

The CBO predicts interest payments will remain below current levels until 2018.

The Bank for Intl Settlements says government debt becomes a drag on growth at 85 percent of GDP. Manmohan Kumar and Jaejoon Woo at the IMF found a significant negative effect on growth above the 90 percent threshold – for every 10 percent increase, growth fell by 0.15 percent per year.

Robert Greenstein at the Center for Budget and Policy Priorities said most economists don’t agree that we are already in a danger zone because gross debt exceeds 90 percent of GDP.

John Makin at the American Enterprise Institute said the 90 percent threshold is not a reliable gauge.

Drew Matus at UBS Securities said comparing the US to Sweden or Japan doesn’t cut it.

Dean Baker at the Center for Economic and Policy Research says the idea of debt limiting growth is very silly because the US retains vast assets, including technically recoverable oil and gas reserves estimated at $128 trillion.

Read the full article at http://www.bloomberg.com/news/2013-03-22/economists-see-no-crisis-with-u-s-debt-as-economy-gains.html

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