Harvard economics professor Ken Rogoff is predicting that within the next few years, higher interest rates will precipitate a debt crisis in the United States. He predicted this economic future in comments at an economic forum, as reported by Bloomberg.com:
Investors will eventually demand higher interest rates to lend to countries around the world that have accumulated debt, including the U.S., he said. The IMF forecast in November that gross U.S. borrowings will amount to the equivalent of 99.5 percent of annual economic output in 2011. The U.K.’s will reach 94.1 percent and Japan’s will spiral to 204.3 percent.
“In rich countries -- Germany, the United States and maybe Japan -- we are going to see slow growth. They will tighten their belts when the problem hits with interest rates,” Rogoff said at the forum, which was hosted by CLSA Asia-Pacific Markets, a unit of Credit Agricole SA, France’s largest retail bank. Japanese fiscal policy is “out of control,” he said.
He summarizes recent economic history with the following pithy comment to the Washington Post:
"We've shifted from a position of having too much private debt to a position of having too much government debt," says Ken Rogoff, the Harvard economist who last year co-wrote the definitive book on financial crises, "This Time Is Different." "We still are facing the prospect of having to make huge adjustments in a way that we haven't done in generations, and the country doesn't appear to be even remotely ready to confront this."
The solution to a debt problem is quite straight forward. We need to take the following steps:
- Balance trade so that we stop borrowing from foreigners.
- Balance the federal budget.
- Switch from income to consumption taxes to encourage savings.
Disclosure: No positions
