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Rogoff predicts a U.S. Debt Crisis
Howard Richman, 3/31/2010

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:

  1. Balance trade so that we stop borrowing from foreigners.
  2. Balance the federal budget.
  3. Switch from income to consumption taxes to encourage savings.

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Comment by Don Dyer, 4/3/2010:

I agree that we need to balance trade. The problem is that our industry is so atrophied so that this is not possible for at least twenty years. Balance the federal budget - a good idea, but it will never happen. The Feds will either have to default on the debt or inflat and so they will inflat. Consumption taxes - it won't work as in today's weak economy, which is consumption driven, this will cause collaspse.

Reduce Fed spending drastically, allow the free enterprise economy to work without Fed interference, and go back to the gold standard.

Response to this comment by Howard Richman, 4/4/2010:
i disagree. Our industry would come back if we had balanced trade. Also, balanced trade would stimulate the economy enough so that we would need more savings, not more consummption.




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    Wikipedia:

  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

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  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]