Bad Debt is Forever!

Business Insider is highlighting a paper just published by economists Ken Rogoff, Carmen Reinhart and Vincent Reinhart, called Debt Overhangs: Past and Present. This paper builds upon the research published in the book, This Time It’s Different, which I read and reviewed in January. In this article the authors are saying that countries debt levels above 90% of GDP correspond to lower growth rates, 2.3% versus 3.5% for low debt periods, and an average debt duration of 23 years.  Ouch! 23 years of substandard GDP growth is a very, long time and it implies a significant wealth transfer to other nations. The authors implied those results in their book but it looks like they backed it up with some more research into countries with debt levels above 90%. I guess we have to start admitting that debt does matter and big stimulus plans like those advocated by Krugman to grow out of our mess without the pain of austerity are officially dead. That leaves us with very few options. Since we cannot rely on the next generation’s income to grow fast enough to pay for our increasing Social Security and Medicare benefits, those programs have officially become a “pact between one generation and the next” systems. This should be amusing. Democrats loath to use those words while Republicans prefer to not talk about it at all. Now they both have to acknowledge that the growth in Social Security and Medicare benefits is not sustainable and that those benefits are now subservient to the taxes you can collect from the next generation. This is no surprise to the young voters. Considering the enthusiasm the young voters have for Ron Paul, we have to assume that they know how to count and they are not happy with the answer they keep coming up with. So the young voters are pissed and the elderly will be pissed shortly. I doubt anyone will be happy. The only positive thing coming out of this affair is that it should be pretty amusing to listen to our politicians spin the politically unattractive option of implementing something pretty similar to Bowles-Simpson plan, the Ryan plan, or sequestration as good for the country.

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