NYC Independent Traders and Investors Message Board › Austerity vs. Debt: The debate over the Reinhart-Rogoff spreadsheets

Austerity vs. Debt: The debate over the Reinhart-Rogoff spreadsheets

A former member
Post #: 118
Brett Arends' piece, "Why everyone is wrong about austerity" is a pretty good read.

Some points he makes:

Both Reinhart and Rogoff and their critics,Herndon, Ash and Pollin are misusing history by focusing on a limited data set (a few "advanced economies" during the period 1946-2009) and presuming to deduce universal truths. We cannot liken human history or economics to the natural sciences.

Anti-austerians aren’t considering the past repudiation of debt via reduced purchasing power of the currency. Many of today's investors who are in line to be stiffed are people nearing or in retirement, who are not able to weather significant losses.

The level of total public, private, corporate, and off-balance-sheet liabilities in the U.S. today — and in many other advanced economies — has no real parallel in a modern world. Flawed comparisons with 1945 are not helpful.

His conclusion:

"We may never know for certain. In the meantime, common sense may remain a useful tool. I remain skeptical that we can borrow and print money indefinitely with no consequences whatsoever. Call me crazy."
I'm worried that we may indeed find out that common sense trumps mathematical analysis and high debts do matter :-(

Can we learn from the recent past? For a very readable account of the role of a certain Gaussian copula function, a formula for measuring risk, in the justification of giving triple-A ratings to pools of subprime mortgages go to­

What do you think about the Austerity vs. Growth Based on Debt debate?
What do you think of mathematical analysis vs. common sense?
Ron L.
New York, NY
Post #: 5
I suggest that framing the issue as debt-versus-austerity is a false choice. That question ignores the function of timing.

My view is that there should be “debt” now – in the form of economic stimulus – and (relative) austerity somewhat later, once the economy is stabilized in its recovery trajectory (as it will inevitably do, because population growth and technological advances always join to further prosperity).

While the usually paired assertions that “our debt is not sustainable” and that it will result in “run-away inflation,” are in wide currency, the supporting evidence is scant for all I’ve seen. The two principal precedents cited for that are the German Weimar Republic and the post-bellum Confederate States of the America. Both were economies whose productive capacities were all but destroyed by war, and were subject to burdensome reparations obligations to boot . . . neither of which describes the 21st-century United States.

Our own most recent bout with inflation, in the 1970's, was the effect of unfunded spending on the Vietnam war – which was not stimulative to the domestic economy – and the first OPEC oil embargo, which was tantamount to a rather large tax increase (like “austerity” is).

The model should be a “New Deal” type build-out of useful physical infrastructure. Four generations after the 1930's, our economy is still gainfully employing the schools, parks, government buildings, and reclaimed farmland that Government spending bought for us then. Government spending – even debt-funded spending (conveniently, at today’s historically low interest rates) – should be providing the next generations’s transportation, communications and education facilities.

Eventually, the debt will need to be repaid and retired. (Nobody really argues for "debt indefinitely.")

A rejuvenated, more efficient, expanding economy, with its concurrent burst of tax revenue, will do that in a walk.
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