Kenneth Rogoff used to worry that America’s debt would slow growth. Nowadays, the former chief economist of the International Monetary Fund is worried about something worse.
“Just to be clear, I haven’t worried about a debt crisis in the US until very recently,” Rogoff, a Harvard economics professor, told Yahoo Finance Executive Editor Brian Sozzi (video above).
What would set one off? “A shock like a bigger war than we had in Iran,” Taiwan, “a cyberattack, some out-of-the-box shock,” Rogoff said. “The problem is we’re not resilient.”
The debt, “depending on how you measure it,” is “hitting an all-time high, going much higher,” he explained. With interest rates back to historically normal levels, “suddenly debt servicing costs are second on the budget, on its way to first, according to the CBO.”
Rogoff added, “Politically, we’re sort of like a deer caught in the headlights.”
Read more: How the soaring federal debt affects you personally
Other countries have the same problem, he said, pointing to France and the UK. However, he added, “the US is the biggest debtor, and so it’s the most vulnerable to this rise in interest rates.”
A crisis could take several forms, Rogoff said. One is inflation: “You can say the Fed would never allow that. Well, in an extreme situation, they would.”
Another is financial repression, “which is basically what Japan did,” pushing insurance companies, pension funds, and other locals to hold more government debt.
Cutting spending or raising taxes is the third option, “but I think until we have a crisis, the voter’s not going to go for it.”
“Maybe nothing will happen for 15 years,” he noted.
And according to Rogoff, AI isn’t going to solve the issue.
“If it did come in big, it’s going to keep raising interest rates,” Rogoff said. With the debt “already, you know, over 100% of GDP,” every one-point rise in rates means “you might get more revenue, but you got to pay just as much or more on your debt.”
AI also favors capital over workers, he said, and “labor is easier to tax than capital.”
Internal AI tools help analyze interview transcripts and draft. Editors reviewed, edited, and fact-checked this post before publication.
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Source: finance.yahoo.com
