Reinhart Rogoff respond

A nice “open letter” take down of Paul Krugman. I respect Dr. Krugman a lot especially because of the work he did in the 90’s presaging the Asian crisis. However his increasingly left-wing postures have made it difficult to agree with him, even if his analysis is often spot on.

The open letter is a rebuttal to PK’s criticism, but there are some beautiful zingers including this one (taking issue with PK’s assertion that they hid the data behind the work): “Fortunately, the “Wayback Machine” crawls the Internet and periodically makes wholesale copies of web pages…┬áThese data are regularly sought and found for those doing research who care to look.” (emphasis added)

What is really galling is, as RR point out, PK used to be quite the fan of the concept of a debt overhang. But in some weird way he applied it only to emerging markets. PK still seems to believe that advanced countries can borrow indefinitely as long as interest rates are low. Holding these beliefs in a post-2008 and post-euro crisis world seems weird. Why should the US not face a debt crisis? After all its Debt/GDP is over 100% & it has been racking up new debt at an almost 10% of GDP per annum rate. What about Japan, which could have taken the first step into the abyss with the current Abe-nomics programme? (one fund manager I know calls it the Mug-abe-nomics, if central bank monetization works Zimbabwe should be the richest country on Earth)

Japanese interest rates are rising in face of the largest QE programme ever. The 7 trillion yen per month of liquidity injection (about 70 billion dollars per month) compares with $85 billion per month addition by the US Fed. But the Japanese economy is one-third the size of the US economy.

I continue to believe that fiscal deficits are inimical to growth. Perhaps as posited, there is a tipping point where the future growth is materially lowered. Perhaps there is no one tipping point, but it is a slope. Either way RR’s basic analysis and results are probably right no matter that they made a few errors along the way.

Leave a Reply

Your email address will not be published. Required fields are marked *

Connect with Facebook

This site uses Akismet to reduce spam. Learn how your comment data is processed.