Kenneth Rogoff once worried that U.S. debt would slow growth. Now the former chief economist of the International Monetary Fund is worried about something worse.
“Just to be clear, I wasn’t worried about a debt crisis in the United States until very recently,” Rogoff, an economics professor at Harvard, told Yahoo Finance editor-in-chief Brian Sozzi (video above).
What could trigger a reaction? “A war-like shock bigger than what we had in Iran,” in Taiwan, “a cyberattack, an unusual shock,” Rogoff said. “The problem is we’re not resilient.”
Debt, “depending on how you measure it,” “is at an all-time high and going much higher,” he said. With interest rates returning to historically normal levels, “debt servicing costs suddenly move to second place in the budget, on track to become first, according to the CBO.”
Rogoff added: “Politically, we are a bit like a deer caught in the headlights. »
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Other countries have the same problem, he said, citing France and the United Kingdom. However, he added, “the United States is the largest debtor and is therefore the most vulnerable to this rise in interest rates.”
A crisis could take many forms, Rogoff said. One is inflation: “Arguably the Fed would never allow that. Well, in an extreme situation, she would. »
Another problem is financial repression, “which is essentially what Japan did,” pushing insurance companies, pension funds and other local players to hold more government debt.
Cutting spending or raising taxes is the third option, “but I think until there’s a crisis, voters won’t go down that route.”
“Maybe nothing will happen for 15 years,” he noted.
And according to Rogoff, AI won’t solve the problem.
“If this turns out to be significant, it’s going to continue to raise interest rates,” Rogoff said. With debt “already, you know, above 100% of GDP,” each point increase in rates means “you might get more revenue, but you’ll have to pay as much or more toward your debt.”
AI also favors capital over workers, he said, and “labor is easier to tax than capital.”
In-house AI tools help analyze interview transcripts and drafts. The editors reviewed, edited and fact-checked this article before publication.
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