Salient to Investors:

Ken Rogoff at Harvard says:

  • The global economy is growing more slowly than everybody wants – The improving US is one of the bright spots with only 2% growth. China is slowing, India slowing dramatically. 
  • US trend growth rate is 2.5%. Need 4%-5% growth for a sustained period to solve unemployment problem. Housing will continue to strengthen and employment stabilise but we won’t see galloping growth.
  • The US cannot live on stimulus forever but withdrawing it too rapidly makes no sense. The Fed focus on final output, unemployment and inflation is wise but needs to force its message.
  • The US is in a static situation in a changing world which is not healthy. The US government is paralyzed so cannot be creative – we need tax reform, spending on education, to rein in entitlements.
  • Of course the problem is debt – we have record public, private, international debt. US debt levels is at a level where its been historically problematic – very large debt creates inter-generational and distributional tensions. The debt needs to be gradually reined in, not dramatically cut with draconian austerity.
  • Debt is not the only problem and Keynesian spending is not the solution – we need more fundamental reform. Fiscal stimulus is currently 7% of GDP and we need to slowly reduce it. The US needs to spend more on sensible infrastructure, and encourage private funding of infrastructure and other things over which it has had a monopoly.
  • Debt levels at 90% or more of income is historically associated with lower sustained growth, and can restrain growth for decades. US debt at twice current levels would be dangerous. Europe is in more danger of repeating a Japan.
  • Over time, government is service intensive so is always going to be more expensive. The US is on the healthy side of government spending levels unlike France where government spending is half of GDP. Krugman may be right we don’t have too much debt but eventually we will have.
  • In the fair chance we don’t get an agreement on the fiscal it won’t be the end of the world because the hue and cry will bring a settlement within a few weeks. The fiscal cliff is a skirmish in a war. Another debt ceiling fiasco would be ugly.
  • Tax reform is needed but a dream at the moment. Things like the tax treatment of carried interest is egregious.
  • The US is tracking the average of post war crisis. It typically takes another 5 to 6 years to reach normal employment, but will be longer at the current pace. It takes 5 to 6 years for housing to stabilize.
  • Another crisis is not around the corner, unlike Europe or Japan. See no danger of a housing bubble.
  • Credit problems is one leading indicator of crises that got cast aside,  housing bubbles another – central banks need to refocus on them.
  • Tax increases on the wealthy is the just the first move to raising taxes on everyone. Tax hikes hurt growth proportionate more in most cases. The Bush tax cuts were the first step towards the financial crisis.
  • Entitlements, especially medicare, have to be cut because they look crazy 10 years out.
  • Spending less on defense is unlikely in a world where emerging markets are spending more on defense and the issues getting bigger . Government spending on goods and services isn’t that big so not much to cut – we have to cut entitlements , especially medicare. We need more spending on R&D , education, infrastructure.
  • The big problem is the incredible political paralysis, like can seen in gun control. Simpson-Boles was a bold and sensible plan that got thrown out by both sides – we would be in a lot better place today had we adopted it. Clearly there is a lot of political opposition to it.
  • Europe is still a mess. It needs fundamental change not just liquidity injections.
  • China has stabilized but has many bubble signs.

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