Salient to Investors:

Brett Arends writes:

It is not clear if high debt levels lead to slower growth, or result from slower growth, or that the two have only a loose connection, but we cannot borrow and print money indefinitely with no consequences whatsoever.

Rogoff and Reinhart got their math wrong but their data still shows some correlation between debt levels and lower growth rates. The UMass–Amherst economists who revealed Reinhart and Rogoff’s errors found that economies with government debt over 90% grew by just 2.2% a year on average, versus just over 3 percent for economies with debt between 30% and 90% of GDP, and over 4 percent for economies below 30% of GDP.

However their study was mostly based on data for advanced economies from 1946 to 2009, and you cannot deduce universal rules for the future from a 63-year snapshot of history. Historians like Harvard’s Niall Ferguson, a leading champion of the Reinhart-Rogoff view, should have been more skeptical.

New Zealand right after World War II had high debts, yet grew very quickly in the late 1940s because everyone needed food and wool.

Anti-austerians, who cite the biggest, broadest, longest period of growth and prosperity in US after WWII, despite debt at 120% of GDP in 1945, ignore the fact that taxpayers effectively repudiated a large chunk of it with a falling dollar and surge in inflation.

In the 1970s, huge government debts were partially repudiated every year through inflation – Treasuries became known as “certificates of confiscation.”

ICI reports the public holds $3.4 trillion in bond funds so will pay a vicious price if inflation surges again.

US household, corporate and state and local governments owe a total of $40+ trillion, nearly 3 times GDP, au contraire to just after WWII when corporate and household balance sheets were in excellent shape due to the high savings rates during the war years, and the war-time inflation which wiped out the debt of the Depression. In addition, today we also have off-balance-sheet liabilities for Social Security and Medicare.

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