Not worried about the massive levels of government spending initiated in recent years (under both George W. Bush and Barack Obama)? Perhaps you might reconsider after reading Megan McArdle’s new Atlantic article about the “outspoken critic of U.S. economic policy” who happens to run the world’s largest mutual fund.
The Fed, complains [PIMCO founder Bill] Gross, is “picking the pockets” of investors. Though he can’t quite bring himself to blame the financial powers that be. “God bless Ben Bernanke and Tim Geithner for what they’re trying to do, but the net result of a lot of what they’re doing is to take money out of the hands of savers.”
This outcome was perhaps predictable. According to Carmen Reinhart and Ken Rogoff, the authors of This Time Is Different, a 500-page encyclopedia of the disasters that have beset overindebted governments and economies, the ratio of government debt to gross domestic product usually doubles after a crisis. Reinhart, now a senior fellow at the Peterson Institute for International Economics, just released, with Rogoff, a global forecast of government debt levels over the next 25 years. Even in their “optimistic” scenario, total U.S. government debt rises from 43 percent of GDP in 2005 to 86 percent in 2015.
And after that? I asked Reinhart the same question I asked Bill Gross: Is the U.S. government going to default on its debt?
Like Gross, she thinks such a scenario—which she calls “debt with drama”—is unlikely. Instead, she predicts that the United States will engage in “financial repression,” a sort of stealth default. Financial repression relies on inflation, regulation, and fancy accounting instead of forced restructurings, or outright refusal to pay. In 1932, for example, New Zealand did a “voluntary” debt swap that converted short-term debt to longer-term debt at lower interest rates. “You look at this deal and you ask yourself, ‘Why would anyone do this? It’s insane,’” says Reinhart. “And then you see that they changed the tax rules, so that if you didn’t do the swap, you’d lose a ton of money.”
Here and now, she thinks much of the debt will be “monetized,” or inflated away, by means of regulations that “encourage” the financial sector not to sell its government debt in the face of inflation.
