The Greater Threat

There's a new report out from economists Carmen M. Reinhart and Kenneth S. Rogoff, authors of This Time is Different: Eight Centuries of Financial Folly, entitled "Growth in a Time of Debt."

Although it is chock full of interesting data about the relationship between government borrowing and economic growth, one illustration seemed particularly relevant to the ongoing debate about which 'flation poses the greater threat:

So, where are we now?

Here is the full summary:

We study economic growth and inflation at different levels of government and external debt. Our analysis is based on new data on forty-four countries spanning about two hundred years. The dataset incorporates over 3,700 annual observations covering a wide range of political systems, institutions, exchange rate arrangements, and historic circumstances. Our main findings are: First, the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP. Above 90 percent, median growth rates fall by one percent, and average growth falls considerably more. We find that the threshold for public debt is similar in advanced and emerging economies. Second, emerging markets face lower thresholds for external debt (public and private)—which is usually denominated in a foreign currency. When external debt reaches 60 percent of GDP, annual growth declines by about two percent; for higher levels, growth rates are roughly cut in half. Third, there is no apparent contemporaneous link between inflation and public debt levels for the advanced countries as a group (some countries, such as the United States, have experienced higher inflation when debt/GDP is high.) The story is entirely different for emerging markets, where inflation rises sharply as debt increases.

(Hat tip to Paul Kedrosky's Infectious Greed.)

Comments

[alex west]

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First, the relationship between government debt and real GDP growth is weak for debt/GDP ratios below a threshold of 90 percent of GDP
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waste of time...

as long as mainstream economists will keep on comparing federal debt to GDP AKA debt/GDP they wont solve anything... or understand...

only reason cause economists compare this way TO bleach out the problem, to say look its only 50-60-90 %. .whatever.. not big deal...

the only proper way to compare US gov deficit is in terms of RECEIPTS/outlays of budget itself...

here's real life example..

lets say you make 100,000 $ per yes, but spend 200,000 $ per.. what's your deficit ? 100 percent.. right... you don't compare to GDP, or anything else.. you outlays exceed receipts 100 percent..

lets talk about US gov, esp federal budget..

for 2010 fin year US gov receipts will be around 1.8 - 2 trln $ ... but outlays 3.7-3.9 trln $.. thus its +-100 percent... you don't compare to GDP.. its pointless.. to balance budget US gov will be forced DOUBLE ALL taxes or cut outlays in half... aint gonna happen ..

so,,, in 2,3 years will be total US dollar debasement.. its as sure as hell...

Alex