Rogoff on Debt, Interest Rates, Taxes and Spending

Aki Ito and Jason Clenfield of Bloomberg do a nice job of summarizing Kenneth Rogoff's remarks at a forum in Tokyo in "Harvard’s Rogoff Sees Sovereign Defaults, ‘Painful’ Austerity."  Rogoff does not express much hope for solutions on budgetary problems from the federal government.

Feb. 24 (Bloomberg) -- Ballooning debt is likely to force several countries to default and the U.S. to cut spending, according to Harvard University Professor Kenneth Rogoff, who in 2008 predicted the failure of big American banks.

Following banking crises, “we usually see a bunch of sovereign defaults, say in a few years,” Rogoff, a former chief economist at the International Monetary Fund, said at a forum in Tokyo yesterday. “I predict we will again.”

The U.S. is likely to tighten monetary policy before cutting government spending, sending “shockwaves” through financial markets, Rogoff said in an interview after the speech. Fiscal policy won’t be curbed until soaring bond yields trigger “very painful” tax increases and spending cuts, he said...

“Most countries have reached a point where it would be much wiser to phase out fiscal stimulus,” said Rogoff, who co- wrote a history of financial crises published in 2009. It would be better “to keep monetary policy soft and start gradually tightening fiscal policy even if it meant some inflation.”...

The U.S. government will delay any efforts to contain the deficit until Treasury yields reach around 6 percent to 7 percent, Rogoff said.

“The U.S. is in a state of paralysis in its fiscal policy,” he said. “Monetary policy will tighten first, and I don’t think it’s the right mix.”