Monthly Archives: March 2013

Why I’m more worried than Paul Krugman about the U.S. debt burden

I have been writing recently ([1], [2]) about my paper Crunch Time: Fiscal Crises and the Role of Monetary Policy, co-authored with David Greenlaw (Managing Director and Chief U.S. Fixed Income Economist for Morgan Stanley), Peter Hooper (Managing Director and Chief Economist for Deutsche Bank Securities Inc.), and Frederic Mishkin (professor at Columbia University and former governor of the Federal Reserve). Our paper has generated some interesting discussion by
Paul Krugman and
Matthew O’Brien, among others, to which I’d like to respond.

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Does the U.S. risk a fiscal tipping point?

In my previous post
I reviewed the recent experience of a number of countries whose sovereign debt levels became sufficiently high that creditors began to have doubts about the government’s ability to stabilize debt relative to GDP. When this happens, the government starts to face a higher interest rate, which makes debt stabilization all the more difficult. Is there any danger of the same adverse feedback loop starting to matter for the United States?

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Still in Search of Expansionary Fiscal Contraction

The revisions in Euro zone and UK GDP figures have confirmed the lackluster performance in economies where rapid fiscal consolidation has been implemented. In the Euro zone, estimated growth has now been negative for five quarters. And in the UK, revised figures indicate negative growth for 2012Q4. In contrast, the US has exhibited continued, albeit modest, growth.

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Fiscal tipping points

At the recent U.S. Monetary Policy Forum I presented the paper Crunch Time: Fiscal Crises and the Role of Monetary Policy, along with co-authors David Greenlaw (Managing Director and Chief U.S. Fixed Income Economist for Morgan Stanley), Peter Hooper (Managing Director and Chief Economist for Deutsche Bank Securities Inc.), and Frederic Mishkin (professor at Columbia University and former governor of the Federal Reserve). One of the goals of our research was to try to understand the events that can lead a country to a tipping point in which it faces rapid increases in the interest rate on its sovereign debt, as a result of which the country finds itself with an unmanageable fiscal burden.

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