Harvard economics professor Kenneth Rogoff, who previously served as the chief economist at the International Monetary Fund (IMF), has warned that the U.S. defaulting on its debt obligations could spark a global financial crisis. “It’s a very perilous situation and we are in unknown waters,” he warned.
Harvard Professor of Economics Kenneth Rogoff on U.S. Default and Global Financial Crisis
Harvard economics professor Kenneth Rogoff shared his view on the U.S. economy, a possible U.S. default, and a global financial crisis in an interview with ET editor Srijana Mitra Das, published Thursday. Rogoff is a professor of Economics and Maurits C. Boas Chair of International Economics at Harvard University. From 2001–2003, he served as Chief Economist and Director of Research at the International Monetary Fund (IMF).
He was asked whether the current U.S. debt crisis and its potential default could “bring back the risks of a global recession.” Rugoff replied:
Absolutely. The risks exist anyway but if this worsens, it could pose a global financial crisis. I hope it won’t come to that — but it’s a very perilous situation and we are in unknown waters.
“Generally, when you navigate government spending, you consider one bill at a time. You look over all its details and then negotiate how to work these out,” he explained. However, he stressed that the Republicans are trying to get everything all at once, emphasizing that “No country runs its fiscal policy that way.”
He cautioned: “Typically, these negotiations do get resolved at midnight but there is a two to three percent chance at the moment here that we will discover what a U.S. default looks like.”
How the U.S. ‘Defaulted’ in the Past
Rogoff further detailed that the U.S. has “defaulted” in the past but “in a different way.” One example was in the early 1930s when American debt used to be payable in gold. President Franklin Roosevelt changed the gold price from $20 to $35. “We defaulted on the gold clause while we paid the debt in dollars, which was worth a lot less,” the Harvard professor noted.
Another example was “after the Revolutionary War when the U.S. was forming,” the economics professor described. “Alexander Hamilton, the first secretary of the U.S. Treasury, only paid some of the inherited colonial debt,” Rugoff explained, adding:
We’ve also had high inflation recently — so, if you’re a U.S. debt holder, the value of your holding has…
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