The Debt Overhang's Lasting Effects
It has often been argued that the U.S. can afford to take on more federal government debt to finance growth initiatives because interest rates are at such extraordinarily low levels. Here's a competing thought: What if interest rates are at such low levels because market participants regard the massive amount of debt as a force that will suppress growth (and limit inflation), making bonds more attractive?
New research supports the thesis that high levels of debt can significantly impair economic growth rates in countries where public (e.g., central government) debt exceeds 90% of GDP. In these instances, growth rates were reduced by 1.2 percentage points, on average, from 3.5% per year to 2.3%. Noted economists Carmen M. Reinhart, Vincent R. Reinhart and Kenneth S. Rogoff recently published their findings in a (PDF link) paper at the National Bureau of Economic Research....456 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.
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