Tags: Ken | Rogoff | US | Default

Rogoff: U.S. Has Defaulted Before, May Do So Again

Friday, 05 Mar 2010 09:16 AM

Harvard professor and former IMF chief economist Ken Rogoff says the United States has been in "default" before, when it went off the gold standard, and there is no reason why it won't do so again.
He said that people generally fail to perceive how bad the problem of defaulting gross government debt is until the thresholds reach 90 percent to 100 percent of gross domestic product, or GDP.

“Up to that point, you don’t notice much,” Rogoff told CNBC. “And then suddenly … something’s gotta give.”

As an example, he points out that the United States defaulted on its debts during The Great Depression.

“We went off the gold standard,” he observes, and the price of gold, which used to be $20 an ounce, suddenly jumped to $35 an ounce.

“That was a default on domestic debt,” Rogoff observes. “You would be amazed at how many countries have amnesia with respect to their default(s).”

Even given that markets would give the U.S. more time before proclaiming default, another U.S. default certainly isn’t out of the question now, Rogoff says.

On both sides of the Atlantic, government spending and unfunded retirement commitments continue to hit record highs, observes Encima Global head David Malpass.

“This discourages the new private-sector investment needed to create growth and all the good things that go with it: jobs, profits, house purchases and government tax receipts,” Malpass writes in The Wall Street Journal.

“The fundamental issue is whether government financial crises — in Greece, California, New York or elsewhere — will cause government spending reforms," he said.

“If not, then growth, the dollar and euro are in further peril as markets force bailouts and waves of defaults.”

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