Harvard economics professor Kenneth Rogoff, who preliminarily 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 scene and we're in unknown waters, ” he warned.
Harvard Professor of Economics Kenneth Rogoff on U.S. Default and Global Financial Crisis
Harvard economics professor Kenneth Rogoff participated with his perspective on the U.S. economy, a possible U.S. default, and a global financial crisis in an interview with ET editor Srijana Mitra Das, issued 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 inquired whether the current U.S. debt crisis and its potential default could “ bring back the threats 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.
“ Commonly, when you navigate government spending, you consider one bill at a moment. You look over all its details and then negotiate how to work these out, ” he explained. Still, he stressed that the Republicans are trying to pick up everything all at once, emphasizing that “ No country runs its fiscal policy that way. ”
He cautioned “ Typically, these negotiations do pick up resolved at midnight but there's a two to three percent chance at the moment here that we will catch on 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 another way.” One example was in the primal 1930s when American debt was utilized to be payable in gold. President Franklin Roosevelt changed the gold price from $20 to $35. “We defaulted on the gold clause while we compensated the debt in dollars, which was value a lot less,” the Harvard professor noted.
Another example was “ after the Revolutionary War when theU.S. was forming, ” the economics professor described. “ Alexander Hamilton, the initial secretary of the U.S. Treasury, only compensated some of the inherited colonial debt, ” Rugoff clarified, adding:
We’ve also had high inflation recently — so, if you’re a U.S. debt holder, the value of your holding has reduced markedly in the last two years. That is a kind of default since you weren’t expecting the loss of value but it is much less disruptive than this situation which is like facing a black hole.
U.S. Treasury Secretary Janet Yellen has spoken that the Treasury may not be suitable to pay all of the government’s bills as early as June 1 “if Congress does not raise or suspend the debt limit before that time.” still, some believe that raising the debt ceiling will make the problem worse, involving economist Peter Schiff.
Like Yellen, the Congressional Budget Office also warned that the government could default on its debt in the initial two weeks of June. The IMF cautioned last week that a U.S. default would have “ very serious repercussions. ” Meanwhile, former President and 2024 presidential candidate Donald Trump has urged Republican lawmakers to allow the U.S. to default on its debt if the Democrats don't agree to spending cuts.
(Kevin Helms, Bitcoin.com, 2023)