Figure 4, which plots total (public and private) credit market debt outstanding for the US during 1916 to 2010:Q1 makes this point clear.11 Despite considerable deleveraging by the private financial sector, total debt remains near its historic high in 2008. Total public sector debt during the first quarter of 2010 is 117% of GDP. It has only been higher during a one-year stint at 119% in 1945. Perhaps soaring US debt levels will not prove to be a drag on growth in the decades to come. However, if history is any guide, that is a risky proposition and over-reliance on US exceptionalism may only prove to be one more example of the “This Time is Different” syndrome.12
For many if not most advanced countries, dismissing debt concerns at this time is tantamount to ignoring the proverbial elephant in the room.
Figure 4. Total (public and private) credit market debt outstanding: US, 1916-2010Q1
Sources: Historical Statistics of the US, Flow of Funds, Board of Governors of the Federal Reserve International Monetary Fund, World Economic Outlook
References
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1 In this paper “public debt” refers to gross central government debt. “Domestic public debt” is government debt issued under domestic legal jurisdiction. Public debt does not include obligations carrying a government guarantee. Total gross external debt includes the external debts of all branches of government as well as private debt that issued by domestic private entities under a foreign jurisdiction.
2 The comparable emerging market exercises are presented in the original paper.
3 The four “buckets” encompassing low, medium-low, medium-high, and high debt levels are based on our interpretation of much of the literature and policy discussion on what are considered low, high etc. debt levels. It parallels the World Bank country groupings according to four income groups. Sensitivity analysis involving a different set of debt cutoffs merits exploration, as do country-specific debt thresholds along the broad lines discussed in Reinhart, Rogoff, and Savastano (2003).
4 The interested reader is referred to the original paper for the comparable emerging market table.
5 Our sample includes 24 emerging market countries.
6 The null hypothesis is whatever “normal” growth is versus the alternative of lower growth.
7 Figure 3 in the NBER WP is not included in the published version of the paper.
8 See Section IV devoted to fiscal consequences in Reinhart Rogoff (2008), see also Laeven and Valencia (2010).
9 For a model where credit-financed government deficits lead to a currency crisis, see Krugman (1979).
10 Indeed, this is the central argument in Carmen M. Reinhart and Vincent R. Reinhart (2010) originally published in November 17, 2008).
11 Flow of Funds aggregate the private and public sectors, where the latter is comprised of federal (net), state and local and government enterprises. To reiterate, this is not the public debt measure used in our historical analysis, which is gross central government debt (which for the U.S. is at present about 90 percent of GDP).
12 The “This Time is Different Syndrome” is rooted in the firmly-held beliefs that: (i) Financial crises and negative outcomes are something that happen to other people in other countries at other times (these do not happen here and now to us);(ii) we are doing things better, we are smarter, we have learned from the past mistakes; (iii) as a consequence, old rules of valuation are not thought to apply any longer.
Copyright (c) Carmen Reinhart, Kenneth Rogoff, VoxEU.org.
