Harvard economics professor Kenneth Rogoff has shared his thoughts on the U.S. economy, a potential U.S. default, and the risk of a global financial crisis in a recent interview. Rogoff, who is the Maurits C. Boas Chair of International Economics at Harvard University and a former Chief Economist and Director of Research at the International Monetary Fund (IMF), expressed concern over the U.S. debt crisis and its potential to trigger a global recession.
Rogoff stressed that the situation is very precarious, stating that the risks of a global financial crisis already exist, but could worsen if the U.S. defaults on its debt. He explained that the Republicans are trying to negotiate everything at once, which is not how fiscal policy is typically managed. Rogoff cautioned that there is a 2 to 3 percent chance that the U.S. could default, which could have severe repercussions.
According to Rogoff, the U.S. has defaulted on its debt in the past, but in different ways. For instance, in the early 1930s, American debt was payable in gold, and President Franklin Roosevelt changed the gold price from $20 to $35, which resulted in the U.S. defaulting on the gold clause. Rogoff also mentioned that after the Revolutionary War, the U.S. only paid some of the inherited colonial debt.
Furthermore, Rogoff pointed out that high inflation in recent years has reduced the value of U.S. debt, which is a form of default, but less disruptive than the current situation. He likened the current situation to facing a black hole.
Treasury Secretary Janet Yellen has warned that the Treasury may not be able 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. However, some economists, including Peter Schiff, believe that raising the debt ceiling will worsen the problem. The Congressional Budget Office has similarly warned that the government could default on its debt in the first two weeks of June. The IMF has also cautioned that a U.S. default would have very serious repercussions.
Former President and 2024 presidential candidate Donald Trump has urged Republican lawmakers to let the U.S. default on its debt if the Democrats do not agree to spending cuts. However, Rogoff emphasized that no country manages its fiscal policy in this way and that it could lead to disastrous consequences. He hopes that the situation will be resolved soon to avoid a global financial crisis.