Harvard Economics Professor: US Default Could Spark Global Financial Crisis

Harvard economics professor Kenneth Rogoff, who beforehand served because the chief economist on the International Monetary Fund (IMF), has warned that the U.S. defaulting on its debt obligations may spark a world monetary disaster. “It’s a very perilous situation and we are in unknown waters,” he warned.

Harvard Professor of Economics Kenneth Rogoff on U.S. Default and Global Financial Crisis

Harvard economics professor Kenneth Rogoff shared his view on the U.S. financial system, a doable U.S. default, and a world monetary disaster in an interview with ET editor Srijana Mitra Das, printed 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 on the International Monetary Fund (IMF).

He was requested whether or not the present U.S. debt disaster and its potential default may “bring back the risks of a global recession.” Rugoff replied:

Absolutely. The dangers exist anyway but when this worsens, it may pose a world monetary disaster. I hope it gained’t come to that — however it’s a really perilous scenario and we’re in unknown waters.

“Generally, when you navigate government spending, you consider one bill at a time. You look over all its details and then negotiate how to work these out,” he defined. However, he burdened that the Republicans try to get all the pieces unexpectedly, emphasizing that “No country runs its fiscal policy that way.”

He cautioned: “Typically, these negotiations do get resolved at midnight but there is a two to three percent chance at the moment here that we will discover what a U.S. default looks like.”

How the U.S. ‘Defaulted’ within the Past

Rogoff additional detailed that the U.S. has “defaulted” previously however “in a different way.” One instance was within the early Thirties when American debt was once payable in gold. President Franklin Roosevelt modified the gold value from $20 to $35. “We defaulted on the gold clause while we paid the debt in dollars, which was worth a lot less,” the Harvard professor famous.

Another instance was “after the Revolutionary War when the U.S. was forming,” the economics professor described. “Alexander Hamilton, the first secretary of the U.S. Treasury, only paid some of the inherited colonial debt,” Rugoff defined, including:

We’ve additionally had excessive inflation lately — so, when you’re a U.S. debt holder, the worth of your holding has decreased markedly within the final two years. That is a sort of default because you weren’t anticipating the lack of worth however it’s a lot much less disruptive than this case which is like dealing with a black gap.

U.S. Treasury Secretary Janet Yellen has stated that the Treasury might not be capable of pay the entire authorities’s payments as early as June 1 “if Congress does not raise or suspend the debt limit before that time.” However, some imagine that elevating the debt ceiling will make the issue worse, together with economist Peter Schiff.

Like Yellen, the Congressional Budget Office equally warned that the federal government may default on its debt within the first two weeks of June. The IMF cautioned final 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 let the U.S. default on its debt if the Democrats don’t comply with spending cuts.

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