Don't Panic About Soaring U.S. Debt, But Do Worry, Economist Reinhart Says

"The Aaa rating of the U.S. is not guaranteed." Those comments were made recently by Moody's Steven Hess, adding that America could lose its "Aaa" rating if debt and deficit gaps are not cut in three to four years.

That's not good news as the U.S. deficit reached a record $1.4 trillion in the year ended Sept. 30. "Downgrade is a real possibility," says our guest Carmen Reinhart, an economics professor at the University of Maryland and former IMF economist.

While Reinhart and other economists agree we don't want to scale back stimulus programs prematurely -- and kill the fragile recovery (as was the case during the 1930s) -- the question now is: So when should we start to worry about debt levels? 

We're getting closer.  "Having a well delineated exit strategy at hand -- both on the monetary policy side, which I think we have and the fiscal side, I don't think we do -- is very appropriate at this time," she says. "You don't wait for the downgrades."

However, "implementing it at this time, is the point that I'm making, that it is premature," says Reinhart, also co-author of a new book, "This Time Is Different: Eight Centuries of Financial Folly," with Harvard's Kenneth Rogoff.

The book argues the recent financial crisis is not unique compared to previous collapses. "Mountains of debt end badly" based on history, Reinhart tells Aaron and Henry.

And the risks associated current debt levels and (if it comes to that) debt downgrades would be huge:

• Inflationary pressures and a national debt that will cost more to repay
• Tenuousness of the status of the U.S. dollar as the world's reserve currency