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

Posted Oct 26, 2009 09:30am EDT by Heesun Wee in Investing, Recession, Banking

"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

 

140 Comments

MikeD
MikeD - Monday October 26, 2009 09:37AM EDT

Look out, Moodys is pretending they grew a pair and will actually do their job. I'll believe it when I see it!

Tex
Tex - Monday October 26, 2009 09:39AM EDT

She really has nothing to say. We must stimulate; we must not stimulate too long. Duh!

Yahoo! Finance User
Yahoo! Finance User - Monday October 26, 2009 09:40AM EDT

Don't worry? Well, let's keep taking care of our own. research and buy domestically... www.myamericangoods.com

Yahoo! Finance User
Yahoo! Finance User - Monday October 26, 2009 09:41AM EDT

No worries, joe biden said, just SPEND your way out of BK...and then barack hussein obama says we'll just cut it in 1/2 by the end of the year but taxing the rich ( he never said what year)... mmm mmm mmm Now if you want gov't run health care, it will be paid for by eliminating waste fraud and abuse and taxing the rich again.. IT'S FREEEEEE... ah, if we can save SO MUCH money by eliminating waste fraud and abuse, why NOT DO IT NOW??? hmmm?... (that's right ACORN would be out of bidness) what a complete fraud barack hussein obama is and the dullards voted for him.. mmm mmm mmm

Yahoo! Finance User
Yahoo! Finance User - Monday October 26, 2009 09:42AM EDT

With A "Growing"....$$ 16 - TRILLION DOLLARS....Existing DEFICIT.....I Dont Worry....Let Mr. NOBAMA & BERNANKE....Whom "Created" This..Debacle...WORRY...!!!!

marx
marx - Monday October 26, 2009 09:45AM EDT

700 B approved last year and less than 20% of that money was spent.What about the remaining 560 B of the stimulus package?Is this another Elephant in the room or under the rug or "LOST" by the thugs that continue to steal from us.SHOW ME MY MONEY!

hadenoughgov
hadenoughgov - Monday October 26, 2009 09:46AM EDT

You know we are.being lied to when 80% of the bussineses reporting earnings are all positive. How can that be when companys are closing and laying off more. Im sick of them pissing down our necks and telling us it's raining. Keep on cooking the books you crooks!!!!!!!

sensey
sensey - Monday October 26, 2009 09:48AM EDT

Good morning sunshine !! Another beautiful day in S-FL... (forget about the 'Phins blowing that big lead yesterday) ... and the 10-year drops back thru 3.50 - so can we now get long again in our favorite names? Clearly, some participants think so: FCX, FLS, JOYG off and running. Melia prefers to wait until the "magic hour" of 10:15-10:20 before sticking in any bids. /////////// ///////////// As for the topic at hand: "America could lose its "Aaa" rating if debt and deficit gaps are not cut in three to four years." What a laugh! From the likes of Moody's no less. "Everybody knows ..." etc, that we are staring $1.5T per year added to the debt, and nothing the Dems can do will change that, even drastically higher taxes that will tank the economy and raise the yearly deficit to over $2T.... time for some actual "change we can believe in."

sensey
sensey - Monday October 26, 2009 09:48AM EDT

Good morning sunshine !! Another beautiful day in S-FL... (forget about the 'Phins blowing that big lead yesterday) ... and the 10-year drops back thru 3.50 - so can we now get long again in our favorite names? Clearly, some participants think so: FCX, FLS, JOYG off and running. Melia prefers to wait until the "magic hour" of 10:15-10:20 before sticking in any bids. /////////// ///////////// As for the topic at hand: "America could lose its "Aaa" rating if debt and deficit gaps are not cut in three to four years." What a laugh! From the likes of Moody's no less. "Everybody knows ..." etc, that we are staring $1.5T per year added to the debt, and nothing the Dems can do will change that, even drastically higher taxes that will tank the economy and raise the yearly deficit to over $2T.... time for some actual "change we can believe in."

LegalizeMe
LegalizeMe - Monday October 26, 2009 09:48AM EDT

I'm just waiting for this lady to put on a red nose and clown shoes. The rest of her outfit screams "I climbed out of a small car with 50 other clowns"

Mike
Mike - Monday October 26, 2009 09:51AM EDT

It will be interesting to see how European countries respond to the inflated oil prices compared to American economies. This may be the tipping point for the U.S. dollar as the world's reserve.

Anthony
Anthony - Monday October 26, 2009 09:53AM EDT

GOLD GOLD GOLD

Yahoo! Finance User
Yahoo! Finance User - Monday October 26, 2009 09:55AM EDT

Let the good times roll. Benny and the "Hill" will save us. Trust me.

Dennybro
Dennybro - Monday October 26, 2009 09:56AM EDT

DON'T WORRY!!!!??? Who's gonna pay for all this shit--WE ARE!!!

erica
erica - Monday October 26, 2009 10:00AM EDT

It would be funny if the government keeps telling the ratings agencies to report honestly and then the ratings agencies downgrades the US government to AA. The government had been leaning on the ratings agencies to push their agenda for a long time.

JUAN
JUAN - Monday October 26, 2009 10:04AM EDT

When the U.S. Dollar..Goes Down the Toilet..Can I Use My Monopoly...Monies...????

Yahoo! Finance User
Yahoo! Finance User - Monday October 26, 2009 10:05AM EDT

Spent a whopping 14% of the stimulus money so far...and that's it boys and girls, that's the best the job market is going to get 10%.. spending the 14% has increased the unemployment from under 8 to 10% (actually 15-17%)... way to go obama... now the rest of the 86% is going for the liberals election campaign in 2010...and barack hussein obama and his regime want another stimulus???? LOL, stooges running the gov't and lap dog media panting in admiration of maybe getting an invite to one of the 'constant' parties at the Obama crib.. aka White house

Yahoo! Finance User
Yahoo! Finance User - Monday October 26, 2009 10:05AM EDT

Is this a buy the rumor, sell the news kind of week?

Free Texas 2012
Free Texas 2012 - Monday October 26, 2009 10:07AM EDT

Beware of academia analysis, although this lady seems reasonable and actually does have some real world background. Suffice it to say that no one really has a good handle on what is happening or what will happen until it is over then they try to retrofit there assessments to fit what happened. Keep both eyes open and trust no one other than yourself.

sensey
sensey - Monday October 26, 2009 10:08AM EDT

"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." //////////// /////////// Uh huh... ya know, this time, it looks like Melia must agree with the prevailing sentiment here - the lady does not make any sense. Either we have an "exit strategy" or we don't - first she sez we do then she sez we don't - make up your mind! Wondering what her background is - coz it sounds like a typical academe with zero real-world experience. Melia is not so equivocal - "we" don't have anything resembling an "exit strategy" - no matter what Benji Bernanke tells the looters on the Hill.

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