Friday, December 20, 2013

BEA Final December Report: Q3 2013 US GDP Even Strong 4.1% Revised Up from 3.6%

Report establishes a three-quarter positive trend, driven by private investment in larger inventory levels:

Wednesday, December 18, 2013

US Federal Reserve Taper / US Labor Department November Report

Post-Recession Unemployment has improved 3%, while Employment is down a concerning 3%, a significant factor in the US Fed's decision to only modestly taper its Asset Purchase Program by $10B per month:

Central Bank's Balance Sheets- Aug 2008 thru Aug 2013

Today, the US Federal Reserve decided to very modestly taper the size of its Asset Purchase Program from $85B to $75B per month, starting Jan 2014. On the below chart, the slope of the US Fed Balance Sheet growth line will barely change. Currently, only the Bank of England has added more to its Assets (on a % basis) than the US Fed, since Aug 2008, and the Swiss have only acted defensively in growing its balance sheet to prevent the Franc from appreciation beyond limits targeted to keep Swiss Industry globally competitive-

Friday, December 6, 2013

US Labor Department November Report

Unemployment had strong favorable move of 0.3% to 7.0%. Even better, Labor Participation likewise improved, the first time this year both measures were simultaneously positive.

Thursday, December 5, 2013

BEA December Report: Q3 2013 US GDP Strong 3.6%

Report establishes a three-quarter positive trend, driven by private investment in larger inventory levels:

Wednesday, August 21, 2013

Adam Smith on Public Debt

Courtesy of the WSJ: From Adam Smith's "The Wealth of Nations," 1776

The public funds of the different indebted nations of Europe, particularly those of England, have by one author been represented as the accumulation of a great capital superadded to the other capital of the country, by means of which its trade is extended, its manufactures multiplied, and its lands cultivated and improved much beyond what they could have been by means of that other capital only. He does not consider that the capital which the first creditors of the public advanced to government was, from the moment in which they advanced it, a certain portion of the annual produce turned away from serving in the function of a capital to serve in that of a revenue; from maintaining productive labourers to maintain unproductive ones, and to be spent and wasted, generally in the course of the year, without even the hope of any future reproduction.

Sunday, August 11, 2013

Essential Reading for Discerning Between Communism & Socialism vs. Capitalism

Yang Jisheng: In China
 Courtest of WSJ:

Reading Hayek in Beijing

In the spring of 1959, Yang Jisheng, then an 18-year-old scholarship student at a boarding school in China's Hubei Province, got an unexpected visit from a childhood friend. "Your father is starving to death!" the friend told him. "Hurry back, and take some rice if you can."
Granted leave from his school, Mr. Yang rushed to his family farm. "The elm tree in front of our house had been reduced to a barkless trunk," he recalled, "and even its roots had been dug up." Entering his home, he found his father "half-reclined on his bed, his eyes sunken and lifeless, his face gaunt, the skin creased and flaccid . . . I was shocked with the realization that the term skin and bones referred to something so horrible and cruel."

Mr. Yang's father would die within three days. Yet it would take years before Mr. Yang learned that what happened to his father was not an isolated incident. He was one of the 36 million Chinese who succumbed to famine between 1958 and 1962.

It would take years more for him to realize that the source of all the suffering was not nature: There were no major droughts or floods in China in the famine years. Rather, the cause was man, and one man in particular: Mao Zedong, the Great Helmsman, whose visage still stares down on Beijing's Tiananmen Square from atop the gates of the Forbidden City.
Zina Saunders
Yang Jisheng

Mr. Yang went on to make his career, first as a journalist and senior editor with the Xinhua News Agency, then as a historian whose unflinching scholarship has brought him into increasing conflict with the Communist Party—of which he nonetheless remains a member. Now 72 and a resident of Beijing, he's in New York this month to receive the Manhattan Institute's Hayek Prize for "Tombstone," his painstakingly researched, definitive history of the famine. On a visit to the Journal's headquarters, his affinity for the prize's namesake becomes clear.

"This book had a huge impact on me," he says, holding up his dog-eared Chinese translation of Friedrich Hayek's "The Road to Serfdom." Hayek's book, he explains, was originally translated into Chinese in 1962 as "an 'internal reference' for top leaders," meaning it was forbidden fruit to everyone else. Only in 1997 was a redacted translation made publicly available, complete with an editor's preface denouncing Hayek as "not in line with the facts," and "conceptually mixed up."

Mr. Yang quickly saw that in Hayek's warnings about the dangers of economic centralization lay both the ultimate explanation for the tragedies of his youth—and the predicaments of China's present. "In a country where the sole employer is the state," Hayek had observed, "opposition means death by slow starvation."

So it was in 1958 as Mao initiated his Great Leap Forward, demanding huge increases in grain and steel production. Peasants were forced to work intolerable hours to meet impossible grain quotas, often employing disastrous agricultural methods inspired by the quack Soviet agronomist Trofim Lysenko. The grain that was produced was shipped to the cities, and even exported abroad, with no allowances made to feed the peasants adequately. Starving peasants were prevented from fleeing their districts to find food. Cannibalism, including parents eating their own children, became commonplace.

"Mao's powers expanded from the people's minds to their stomachs," Mr. Yang says. "Whatever the Chinese people's brains were thinking and what their stomachs were receiving were all under the control of Mao. . . . His powers extended to every inch of the field, and every factory, every workroom of a factory, every family in China."
All the while, sympathetic Western journalists—America's Edgar Snow and Britain's Felix Greene in particular—were invited on carefully orchestrated tours so they could "refute" rumors of mass starvation. To this day, few people realize that Mao's forced famine was the single greatest atrocity of the 20th century, exceeding by orders of magnitude the Rwandan genocide, the Cambodian Killing Fields and the Holocaust.
The power of Mr. Yang's book lies in its hauntingly precise descriptions of the cruelty of party officials, the suffering of the peasants, the pervasive dread of being called "a right deviationist" for telling the truth that quotas weren't being met and that millions were being starved to death, and the toadyism of Mao lieutenants.

Yet the book is more than a history of a uniquely cruel regime at a receding moment in time. It is also a warning of what lies at the end of the road for nations that substitute individualism with any form of collectivism, no matter what the motives. Which brings Mr. Yang to the present day.
"China's economy is not what [Party leaders] claim as the 'socialist-market economy,' " he says. "It's a 'power-market' economy."
What does that mean?

"It means the market is controlled by the power. . . . For example, the land: Any permit to enter any sector, to do any business has to be approved by the government. Even local government, down to the county level. So every county operates like an enterprise, a company. The party secretary of the county is the CEO, the president."
Put another way, the conventional notion that the modern Chinese system combines political authoritarianism with economic liberalism is mistaken: A more accurate description of the recipe is dictatorship and cronyism, with the results showing up in rampant corruption, environmental degradation and wide inequalities between the politically well-connected and everyone else. "There are two major forms of hatred" in China today, Mr. Yang explains. "Hatred toward the rich; hatred toward the powerful, the officials." As often as not they are one and the same.

Yet isn't China a vastly freer place than it was in the days of Mr. Yang's youth? He allows that the party's top priority in the post-Mao era has been to improve the lot of the peasantry, "to deal with how to fill the stomach."
He also acknowledges that there's more intellectual freedom. "I would have been executed if I had this book published 40 years ago," he notes. "I would have been imprisoned if this book was out 30 years ago. Now the result is that I'm not allowed to get any articles published in the mainstream media." The Chinese-language version of "Tombstone" was published in Hong Kong but is banned on the mainland.

There is, of course, a rational reason why the regime tolerates Mr. Yang. To survive, the regime needs to censor vast amounts of information—what Mr. Yang calls "the ruling technique" of Chinese leaders across the centuries. Yet censorship isn't enough: It also needs a certain number of people who understand the full truth about the Maoist system so that the party will never repeat its mistakes, even as it keeps the cult of Mao alive in order to preserve its political legitimacy. That's especially true today as China is being swept by a wave of Maoist nostalgia among people who, Mr. Yang says, "abstract Mao as this symbol of social justice," and then use that abstraction to criticize the current regime.

"Ten million workers get laid off in the state-owned enterprise reforms," he explains. "So many people are dissatisfied with the reforms. Then they become nostalgic and think the Mao era was much better. Because they never experienced the Mao era!" One of the leaders of that revival, incidentally, was Bo Xilai, the powerful former Chongqing party chief, brought down in a murder scandal last year.
But there's a more sinister reason why Mr. Yang is tolerated. Put simply, the regime needs some people to have a degree of intellectual freedom, in order to more perfectly maintain its dictatorship over everyone else.
"Once I gave a lecture to leaders at a government bureau," Mr. Yang recalls. "I told them it's a dangerous job, you guys, being officials, because you have too much power. I said you guys have to be careful because those who want approval from you to get certain land and projects, who bribe you, these are like bullets, ammunition, coated in sugar, to fire at you. So today you may be a top official, tomorrow you may be a prisoner."

How did the officials react to that one?
"They said, 'Professor Yang, what you said, we should pay attention.' "

So they should. As Hayek wrote in his famous essay on "The Use of Knowledge in a Society," the fundamental problem of any planned system is that "knowledge of circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess."
The Great Leap Forward was an extreme example of what happens when a coercive state, operating on the conceit of perfect knowledge, attempts to achieve some end. Even today the regime seems to think it's possible to know everything—one reason they devote so many resources to monitoring domestic websites and hacking into the servers of Western companies. But the problem of incomplete knowledge can't be solved in an authoritarian system that refuses to cede power to the separate people who possess that knowledge.
"For the last 20 years, the Chinese government has been saying they have to change the growth mode of the economy," Mr. Yang notes. "So they've been saying, rather than just merely expanding the economy they should do internal changes, meaning more value-added services and high tech. They've been shouting such slogans for 20 years, and not many results. Why haven't we seen many changes? Because it's the problem that lies in the very system, because it's a power-market economy. . . . If the politics isn't changed, the growth mode cannot be changed."
That suggests China will never become a mature power until it becomes a democratic one. As to whether that will happen anytime soon, Mr. Yang seems doubtful: The one opinion widely shared by rulers and ruled alike in China is that without the Communist Party's leadership, "China will be thrown into chaos."

Still, Mr. Yang hardly seems to have given up hope that he can play a role in raising his country's prospects. In particular, he's keen to reclaim two ideas at risk of being lost in today's China.

The first is the meaning of rights. A saying attributed to the philosopher Lao Tzu, he says, has it that a ruler should fill the people's stomachs and empty their heads. The gambit of China's current rulers is that they can stay in power forever by applying that maxim. Mr. Yang hopes they're wrong.
"People have more needs than just eating!" he insists. "In China, human rights means the right to survive, and I argue with these people. This is not human rights, it's animal rights. People have all sorts of needs. Spiritual needs, the need to be free, the freedoms."
The second is the obligation of memory. China today is a country galloping into a century many people believe it will define, one way or the other. Yet the past, Mr. Yang insists, also has its claims.

"If a people cannot face their history, these people won't have a future. That was one of the purposes for me to write this book. I wrote a lot of hard facts, tragedies. I wanted people to learn a lesson, so we can be far away from the darkness, far away from tragedies, and won't repeat them."
Hayek would have understood both points well.
Mr. Stephens writes "Global View," the Journal's foreign-affairs column.
A version of this article appeared May 25, 2013, on page A11 in the U.S. edition of The Wall Street Journal, with the headline: Reading Hayek in Beijing.

YTD World Markets Weekend Update as of 8/9/13: Mixed Bag With A Negative Trend


Wednesday, August 7, 2013

Austrian Economics - A Primer

Courtesy of EcPoFi

By Dr Eamonn Butler

Austrian School economists gave us the ideas of marginal utility, opportunity cost, and the importance of time and ignorance in shaping human choices and the markets, prices and production systems that stem from them. 'Austrian' economics has revolutionized our understanding of what money is, why economic booms invariably turn to damaging busts, why government intervention in the economy is a mistake, the importance of time and information in economic decision-making, the crucial role of entrepreneurship, and how much economic policy is just plain wrong. Eamonn Butler explains these ideas in straightforward, non-technical language, making this Primer is the ideal introduction for anyone who wants to understand the key insights of the Austrian School and their relevance and importance to our economic situation today.

Saturday, July 13, 2013

By John B. Taylor: Once Again, the Fed Shies Away From the Exit Door

Courtesy WSJ: Fed Shies Away From Exit Door. Not Much Different Than What Occurred In 60s & 70s. Volcker In The Late 70s Proved Money Policy Can Be Reversed.

The Federal Reserve's liquidity operations during the 2008 financial panic represented good central banking: providing loans when markets freeze up. But instead of simply letting those programs expire as the panic subsided, the Fed embarked on its first quantitative easing program (QE1)—large-scale purchases of mortgage-backed securities and Treasurys—trying to stimulate the housing market and the economy. After that, I warned on these pages in September 2010 about the dangers of "another large dose of quantitative easing" that would raise "more uncertainty about how it will ever be unwound."

Since then the Fed has injected two more massive doses of quantitative easing: QE2 starting in November 2010 and QE3 starting late last year. Then, last month, Fed Chairman Ben Bernanke let it be known in a news conference that the old QE3 (purchasing $85 billion of Treasury bonds and mortgage-backed securities a month until labor market conditions improve substantially) would taper into a new QE3—in which purchases would likely slow by the end of 2013 and stop in the middle of 2014. The turbulent reaction in the markets showed that the predicted dangers from unwinding would be real.

The Fed has justified its policies as a means of helping the economy recover. Yet economic growth has come in at less than half what the Fed predicted with all its unprecedented interventions during the past four years, and growth remains under 2% so far this year. Some at the Fed blame other factors for this terribly weak recovery—the latest excuse being cuts in state and local government purchases. But those cuts are the result not the cause of the weak economy as tax revenues have slowed.
A growing number of economists, former central bankers and senior government officials—including Martin Feldstein, Paul Volcker, Allan Meltzer, Raghu Rajan, David Malpass and Peter Fisher—have now concluded that the Fed's policies are not working. Critics want the Fed to return to a more rules-based monetary policy.
Meanwhile, the global monetary system is starting to fracture. Central bankers around the world, especially in emerging markets such as Brazil, India and South Africa, have experienced adverse spillovers of Fed policy on their currencies and economies. To prevent sharp fluctuations in the value of their currencies and volatile inflows and outflows of capital, they have had to deviate from good policy.
The Bank of Japan's recent move toward a policy of massive quantitative easing is a good example. Following the 2008 financial crisis and the weak recovery, the yen significantly appreciated against the dollar as the Fed repeatedly extended its quantitative easing. A new government was elected in Japan in December in part because of the currency issue. Immediately after the election the government asked the Bank of Japan to match the Fed with its own quantitative easing; this is exactly what it did.

Other governments and central banks have imposed capital controls to limit the inflow of capital and the appreciation of their currencies. But capital controls interfere with firms' investment decisions and cause instability as people try to circumvent them—which leads policy makers to seek even more controls to prevent the circumventions. Alarmed by these developments, the Bank for International Settlements, the central bank of central bankers, called last month for an investigation of these spillovers and international monetary policy coordination.
With so many voices rising in objection, some might assume that it will be just a short time until the Fed changes course. Unfortunately, this assumption is unwarranted based on the experience of the late 1960s and 1970s.
In 1968, Milton Friedman explained the folly of the view that permanently lower unemployment could be achieved through easier monetary policy. At first, his view was adopted by a small minority. By the mid-1970s, there was consensus that easy money was not achieving its economic growth or employment goals.
Then the argument shifted to "yes, we agree that the policy is not working, but it is too costly to end." The economy was performing adequately; shutting the money spigot would just make things worse. Yet unemployment and inflation only increased.

It was not until Paul Volcker became chairman of the Federal Reserve in August 1979 that the Fed's excessively easy monetary policy came to an end. Mr. Volcker's resolve was buttressed by new economic models based on rational expectations and price rigidities which showed that the costs of ending easy money were far less than what the pessimists said. These models also predicted that a change in Fed policy would eventually help bring about lower unemployment—which is what the change in Fed policy did help to bring about in the 1980s and '90s.

There's a parallel with today. More policy makers and economists are coming to realize that the Fed's unconventional monetary policy is not working. Yet there is also a sense that unwinding is too costly right now and can't be reversed.

We witnessed this recently with hints about the end of quantitative easing. When Mr. Bernanke mentioned that quantitative easing—today's version of the easy money of the 1970s—will taper off, the market reacted negatively. Many commentators and pundits claimed that tapering will adversely affect the economy and needs to be delayed. Members of the Federal Open Market Committee also came out publicly to say that serious tapering can be put off until later.

The minutes of the June FOMC meeting were released this week. Those minutes, accompanied by Mr. Bernanke's remarks on Wednesday, made it clear that unless a modern-day Paul Volcker soon appears, the return to conventional monetary policy is still a long way off.

Mr. Taylor is a professor of economics at Stanford University, a senior fellow at the Hoover Institution, and a former Treasury undersecretary for international affairs.

Friday, July 12, 2013

My 2012 Favorite Countries in Sequence- EFI Chart

20 Year US Economic Freedom Index Chart- w/ 5 Key Components

Dynamic Country Debt Chart:

Nation-by-Nation Debt Levels Since 1990 |

Courtesy of the WSJ

World’s Great Leap: 1B people taken out of extreme Poverty in 20 years. China's embrace of Capitalism prime cause

Towards the end of poverty
Nearly 1 billion people have been taken out of extreme poverty in 20 years. The world should aim to do the same again
IN HIS inaugural address in 1949 Harry Truman said that "more than half the people in the world are living in conditions approaching misery. For the first time in history, humanity possesses the knowledge and skill to relieve the suffering of those people." It has taken much longer than Truman hoped, but the world has lately been making extraordinary progress in lifting people out of extreme poverty. Between 1990 and 2010, their number fell by half as a share of the total population in developing countries, from 43% to 21%—a reduction of almost 1 billion people.
Now the world has a serious chance to redeem Truman's pledge to lift the least fortunate. Of the 7 billion people alive on the planet, 1.1 billion subsist below the internationally accepted extreme-poverty line of $1.25 a day. Starting this week and continuing over the next year or so, the UN's usual Who's Who of politicians and officials from governments and international agencies will meet to draw up a new list of targets to replace the Millennium Development Goals (MDGs), which were set in September 2000 and expire in 2015. Governments should adopt as their main new goal the aim of reducing by another billion the number of people in extreme poverty by 2030.

Take a bow, capitalism
Nobody in the developed world comes remotely close to the poverty level that $1.25 a day represents. America's poverty line is $63 a day for a family of four. In the richer parts of the emerging world $4 a day is the poverty barrier. But poverty's scourge is fiercest below $1.25 (the average of the 15 poorest countries' own poverty lines, measured in 2005 dollars and adjusted for differences in purchasing power): people below that level live lives that are poor, nasty, brutish and short. They lack not just education, health care, proper clothing and shelter—which most people in most of the world take for granted—but even enough food for physical and mental health. Raising people above that level of wretchedness is not a sufficient ambition for a prosperous planet, but it is a necessary one.
The world's achievement in the field of poverty reduction is, by almost any measure, impressive. Although many of the original MDGs—such as cutting maternal mortality by three-quarters and child mortality by two-thirds—will not be met, the aim of halving global poverty between 1990 and 2015 was achieved five years early.
The MDGs may have helped marginally, by creating a yardstick for measuring progress, and by focusing minds on the evil of poverty. Most of the credit, however, must go to capitalism and free trade, for they enable economies to grow—and it was growth, principally, that has eased destitution.
Poverty rates started to collapse towards the end of the 20th century largely because developing-country growth accelerated, from an average annual rate of 4.3% in 1960-2000 to 6% in 2000-10. Around two-thirds of poverty reduction within a country comes from growth. Greater equality also helps, contributing the other third. A 1% increase in incomes in the most unequal countries produces a mere 0.6% reduction in poverty; in the most equal countries, it yields a 4.3% cut.
China (which has never shown any interest in MDGs) is responsible for three-quarters of the achievement. Its economy has been growing so fast that, even though inequality is rising fast, extreme poverty is disappearing. China pulled 680m people out of misery in 1981-2010, and reduced its extreme-poverty rate from 84% in 1980 to 10% now.
That is one reason why (as the briefing explains) it will be harder to take a billion more people out of extreme poverty in the next 20 years than it was to take almost a billion out in the past 20. Poorer governance in India and Africa, the next two targets, means that China's experience is unlikely to be swiftly replicated there. Another reason is that the bare achievement of pulling people over the $1.25-a-day line has been relatively easy in the past few years because so many people were just below it. When growth makes them even slightly better off, it hauls them over the line. With fewer people just below the official misery limit, it will be more difficult to push large numbers over it.
So caution is justified, but the goal can still be achieved. If developing countries maintain the impressive growth they have managed since 2000; if the poorest countries are not left behind by faster-growing middle-income ones; and if inequality does not widen so that the rich lap up all the cream of growth—then developing countries would cut extreme poverty from 16% of their populations now to 3% by 2030. That would reduce the absolute numbers by 1 billion. If growth is a little faster and income more equal, extreme poverty could fall to just 1.5%—as near to zero as is realistically possible. The number of the destitute would then be about 100m, most of them in intractable countries in Africa. Misery's billions would be consigned to the annals of history.
Markets v misery
That is a lot of ifs. But making those things happen is not as difficult as cynics profess. The world now knows how to reduce poverty. A lot of targeted policies—basic social safety nets and cash-transfer schemes, such as Brazil's Bolsa Família—help. So does binning policies like fuel subsidies to Indonesia's middle class and China's hukou household-registration system (see article) that boost inequality. But the biggest poverty-reduction measure of all is liberalising markets to let poor people get richer. That means freeing trade between countries (Africa is still cruelly punished by tariffs) and within them (China's real great leap forward occurred because it allowed private business to grow). Both India and Africa are crowded with monopolies and restrictive practices.
Many Westerners have reacted to recession by seeking to constrain markets and roll globalisation back in their own countries, and they want to export these ideas to the developing world, too. It does not need such advice. It is doing quite nicely, largely thanks to the same economic principles that helped the developed world grow rich and could pull the poorest of the poor out of destitution.
 Read the article at: The Economist

Intellectual Integrity vs Hyperbole- Reinhart & Rogoff vs Paul Krugman... Paul at his partisan worst

Letter to Paul Krugman
Cambridge, Massachusetts, May 25 2013
Dear Paul:
Back in the late 1980s, you helped shape the concept of an emerging market debt overhang.  The financial crisis has laid bare the fact that the dividing line between emerging markets and advanced countries is not as crisp as once thought.  Indeed, this is a recurring theme of our 2009 book, This Time is Different:  Eight Centuries of Financial Folly.  Today, the growth bind of advanced countries in the periphery of the eurozone has a great deal in common with that of emerging market economies of the 1980s.
We admire your past scholarly work, which influences us to this day.  So it has been with deep disappointment that we have experienced your spectacularly uncivil behavior the past few weeks.  You have attacked us in very personal terms, virtually non-stop, in your New York Times column and blog posts.  Now you have doubled down in the New York Review of Books, adding the accusation we didn't share our data.  Your characterization of our work and of our policy impact is selective and shallow.  It is deeply misleading about where we stand on the issues.  And we would respectfully submit, your logic and evidence on the policy substance is not nearly as compelling as you imply.
You particularly take aim at our 2010 paper on the long-term secular association between high debt and slow growth. That you disagree with our interpretation of the results is your prerogative.  Your thoroughly ignoring the subsequent literature, however, including the International Monetary Fund's work as well as our own deeper and more complete 2012 paper with Vincent Reinhart, is troubling.   Perhaps, acknowledging the updated literature-not to mention decades of theoretical, empirical, and historical contributions on drawbacks to high debt-would inconveniently undermine your attempt to make us a scapegoat for austerity.  You write "Indeed, Reinhart-Rogoff may have had more immediate influence on public debate than any previous paper in the history of economics."
Setting aside this wild hyperbole, you never seem to mention our other line of work that has surely been far more influential when it comes to responding to the financial crisis.  Specifically, our 2009 book (released before our growth and debt work) showed that recoveries from deep systemic financial crises are long, slow and painful.  This was not the common wisdom at all before us, as you yourself have acknowledged  on more than one occasion.  Over the course of the crisis, and certainly by 2010, policymakers around the world were using our research, alongside their assessments, to help justify sustained macroeconomic easing of both monetary and fiscal policy fronts. 
Your desire to blame our later 2010 paper for the stances of some politicians fails to recognize a basic reality:  We were out there endorsing very different policies.  Anyone with experience in these matters knows that politicians may float a citation to an academic paper if it suits their purposes.  But there are limits to how much policy traction they can get with this device when the paper's authors are out offering very different policy conclusions.  You can refer to the appendix to this letter for our views on policy through the financial crisis as they were stated publicly in real time.  We were not silent.
Very senior former policy makers, observing the attacks of the past few weeks, have forcefully explained that real-time policies are very seldom driven to any significant extent by a single academic paper or result.
It is worth noting that in the past, polemicists have often pinned the austerity charge on the International Monetary Fund for its work with countries having temporary or permanent debt sustainability issues.  Since its origins after World War II, IMF programs have almost always involved some combination of austerity, debt restructurings, and structural reform.  When a country that has been running large deficits is suddenly no longer able to borrow new funds, some measure of adjustment is invariably required, and one of the IMF's usual roles has been to serve as a lightning rod.   Even before the IMF existed, long periods of autarky and hardship accompanied debt crises. 
Now let us turn to the substance. The events of the past few weeks do not change basic facts and fundamentals.  
Some Fundamentals on Debt
First, the advanced economies now have levels of debt that surpass most if not all historic episodes. It is public debt and private debt (which often becomes public as a crisis unfolds). Significant shares of these debts are held by foreigners in most cases, with the notable exception of Japan.  In Europe, where the (public and private) external debt exposures loom largest, financial de-globalization is well underway.  Debt financing has become an increasingly domestic business and a difficult one when the pool of domestic saving is limited.
As for the United States: our only short-lived high-debt episode involved WWII debts, which were held by domestic residents, not fickle international investors or central banks in China and elsewhere around the globe.  This observation is not meant to suggest "a scare" in the offing, with bond vigilantes driving a concerted sell-off of Treasuries by the rest of the world and a dramatic spike US in interest rates.  Carmen's work on financial repression suggests a different scenario. But many emerging markets have stepped into bubble-like territory and we have seen this movie before.  We should not take for granted their prosperity that makes possible their continuing large-scale purchases of US debt.  Reversals are possible.  Sensible risk management means planning for these and other contingencies that might disturb today's low global interest rate environment.
Second, on debt and growth.  The Herndon, Ash and Pollin paper, using a different methodology, reinforces our core result that high levels of debt are associated with lower growth.  This fact has been hidden in the tabloid media and blogosphere discourse, but this point is made plain by even a cursory look at the full set of results reported in the very paper they critique.  More importantly, the result was prominently featured in our 2012 Journal of Economic Perspectives paper with Vincent Reinhart on Debt Overhangs, which they do not cite. The main point of our 2012 paper is that while the difference in annual GDP growth between high and lower debt cases is about one percent a year, debt overhang episodes last on average 23 years. Thus, the cumulative effect on income levels over time is significant.
Third, the debate of the last few weeks does not change the fact that debt levels above 90% (even if one entirely rejects this marker for gross central government debt as a common cross-country "threshold") are very rare altogether and even rarer in peacetime.  From 1955 until right before the recent crisis, advanced economies spent less than 10% of those years at a debt/GDP ratio of higher than 90%; only about two percent of the years are above 120% debt/GDP. If governments thought high debt was a riskless proposition, why did they avoid it so consistently?
Debt and Growth Causality
Your recent April 29, 2013 NY Times blog The Italian Miracle is meant to highlight how in high-debt Italy, interest rates have come down since the European Central Bank's well-placed efforts to act more as a lender of last resort to periphery countries.  No disagreement there. However, this positive development is meant to re-enforce your strongly held view that high debt is not a problem (even for Italy) and that causality runs exclusively from slow growth to debt.  You do not mention that in this miracle economy, GDP fell by more than 2 percent in 2012 and is expected to fall by a similar amount this year. Elsewhere you have stated that you are sure that Italy's long-term secular growth/debt problems, which date back to the 1990s, are purely a case of slow growth causing high debt.  This claim is highly debatable.
Indeed, your repeatedly-expressed view that slow growth causes high debt but not visa-versa, is hardly supported by the recent literature on the subject.  Of course, as we have already noted, this work has been singularly ignored in the public discourse of the past few weeks.  The best and worst that can be said is that the results are mixed.  A number of studies looking at more comprehensive growth models have found significant effects of debt on growth. We made this point in the appendix to our New York Times piece.  Of course, it is well known that the economic cycle impacts government finances and therefore debt (causation from growth to debt).  Cyclically adjusted budgets have been around for decades, your shallow characterization of the growth-debt connection. 
As for ways debt might affect growth, there is debt with drama and debt without drama.
Debt with drama.  Do you really think that a country that is suddenly unable to borrow from international capital markets because its public and/or private debts that are a contingent public liability are deemed unsustainable will not suffer lower growth and higher unemployment as a consequence? With governments and banks shut out from international capital markets, credit to firms and households in periphery Europe remains paralyzed. This credit crunch has a crippling effect on growth and employment with or without austerity.  Fiscal austerity reinforces the procyclicality of the external and domestic credit crunch.  This pattern is not unique to this episode.
Policy response to debt with drama.  On the policy response to this sad state of affairs, we stress that restoring the credit channel is essential for sustained growth, and this is why there is a need to write off senior bank debt in many countries. Furthermore, there is no reason why the ECB should buy only sovereign debt-purchases of senior bank debt along the lines of the US Federal Reserve's purchases of mortgage-backed securities would be instrumental in rekindling credit and working capital for firms.  We don't see your attraction to fiscal largesse as a substitute. Periphery Europe cannot afford it and for Germany, which can afford it, fiscal expansion would be procyclical.  Any overheating in Germany would exert pressure on the ECB to maintain a tighter monetary policy, backtracking some of the progress made by Mario Draghi. A better use of Germany's balance sheet strength would be to agree on faster and bigger haircuts for the periphery, and to support significantly more expansionary monetary policy by the ECB.
Debt without drama.  There are other cases, like the US today or Japan since the mid-1990s, where there is debt without drama.  The plain fact that we know less about these episodes is a point we already made in our New York Times piece.  We pointedly do not include the historical episodes of 19th century UK and Netherlands among these puzzling cases. Those imperial debts were importantly financed by massive resource transfers from the colonies. They had "good" high-debt centuries because their colonies did not.  We offer a number of ideas in our 2012 paper for why debt overhang might matter even when there is no imminent collapse of borrowing capacity. 
Bad shocks do happen. What is the foundation for your certainty that as peacetime debt hits new records in coming years, the United States will be able to engage in  forceful countercyclical fiscal policy if hit by a large unexpected shock?  Furthermore, do you really want to find out the answer to that question the hard way?
The United Kingdom, which does not issue the reserve currency, is more dependent on its financial sector and suffered a bigger banking bust, has not had the same shale gas revolution, and is more vulnerable to Europe, is clearly more exposed to the drama scenario than the US.  And yet you regularly assert that the situations in the US and UK are the same and that both countries have the costless option of engaging in an open-ended fiscal expansion.  Of course, this does not preclude high-return infrastructure investments, making use of the public balance sheet directly or indirectly through public-private partnerships.
Policy response to debt without drama.  Let us be clear, we have addressed the role of somewhat higher inflation and financial repression in debt reduction in our research and in numerous pieces of commentary.  As our appendix shows, we did not advocate austerity in the immediate wake of the crisis when recovery was frail.  But the subprime crisis began in the summer of 2007, now six years ago.  Waiting 10 to 15 more years to deal with a festering problem is an invitation for decay, if not necessarily an outright debt crisis.  The end may not come with a bang but with a whimper.
Scholarship: Stick to the facts
The accusation in the New York Review of Books is a sloppy neglect on your part to check the facts before charging us with a serious academic ethical infraction.  You had already implicitly endorsed this from your perch at the New York Times by posting a link to a program that treated the misstatement as fact.
Fortunately, the "Wayback Machine" crawls the Internet and periodically makes wholesale copies of web pages. The debt/GDP database was first archived in October 2010 from Carmen's University of Maryland webpage.  The data migrated to in March 2011.  There it sits with our other data, on inflation, crises dates, and exchange rates.  These data are regularly sought and found for those doing research who care to look. The greater disclosure of debt data from official institutions is testament to this.  The IMF began to construct historical public debt data only after we had provided a roadmap in the list of our detailed references in a 2009 book (and before that in a 2008 working paper) that explained how we had unearthed the data. 
Our interaction with scholars and practitioners working on real world questions in our field is ongoing, and our doors remain open. So to accuse us of not sharing our data is an unfounded attack on our academic and personal integrity. 
Finally, we attach, as do many other mainstream economists, a somewhat higher weight on risks than you do, as debts of all measure -- including old age liabilities, public debt, private debt and external debt -- ascend into record territory.   This is not a conclusion based on one or two papers as you sometimes seem to imply, but rather on a long-standing body of economic research and extensive historical experience about the risks of record high debt levels. 
You often cite John Maynard Keynes.  We read Keynes, all the way through.  He wrote How to Pay for the War in 1940 precisely because he was not blasé about large deficits - even in support of a cause as noble as a war of survival. Debt is a slow-moving variable that cannot - and in general should not - be brought down too quickly.  But interest rates can change much more quickly than fiscal policy and debt. 
You might be right, and this time might be, after all, different.  If so, we will admit that we were wrong.  Whatever the outcome, we intend to be there to put the results in proper context for the community of scholars, policymakers, and civil society. 
Respectfully yours,
Carmen M. Reinhart and Kenneth S. Rogoff
Harvard University.

Appendix I. Reinhart and Rogoff: Selected interviews, op-eds, and media on the policy response to crisis
"Two prominent economists who published an acclaimed study last year of 800 years of national financial crises, "This Time Is Different," see flaws on both sides of today's argument. The debt must be dealt with, they say, but not too fast."
Paul Krugman, New York Times, August 18, 2010  (Citing from McClatchy article"Rogoff:  We may need another stimulus bill just to decompress from the previous one, a smaller one to cushion the landing.   Reinhart:  I'm not one of those deficit hawks.... I'm not saying you run out and pull the plug and have an adjustment that could derail what fragile recovery we do have.  Good for them."
Top Culprit in the Financial Crisis: Human Nature, Barrons, November 24, 2012, by Lawrence C. Strauss
Reinhart: "...the thrust in a deep financial crisis, when you throw in both monetary and fiscal stimulus, is to come up with something that helps raise the floor. That's why the decline wasn't 10% or 12%. However, one area where policy really has left a bit to be desired is that both in the U.S. and in Europe, we have embraced forbearance. Delaying debt write-downs and delaying marking to market is not particularly conducive to speeding up deleveraging and recovery."
Rogoff:  "...if you didn't just raise taxes or cut taxes but actually fixed the tax system, that would be very important....And, lastly, other things, like infrastructure and education spending, are important. This isn't all about austerity versus no austerity. Countries that are successful in dealing with these crises, such as Sweden, sometimes take them as an opportunity to change. We haven't."
Reinhart Testimony before Senate Budget Committee, February 9, 2010. "In light of the likelihood of continued weak consumption in the U.S. and Europe, rapid withdrawal of stimulus could easily tilt the economy back into recession. To be sure, this is not the time to exit. It is, however, the time to lay out a credible plan for a future exit."
In Praise of Carmen Reinhart, Guardian, April 2, 2010 (editorial page)
"The world's best known female economist has warned cutting the deficit the Tory way would send the UK back into recession."
5 Myths about the European debt crisis, by Carmen Reinhart and Vincent Reinhart, Washington Post, May 9, 2010
Myth #3:
 Fiscal austerity will solve Europe's debt difficulties.
"But fiscal austerity usually doesn't pay off quickly. A large and sudden contraction in government spending is almost sure to shrink economic activity as well. This means tax collections fall and unemployment and welfare benefits rise, undermining efforts to reduce the deficit. Even if new borrowing is reduced or eliminated, it takes time to whittle down a large debt, and international investors are notoriously impatient."
"One of the main goals of financial repression is to keep nominal interest rates lower than would otherwise prevail. This effect, other things being equal, reduces governments' interest expenses for a given stock of debt and contributes to deficit reduction. However, when financial repression produces negative real interest rates and reduces or liquidates existing debts, it is a transfer from creditors (savers) to borrowers and, in some cases, governments."
"The current strategy that calls for years of austerity and recession in the periphery countries is just not tenable."
The Euro's Pig-Headed Masters (Kenneth Rogoff, Project Syndicate, June 2011) "Instead of restructuring the manifestly unsustainable debt burdens of Portugal, Ireland, and Greece (the PIGs), politicians and policymakers are pushing for ever-larger bailout packages with ever-less realistic austerity conditions."
The Economy and the Candidates, Wall Street Journal Report with Maria Bartiromo, October 21, 2012 (interview with Kenneth Rogoff)
Min 2:40  on Fiscal Cliff  "Hopefully we won't commit economic suicide by actually putting in all that tightening so quickly."  I like to see something like Simpson Bowles....If we did, we could have our cake and eat it too, we could have more revenue without hurting growth."
Kenneth Rogoff on Economy, European Debt Crisis, Bloomberg Surveillance, July 27, 2012, Interviewer Tom Keene:  "You told me five years and change ago that we would need four trillion dollars of stimulus to get through this"  min 7:55: "yes to great infrastructure projects, but not to just digging ditches"
The Bullets Yet to Be Fired, Financial Times, August 8, 2011 (by Kenneth Rogoff)
"In the case of Europe, this involves very large debt write downs in the smaller periphery countries,  combined with a German guarantee of central government debt in the rest....In the case of the US,  policymakers need to offer schemes to write down underwater mortgages....there is still the option of trying to achieve some modest  deleveraging through moderate inflation of say 4 to 6 per cent for several years.....Last but not least, monetary and financial solutions must be buttressed by structural reforms...."
Farheed Zakaria, GPS "Krugman calls for Space Aliens to Fix US Economy," August 12, 2011, Ken Rogoff:  "Infrastructure spending, if it were well-spent, that's great. I'm all for that.  I'd borrow for that, assuming we're not paying Boston Big Dig kind of prices for the infrastructure."
Interview with Charlie Rose, Business Week, December 2012,  CR: Does this economy need further stimulus? KR"Certainly, withdrawing it at too rapid a rate in such a fragile economy makes no sense....We need to have areas where we spend money, like infrastructure, education."
Inflation is Now the Lesser Evil, Kenneth Rogoff, Project Syndicate, December 2008, "It is time for the world's major central banks to acknowledge that a sudden burst of moderate inflation would be extremely helpful in unwinding today's epic debt morass."

 Appendix II. Reinhart and Rogoff's support of Grand Bargain in Senator Tom Coburn's book "The Debt Bomb"

Failing to find evidence of extreme hawkish positions in interviews, op-eds and media appearances, some have claimed that we were much more hawkish in private.  Any academic who has dealt with policymakers full well knows that if one's public and private positions are incongruous, it undermines one's impact.[1]
 Senator Coburn's book gives his perspective and selected comments on one such private meeting, an April 5, 2011. It was an informal one hour breakfast meeting with forty Senators roughly evenly divided between Democrats and Republicans. The meeting was organized by the so-called "Gang of Six" centrist senators, three Democrats and three Republicans.  The Gang of Six, of course, represented a unique bi-partisan effort to strike a long term budget deal in very toxic and polarized environment.   We presume the meeting was kept off-the-record so comments so the senators could be as frank as possible, we did not care. We strongly supported the spirit of the Gang of Six and are proud of our role in helping them and the National Commission on Fiscal Responsibility.
The meeting began with Carmen Reinhart giving a fifteen minute presentation.  The whole focus of the meeting was on how to approach a gradual move towards long-term fiscal sustainability.
The main ideas being discussed at the time were variants of the Simpson Bowles proposal, an ambitious attempt at a Grand Bargain, aiming to gradually reduce deficits over ten years, with a mix of tax increases, spending cuts and entitlement and tax reforms.  In his book, Senator Coburn notes
"Neither Reinhart nor Rogoff said we could fix our debt problem with just tax increases.  Both emphasized the need for comprehensive tax reform and tax code simplification.  Reinhart said the mortgage interest deduction discourages savings, while Rogoff told me later, 'The current code is jalopy.'"   The Debt Bomb, by Senator Tom Coburn, p. 30 (2012)."
Of particular importance to us, their proposal envisioned significant reform of the income tax system in a way that might have potentially have created a more efficient  and fairer system that could have increased revenue with less growth-compromising distortions.  Many others on both sides of the fence, including President Obama and later 2012 Republican Presidential candidate Mitt Romney endorsed such reforms.  When Representative Ryan later cited our work in support of his counterplan, we did not endorse his plan, and continued to favor the Simpson-Bowles approach.
A couple of Senator Coburn's quotes from us at the meeting, taken without the full context of our introductory remarks have been interpreted as saying we endorsed immediately closing the budget.  This was at odds with our position, notably our work on slow and often halting recoveries from financial crises, which we also emphasized.   In fact, taking into account our opening remarks, it is our impression that the Senators full well understood the urgency we were expressing referred to adopting a long-term Grand Bargain a la Simpson Bowles.

Read the article at: Carmen M. Reinhart