Central to the discussion of economic prospects is the level of debt in major
economies. After the severe 2008 global financial crisis and resultant recession in onehalf
of the economies of the world, deleveraging in the private sector was modest and
balance-sheet expansion in the public sector was massive. Indeed, over the long history
considered by Reinhart and Rogoff (2009), the step-up in public debt to nominal GDP
was without precedent in a window not containing a global war. Not only does the
advanced-economy public debt buildup come on top of near-record private debt levels,
but it also comes alongside record and near-record external debt levels and, in many
countries, massively underfunded old age pension and health programs. Reinhart,
Reinhart and Rogoff (2012) characterize the problem as a quadruple debt overhang.
The main contribution of this paper is to lay out a complete menu of options for
renormalizing the level of public debt relative to nominal activity in the long run, should
governments eventually decide to do so. In the first half dozen years after the 2007-
2008 crisis, the real debate has rightly been about how fast and for how long to let
debt/GDP ratios rise, not about cutting them. But a vision of longer-term options and
issues is key to weighing alternative medium-term stabilization strategies.
Read the rest of the paper here.
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