Morning Must-Read: Stephanie Lo and Kenneth Rogoff: Secular Stagnation, Debt Overhang, and Other Rationales for Sluggish Growth, Six Years on
I have a very easy time believing that debt overhangs–private, international, and public–can be enormous headwinds and exert substantial drag on growth and recovery. What I cannot understand is how debt can do so without also being an impaired asset to those who hold it. Debt that is painful enough to bear that it discourages enterprise and spending is also debt that may not be collected in the end, and thus debt that sells at a low price and carries a high face interest rate.
Claiming that the pieces of debt selling at record-high prices and carrying record-low face interest rates–which is the case right now for the death of credit-worthy sovereigns possessing exorbitant privilege–are in any sense a drag or a headwind seems to me to be simply wrong. I do not understand how people of note and reputation can believe it…
…over why sluggish economic growth persists across many advanced economies six years after the onset of the financial crisis. Theories include a secular deficiency in aggregate demand, slowing innovation, adverse demographics, lingering policy uncertainty, post-crisis political fractionalisation, debt overhang, insufficient fiscal stimulus, excessive financial regulation, and some mix of all of the above.
This paper surveys the alternative viewpoints. We argue that until significant pockets of private, external and public debt overhang further abate, the potential role of other headwinds to economic growth will be difficult to quantify.