NEW YORK, NY--(Marketwire - July 8, 2010) - The siren song of "sovereign debt bears" calling for worldwide deficit reduction is not only unenlightened but potentially dangerous, according to economist David Levy in a recently published memo to clients.
"Deficit reduction during a period of depression not only hurts the economy and aggravates financial stresses, but also defeats its own intention: weakening the economy reduces revenue and increases some social outlays, offsetting the intended deficit reduction," Levy said.
"These bears give abounding warnings that the U.S. government is headed for a financial crisis, with calamitous consequences for the country's economy, standard of living, and international standing."
Levy warned that such Cassandra commentary ran the risk of "scaring policymakers into some of the most destructive, wrong-headed views imaginable."
By contrast, Levy pointed out that none of the typical conditions that lead to sovereign debt default apply to the United States, the United Kingdom or Japan. Further, he said, "high public debt doesn't necessarily imply inflation, especially when it is caused by a deflationary private economy." Nor is high public debt likely to be a drag on future growth or prosperity.
Indeed, said Levy, "the concern that high public debt leads to slow economic growth has the causation exactly backwards. Future generations will not bear the burden of current deficit spending."
Adds Levy: "public debt ratios in high-debt capacity nations can go much higher than people think -- and have before -- without leading to default. The danger point is not debt equal to 100% of GDP, as many believe, but debt well over 200% of GDP, possibly a great deal higher."
Levy supports his arguments with extensive historical evidence and identifies many of the problems with competing arguments in this in-depth paper.
The solution to the nation's and the world's current depressed economic condition, according to Levy, lies in "the strongest countries maintaining fiscal stimulus in the face of economic distress."
In the U.S., this means spending "aggressively on programs that produce public assets -- such as public infrastructure, education, green technology, military hardware, and research and development -- to accompany the mounting public debt."
"If U.S. policy is Keynesian while European and Japanese policy is Hooveresque, then the United States will run a huge trade deficit, spilling much of the profits it generates through fiscal policy out to the rest of the world and undermining the effect of the domestic fiscal stimulus," Levy warned.
About The Jerome Levy Forecasting Center
The Jerome Levy Forecasting Center LLC -- the world leader in applying the macroeconomic profits perspective to economic analysis and forecasting -- conducts cutting edge economic research and offers consulting services to its clients. The goal of the Levy Forecasting Center is to improve its clients' business and investment performance by providing them with powerful insights into economic risks and opportunities -- insights that are difficult or even impossible to achieve with conventional approaches to macroeconomic analysis. Additional information may be found at www.levyforecast.com
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