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Letters to the Editor - the Misreading of Reinhart and Rogoff

January 17, 2012

by Various

Dear Editor,

I applaud you for roundly taking to task the media and an ocean of pundits (from Bill Gross to John Mauldin) who have jumped on the notion that a 90% debt-to-GDP ratio is somehow a death knell for an economy.

Reinhart and Rogoff did find that a 90% debt-to-GDP level would likely reduce growth. But pundits have turned this finding into a warning that the US is poised to turn into Greece, fueling the fire of those demanding draconian and immediate deficit reduction. As Huebscher explains, and Reinhart and Rogoff confirm, this is not at all what they wrote and those making this claim are simply wrong.  I recognize that you are not endorsing a “What Me Worry” approach to a significant long-term structural debt problem. But only a true understanding of the data can lead to solutions that will address our debt problem and not just create a crisis of another variety.

How I long for the day (there was one, wasn’t there) when our elected leaders and respected media figures could hold a rational public debate on the economic, for that matter any public policy, issues.  (For one example of what I mean, see Alan Simpson (on Fareed Zekaria), who finds some sensible common ground on deficit reduction). Alas what we are offered instead is a steady barrage of media porn.

This was one of your best, and certainly most important, yet.  It should be required reading by Congressional staff. 

Martin Weil
MW Investment Strategy
Healdsburg, CA

Dear Editor,

Yours was an excellent piece on Reinhart and Rogoff.  If only everyone writing about economics (and every economist, for that matter) would keep repeating things like “correlation does not imply causation” and “past performance is not indicative of future results” we’d be a lot better off. In my 2012 Investment Outlook, I was careful only to call current debt-to-GDP levels dangerous. Thanks for the good work.

Robert P. Seawright
Chief Investment & Information Officer
Madison Avenue Securities, Inc
San Diego, CA

Dear Editor,

Thanks for this article. Even some of the brightest minds have taken the information gleaned from Reinhart and Rogoff in the wrong way.

In an interview with the CFA magazine in November Ken Rogoff suggested even more spending might be necessary if spending is done in the wrong way.   See professors Rogoff’s answers to the two questions on page two.  Perhaps you can answer two questions: What could have been done better? What’s your view on the U.S. debt-ceiling deal of early August?

Thanks for the article.

James B. Cornehlsen, CFA
Dunn Warren Investment Advisors, LLC
Greenwood Village, CO

Robert Huebscher responds:  Regarding your two questions, for the most part the government took the rights steps after the crisis.  I fault the government for its handling of some of the major bankruptcies, when it unnecessarily protected certain stakeholders.  The primary cause of the crisis was excess leverage, and the government needs to do more to address that issue.  The debt-ceiling deal was a sideshow.  The major deficit-related issue that must be confronted is entitlement reform, and neither political party has shown any willingness to take that on.

Dear Editor,

I appreciate your comments in your piece on the misreading of Reinhart and Rogoff.  Economics is an imprecise science, if it is science at all.   Misinterpreting correlation as causation may lead to unwarranted and unproductive policy.  Science may or may not direct policy but when policy directs science than knowledge is reduced to commerce.

Regarding "good" and bad "debt" I am reminded of a well known farmer's quote, "Never borrow money for anything that won't make you money."

Thank you for the continued excellence of Advisor Perspectives.  It is in my opinion by far the best of class if not indeed best of show.

Mike Ryan CFP®
Wilmette, IL