Jonathan Portes (2013): Comment on Reinhart and Rogoff's FT Article: "My letter to the FT... deliberately concentrates on the case for borrowing now to finance investment, where Reinhart and Rogoff have belatedly joined a growing consensus.... I omitted a couple of points where their article is simply incoherent.... They argue that we should be cautious about borrowing because interest rates might rise: 'Unfortunately, ultra-Keynesians are too dismissive of the risk of a rise in real interest rates. No one fully understands why [real interest] rates have fallen so far so fast, and therefore no one can be sure for how long their current low level will be sustained...

....Leave aside the silly straw man (repeated elsewhere) that 'ultra-Keynesians' want an 'unlimited open-ended surge in debt'. Who are these 'ultras'? Not Martin Wolf and Simon Wren-Lewis in the UK, or Paul Krugman and Brad Delong in the US. And, as Reinhart and Rogoff know perfectly well, of course we think (and hope!) that real interest rates will rise at some stage, when demand and confidence returns and the private sector wants to invest. Bringing that time forward is precisely the objective of the policies we advocate.... Reinhart and Rogoff seem to have got their logic completely inverted.  At the moment the UK (and US) can borrow very long term at very low or even negative real interest rates; the UK index-linked gilt maturing in 2055 has a real yield below zero.  So what Reinhart and Rogoff are arguing is that we should not lock ourselves into long-term debt at very low real interest rates now, because real interest rates might go back up. Suffice it to say that if your financial adviser told you not to take out a long-term fixed rate mortgage now, because interest rates might go up next year, you might reasonably doubt her competence. 

As for the reference to Keynes.... Of course Keynes was worried about the inflationary impact of high deficits during the War, when demand (for both guns and butter) was effectively unlimited, and supply constrained (with full employment and much of the workforce off fighting). To say the least, that's not where we are now.  It's always a little silly speculating what eminent dead people would do today, but it's hardly difficult to figure out what Keynes' prescription would be when unemployment is far too high and investment too low...


#noted

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