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Thursday, June 17, 2010

The Correlation Between Debt Levels and Worried Markets

Here's an interesting observation from the latest economic outlook from Bharat Trehan of the the SF Fed:

looking only at current and projected debt levels, it becomes hard to distinguish the countries that markets are worried about from the countries markets are not worried about.

So the message for the debt-heads is that it's not just debt levels that matter. What else matters?:

History may matter as well ..., countries of most concern are those that have defaulted more frequently in the past. (See Carmen M. Reinhart and Kenneth Rogoff, This Time is Different...) None of those defaults are recent, but there were defaults that occurred during the Great Depression. That is relevant to the present because the financial shocks of the past few years are among the biggest that have happened since that time.

When was the last time the US defaulted?

Finally:

While there is some risk that Europe's sovereign debt crisis could get much worse, the most likely outcome is that it will not. In that case, its effects on the U.S. economy are likely to be small.

    Posted by on Thursday, June 17, 2010 at 03:51 PM in Budget Deficit, Economics | Permalink  Comments (51)


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