Kenneth Rogoff and Carmen Reinhart are in the eye of a storm.

They are Harvard professors, known for their book, This Time is Different , written and published after the 2008 crisis. Their point was that financial crashes can hobble an economy for years. In this sense, they are different from normal recessions, which are part of economic and business cycles. The research was painstaking, going back considerably in time.

The next theme was ‘financial repression’ — short for savers being ‘punished’ for saving because of very low interest rates.

The latest is a missive on government debt. By now, readers must have got the drift. Unsurprisingly, they ‘discovered’ excessive debt and ‘degrowth’ are correlated. And it happens precisely when debt hits 90 per cent of GDP.

What’s interesting is the attempt to prove a statistical relationship between debt and growth. Not causation. So, we are left wondering if high debt leads to a sliding economy or it’s the other way round. What profound addition to knowledge!

The proponents of budget cutting could ask for nothing more. They were least bothered about causation. Austerity in government spending now had academic sanction — from no less than Harvard professors.

It was just an accident that R&R were found out. Two diligent researchers went through their raw data and spotted errors in the calculation spreadsheets. Moreover, data seemed to have been cherry-picked to support a predetermined conclusion. R&R admitted their mistake. There is no auto alert that must go off at 90 per cent.

The theoretical foundations of government borrowing and spending and fiscal deficits being bad, tax cutting to catalyse growth and money being the cause of all inflation were always terribly shaky. The last five years have proved they are far from reality as well.

Ben Bernanke’s printing machine is on at full speed. Quantitative easing 1 was followed by QE 2 and we are now on QE 3. Government debt is up as is the deficit. So where do we stand on inflation and growth?

US inflation is actually declining. Growth is picking up. Bond yields continue to be in the very low single digits. It’s not just the US. Japan, very recently, announced and started an unlimited QE programme. Growth and business sentiment immediately turned up. With no ill-effects on inflation. On the other hand, Britain, in fiscal austerity, is in near recession.

Monetarists unfazed

But the ‘austerians’ and monetarists are unfazed and continue to peddle their brew. For them, the big villain is surely Bernanke. Not because of QE. But because he’s proved QE is not a sufficient condition for inflation.

Easy to scare the naïve and ill-informed with earthy simple slogans, on the trillions of dollars of national debt and deficits, despite the overwhelming contrary evidence.

(The author is a Chennai-based financial consultant.)

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