Tipping Point Nonsense
10 November 2016 | Pago Pago, American Samoa
One of the arguments against modern monetary theory is the tipping point claim. That is, when the ratio of public debt to GDP hits a certain level, countries collapse or have their growth slow or collapse. The World Bank and super conservative Peterson Institute think the magic number is 70%. Rogoff & Reinhart, in their challenged study, think it is 90%. Both have no plausible theory or logical reason for why, only what I contend is the bogus misuse of data. In truth, they are both wrong. Here is why.
The idea that there is a common tipping point in the relationship between public debt and economic growth is still widespread. However, this is likely due to a misinterpretation and misaggregation of data, that is of the existing evidence. Once we allow for the relationship between debt and growth to be country-specific, as a new study shows, there is only quite limited evidence supporting the presence of a within-countries debt threshold.
Other factors and circumstances overwhelm as they factor in. The matter is much more complicated. For examples, how much of the public debt is governmentally owned? Who owns the rest? How well is the country's debt managed? How well is the country's debt accepted and used as a store of value for near cash hoarding? Is inflation under control? Etc, ad nausium.