Harvard economist Rogoff: The United States needs a "crisis shock" to solve its debt problem.

The US debt problem is deeply entrenched, and politicians have been slow to take action. Harvard economist Kenneth Rogoff warns that the situation may only truly change after a major crisis.

In an interview on Friday, Rogoff stated that the U.S. public debt surpassed $40 trillion last week, and coupled with continuously rising interest rates, the debt situation has deteriorated significantly, but Washington's policy response has been severely lagging. He bluntly stated, "Interest rates have reversed, but Washington hasn't."

Rogoff points out that geopolitical conflicts, the impact of artificial intelligence, and even cyber warfare could all become the trigger for the next crisis, at which point the Federal Reserve and the US government will have very limited room for policy maneuver.

He also warned that substantive reforms to social security and other welfare programs also require a crisis as a catalyst, and before that, voters and politicians lack sufficient motivation to take action.

Behind the runaway debt: Interest rates reverse but policy remains unchanged.

Rogoff attributes the long-term runaway U.S. debt to a near-religious belief in academia that interest rates will fall indefinitely. He argues that this presupposition has underpinned the unbridled accumulation of debt over the years.

However, as interest rates rebounded from their lows and continued to rise, the political leadership failed to adjust its response strategy accordingly.

Currently, the auction rate for 30-year U.S. Treasury bonds has risen to its highest level since 2001, and the ever-increasing interest payments are creating a potential "vicious cycle": the larger the debt, the higher the yield that investors demand, which in turn further pushes up borrowing costs.

Rogoff stated that the current trend in long-term Treasury bonds reflects a reality—that the Federal Reserve and the federal government will have very limited policy space available in the event of a crisis.

At the same time, there is a consensus in Washington's political circles that voters are neither willing to accept tax increases nor to accept drastic spending cuts, making the path to reducing the fiscal deficit increasingly narrow.

Potential shocks: Geopolitical and technological risks could be the trigger.

Rogoff listed several scenarios that could trigger a debt crisis within the next five years, including cyber warfare and disruption by artificial intelligence. He stated that if these events occur, they could all lead to a sharp jump in interest rates, further exacerbating already fragile fiscal situations.

"The crisis comes because you don't have enough resilience when the shock happens," Rogoff said. He characterized the war in Iran as "just a small shock compared to what might happen in the next five years," implying that current fiscal vulnerabilities offer little protection against larger shocks.

Rogoff made the comments while in Jackson Hole, Wyoming, attending the annual economic policy symposium hosted by the Federal Reserve Bank of Kansas City. He previously served as the chief economist of the International Monetary Fund.

Social Security Reform: Voter Apathy Makes Political Action Seem Far Away

Rogoff also holds a pessimistic view on social security reform. He stated that substantive reform of welfare programs also requires a crisis to drive it, because voters are not yet aware of the urgency of the issue.

He quoted his prediction in his new book, "Our Dollar, Your Problem," that the current situation "will end in some form of crisis" before reforms can become politically feasible. Rogoff sarcastically remarked that any candidate who campaigns on the promise of fixing Social Security in 2028 will find that "voters' eyes immediately dart away."

This assessment paints a picture that should alarm investors: a fundamental shift in the trajectory of US fiscal policy may be a long way off until a genuine catalyst for reform emerges, and the cost of such a shift may far outweigh the cost of proactive adjustments in the present.

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