Martin Wolf has a really great FT column today pointing out how stupid the debate over fiscal policy has become.

The basic gist: The US government ought to be listening to the bond market -- where a yield on the 10-year of around 2% means the market is basically begging for more borrowing -- rather than Ken Rogoff, the Harvard economist who says that at 90% debt-to-GDP, economies are doomed to slow.

We've been on this kick for awhile, arguing that Reinhart and Rogoff are the most dangerous economists because of the potency of this 90% idea.

Says Wolf:

Another noteworthy objection – grounded in the seminal work of Prof Rogoff and Carmen Reinhart of the Peterson Institute for International Economics in Washington – is that growth slows sharply once public debt exceeds 90 per cent of GDP. Yet this is a statistical relationship, not an iron law. In 1815, UK public debt was 260 per cent of GDP. What followed? The industrial revolution.

What matters is how borrowing is used. In this case, moreover, we need to consider the alternatives. If the fiscal deficit is to be sharply reduced, the surpluses in the rest of the economy must also fall. The question is how that is to be compatible with rapid deleveraging and expanded spending. In my view, it cannot be. A more likely outcome, in present circumstances, is mass default, shrinking profits, damaged banks and a renewed slump. That is what would happen if today’s contained depression ceased to be contained.

Read Wolf's full post >