‘Debt is too big, population too old’: Economist Rogoff says Europe is dying a slow death

From warning of an impending AI market crash and a potential US debt crisis to questioning the future of the dollar’s dominance, renowned economist Kenneth Rogoff believes the global economy is entering a period of profound uncertainty.

The Harvard professor and former chief economist of the International Monetary Fund warns that soaring debt, persistently high interest rates and geopolitical conflicts could expose vulnerabilities that policymakers have long underestimated.

In an exclusive conversation with Firstpost, Rogoff discusses the risks of an AI bubble, the future of money and work, the erosion of the dollar’s reserve currency status, and why he believes the biggest economic shocks often emerge where the world least expects them.

Edited excerpts:

Elon Musk recently argued that by 2036, money may lose its value and inflation may cease to be a concern as AI drives unprecedented productivity. How economically plausible are these predictions? Could AI really usher in an era of abundance where scarcity, money and inflation become less relevant?

It’s nonsense. Let me deconstruct it point by point. First, the idea that money won’t mean anything is flawed. There are things that will never be abundant. Real estate won’t be abundant. Many minerals won’t be abundant. Water won’t be abundant. The world will evolve, and new products will emerge that will be very expensive when they are first invented because everyone wants to be at the cutting edge. It’s true that some existing products will become less expensive, particularly in areas where AI is effective.

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But look at the innovations of the last 100 years. Many things that used to be very expensive are now effectively free. That doesn’t mean nobody cares about money. That’s nonsense. It’s actually a surprisingly foolish thing to say. If Elon Musk really feels that way, he can give his trillion dollars back. That’s all I can say.

There’s also a related misconception that everything will cost nothing and that we will have deflation. I hear this a lot from AI evangelists. They argue that central banks won’t face any challenges because we’ll have deflation.

It’s true that goods that used to be expensive will become cheaper. We experience that all the time. But somehow, we still have inflation. Why is that? First, there are things like real estate that don’t become cheaper. Second, there are constantly new goods being developed. AI isn’t going to make all these new goods abundant. It will take time before their prices come down. The consumer basket is constantly changing.

I think it’s completely misconceived to suggest that capital won’t matter. In fact, capital will be more important than ever. People who have money and control capital will earn huge returns. If you only have labour, you’ll get a low return. You won’t feel that money doesn’t matter.

If we don’t agree with Elon Musk’s observations, how do you envision the next 10 years, when AI is expected to surpass human intelligence?

To be clear, Elon Musk is a visionary. He’s way ahead of the curve and right about many things, but he’s wrong about economics, financing and who benefits. He’s wrong about that. But he is certainly a visionary.

I’m very worried about the transition. Many economists have swallowed the blue pill and believe AI is going to deliver utopia and everything will be great. First of all, I think that in 40 years, AI will seem normal, just as we now think of the modern internet, computers, television and aeroplanes. To us, these things are normal. AI will eventually become normal too. I don’t think it will simply upend humanity in the long run.

I think it will be absorbed into society. But the transition could be brutal. It can certainly eliminate a lot of jobs. I think it will destroy jobs much faster than it creates them. This will be a continuation and acceleration of an existing trend towards labour becoming less important, and I don’t think that is politically sustainable.

That’s assuming we don’t face an existential problem involving rogue AI or rogue individuals or countries misusing AI. I’ve heard many concerning things from experts. That’s all I can say. So, 40 years from now, we’ll have figured it out. But the period between now and then could be pretty rough.

How do you see the Federal Reserve’s independence and interest-rate trajectory under Kevin Warsh, amid President Trump’s pressure for rate cuts and persistent inflation? Are we moving away from the ultra-loose monetary policy that defined the post-2008 era?

Let me say that even if Kamala Harris had been president, I think central bank independence would have come under pressure. Neither party likes central bank independence when it is in power. The Democrats support central bank independence now. Wait until they come to power in 2028.

I think the core problem facing the Fed is that the debt is simply too large and interest rates have now returned to more normal levels. At least, that’s my view.

I think long-term interest rates are as likely to rise as they are to fall, and that is very painful. If there’s a major shock, such as an escalation of the war in the Middle East, a worsening conflict in Asia or Europe, or a confrontation in Asia that forces the US to spend money quickly, I think the Fed’s independence will temporarily disappear, whichever party is in power.

Speaking narrowly about monetary policy, I think the Fed will have to raise interest rates two or three times over the next six to eight months. Long-term interest rates are a better reflection of the underlying market. Inflation is clearly persistent, and the economy is doing well. If the AI bubble bursts tomorrow, of course, the Fed won’t raise interest rates during a market crash. But don’t expect interest rates to go to zero. They won’t.

Long-term interest rates will come down, but not significantly. Take the 10-year rate, for example. I don’t think it will fall below 3.5 per cent when the bubble bursts because everyone knows the crash will be temporary, and then things will start moving again. So I don’t think long-term rates will remain lower for long or fall by much.

In the near term, inflation remains a concern. If there weren’t an election, the Fed would be raising interest rates at its next meeting. There’s no doubt about that.

I don’t criticise the Fed for not raising rates because, however independent it is, it also needs to protect its independence. The last thing it wants is to appear to be influencing the election. It needs to keep its head down.

I think we’ll reach a situation where the Fed says it isn’t raising rates now, but that it clearly needs to. Committee members are likely to signal that rates will rise in December, and we may see a couple more increases shortly afterwards. That’s where I think we’re headed.

You touched upon the US national debt, which is at an all-time high. But this is not just an American problem. European countries and several other economies are also facing huge debt burdens. Why is this happening?

The big change has been the normalisation of interest rates. During the 2010s, almost everyone in the economics profession, at central banks and on Wall Street, including prominent economists such as Larry Summers and Paul Krugman, argued that interest rates would never be high again.

We lived in a world of very low interest rates. Debt was a free lunch. Why not borrow more if you never have to pay much in interest? That became the mantra of many politicians.

The problem with that thinking is that government debt is like a floating-rate mortgage. It looks attractive when interest rates are low but becomes expensive when rates rise. That’s what is happening everywhere now.

France is in serious trouble. The United States, I think, is unprepared to make the necessary adjustments. We’re simply unwilling to do so. I believe there’s a 50-50 chance that the United States will face some kind of debt crisis in the next five years. It’s not because the country lacks money, but because there is no political consensus to address the problem until a crisis occurs.

That’s the biggest issue. I want to clarify that I’ve never gone around saying that debt in advanced economies would necessarily cause a crisis. What I’ve said is that very high debt weighs on economic growth. Despite some questionable arguments written about this, it’s obviously true.

It’s far better to owe a small amount than a large amount. With lower debt, governments can respond to recessions, deal with crises and manage wars.

But the big change is the normalisation of interest rates. That’s a central theme of my book, Our Dollar, Your Problem. Interest rates are likely to rise, and that will be very painful because nobody is prepared for it. And it has happened.

What is the worst-case scenario if interest rates rise further, given the high debt levels in the US and most developed economies?

I think some version of the 1970s is possible, although who knows exactly what it will look like. Advanced economies don’t necessarily need to default. Countries that have their own currencies can resort to inflation. You might ask what happens to central bank independence in such a situation. Central bank independence is a convention, not an absolute.

If the debt problem becomes severe, I think we’ll see some version of financial repression, which is already present on a large scale in India. We’ve seen it in France and Japan as well. Ultimately, there could be some combination of financial repression, inflation, austerity and perhaps partial default.

I don’t think this will happen out of the blue. It would take a war or some other major shock for these countries to realise that they are not resilient.

But the big change is the rise in interest rates. For 15 years, I’ve been showing people that historical data tells us interest rates can remain low for a period, but that doesn’t mean they will always remain low.

It was simply nonsense to suggest that interest rates would stay low forever. Politicians who listened to those economists are now facing problems in many countries.

The US enjoys reserve currency status. How much longer can Washington rely on that privilege to sustain a large fiscal deficit without facing a market backlash?

There are two things to consider. First, reserve currency status allows the United States to borrow more, but not an unlimited amount. A good rule of thumb is that the US can borrow roughly 50 per cent more than it otherwise could. But that privilege doesn’t last forever, and I think we’ve already borrowed 50 per cent more.

I believe the US dollar’s reserve currency status is already on a downward trend.

This isn’t necessarily because markets want it to happen. China cannot afford to give the United States so much power through sanctions and control over the global banking system. That’s unacceptable to China.

Europe has also begun to recognise that this dependence is dangerous for it. So China and European governments will invest heavily in diversification. The other reason is the eventual US debt crisis we’ve discussed. It won’t eliminate the dollar’s reserve currency status, but it will weaken it.

Something similar happened in the 1970s. Europe used to be at the centre of the dollar bloc, but that is no longer the case. I think the transition could happen in stages. Nixon took the US off the gold standard in 1971, and the euro was founded in 1998. But there was a long transition period.

I think something similar will happen in Asia, with a gradual shift towards a Chinese-centric currency system.

De-dollarisation has become a major talking point across the global economy. Which currency has the strongest potential to emerge as an alternative to the dollar?

The initial impact will be that everyone is generally worse off because the dollar is becoming less trustworthy. There are too many sanctions, too much debt and too much risk. The world is worse off when its dominant currency is less reliable.

Over the long run, I think the renminbi (RMB) and the euro will gain a larger market share.

In the near term, gold has been the biggest beneficiary. Central banks around the world are diversifying into gold. I could imagine gold reaching $8,000 or even $10,000 an ounce. Given current trends, there isn’t a good alternative for diversification right now.

The renminbi isn’t ready, and neither is the euro. Countries look at France, while Europe also has questions about its ability to defend itself. So, in the near term, gold is the alternative. Over the longer term, it will be the RMB and the euro.

Brent crude touched $115 per barrel. Do you think war is becoming a structural driver of global inflation rather than a temporary supply shock? Is this a trend that could persist?

I think we live in a new world. I don’t know how conflicts will evolve, but I don’t see us returning to the period after the fall of the Soviet Union, when there was a huge peace dividend.

The United States spends less than half of what it spent on defence at the end of the Cold War in 1990. We’ve cut our defence spending by more than 50 per cent. That situation isn’t sustainable. The same applies to the rest of the world.

It’s unfortunate, and I’m not happy about it. There are many drivers behind this: Russian imperialism, instability in the Middle East, Chinese expansionism and US expansionism.

But I think we’re entering a new world in which, unfortunately, wars will become more common. And I think AI will make things much worse. It will empower smaller players to cause more trouble. That’s one reason interest rates are high. The period of the peace dividend, which was unusual, was one of the factors that helped bring interest rates down.

What is your assessment of the Indian economy? India is one of the fastest-growing developing economies, with a huge market of more than 1.5 billion people.

India is a mixed picture. There are many things it does well. It has had the fastest growth rate among large economies for some time. It has many areas where it is a world leader and has a lot of brilliant people.

On the other hand, India still has a serious employment problem. The population boom came to India earlier than it did to Africa, and India has had a mixed record when it comes to creating jobs.

Many young men who moved to cities looking for work eventually returned to the countryside because India didn’t enter manufacturing early enough.

I think India stands to benefit from AI, believe it or not. AI will be very challenging for the outsourcing industry. But India also has many advantages when it comes to exploiting new AI industries. I think India will do very well in this area.

One example that fascinates me is India’s emergence at the cutting edge of AI filmmaking. Hollywood is beginning to import Indian technology. People are talking about it, and India is already doing it.

Just as India filled gaps and showed creativity in the outsourcing industry, I think we’ll see something similar in AI. So, again, it’s a mixed picture. But overall, India will remain the fastest-growing major economy. It is already the world’s fourth- or fifth-largest economy, and it is on its way to becoming bigger. That trend will continue.

China’s property crisis has exposed a structural weakness in its growth model that cannot be solved through another round of stimulus. Do you agree?

Absolutely. The problem is that it’s not easy to replace the real estate sector.

Commercial real estate, residential real estate and infrastructure together accounted, directly and indirectly, for a third of China’s demand. Electric cars won’t replace that. Solar panels won’t replace that. Nuclear power plants won’t replace that. It’s very difficult.

No country can easily manage such a transition. China will be dealing with the excesses of its infrastructure and property expansion for several years. In that sense, it looks very much like Japan.

But there’s another part of China’s economy that is thriving: AI exports and technology. In the United States, this kind of situation might not be sustainable in a Western democracy. But China will probably allow that part of its economy to continue performing well while the other part struggles. It has the ability to do that.

China remains a powerhouse because the successful, dynamic part of its economy probably consists of 300 to 400 million people, roughly the size of Europe or the United States. So it’s a tale of two Chinas.

What is the most dangerous assumption policymakers are making about the global economy today?

I’ve learnt that when looking for major shocks, the best place to look is where people say something cannot happen. I’ve been writing about China for quite some time, conducting research and showing how overbuilt its economy was and why it would eventually face problems. I wasn’t just expressing opinions; I was presenting evidence.

I’ve also argued against the idea that interest rates would remain low forever, at a time when the entire economics profession was making that assumption. And, of course, I made similar arguments about the possibility of a financial crisis when I wrote my book with Carmen Reinhart. So, right now, if you ask where people believe a crisis can never happen, the answer is the United States. That’s where you should look.

The places where people believe a crisis is impossible are often the places where nobody takes precautions. They throw caution to the wind. That’s what I would say. Of course, France doesn’t look very good either. It’s not just the United States.

There are several European countries in trouble, with France being just one example, right? Yes. But Europe is dying a slow death, whereas the United States will eventually go up in flames.

Don’t misunderstand me. The United States will remain on top. But Americans seem to think everything is perfect and nothing can go wrong. France, obviously, has to make choices. I don’t know what will happen there. I think Germany will still bail out France. But Europe’s fate at the moment is to become a laggard, a museum. That’s where Europe is headed. It risks becoming irrelevant. However, that doesn’t necessarily mean Europe is where the biggest crisis will happen.

You said Europe is dying a slow death. What is driving this decline, and how do you see Europe’s future?

It will always be a nice place to visit. But Europe has tried to maintain its welfare state, and its finances are not sustainable. Its debt is too high, and its population is too old. It cannot maintain its current benefit levels. That’s obvious to everyone.

At the same time, European countries have been free-riding on the United States for space and military protection.

Look at France. Is it really prepared to spend another half a percentage point on its military right now? It doesn’t look like it. I think you’ll see the same situation in many of Europe’s larger economies. In Italy, I can’t imagine the government spending much more on the military.

There’s no place in Europe to launch a satellite, so countries have to go to Kazakhstan. How are they going to compete? Europe also doesn’t have adequate electricity, and it isn’t making the necessary efforts to address the problem.

Europe is very backward-looking.

In one sense, Europe has great institutions, excellent education and wonderful people. But it is definitely in a lot of trouble. It’s facing problems at every level.

How do you see GCC contries diversification efforts?

I’ve watched Saudi Arabia move towards becoming the next Korea. It is one of the first countries in a very long time to move from being a developing economy towards an emerging market and, ultimately, an advanced economy. It was very encouraging to see what was happening. The same applies to the Emirates. They were forward-looking and visionary.

It’s a very difficult geography. I don’t want to make a prediction about what will happen. But I certainly wouldn’t want the United States to be located next to Iran. It’s a very difficult situation. There are also so many workers from India who depend on employment in the Gulf. This is a disaster. It’s a full-blown disaster. I hope peace can be achieved, through a détente or some other arrangement.

I think the world can live with higher gas and diesel prices if it has time to adjust. The problem here is that countries need time to redirect their imports and find alternative suppliers. When the Prime Minister of India came and told people to use half as much fertiliser as they had been using before, it was very sad. I know he was saying what he needed to say, but the situation is tragic.

Some of the pain from the war in the Middle East is spreading across the world, and India has been badly affected. There could be serious consequences for future generations, including malnutrition and undernourished children, because countries may not have enough fertiliser to plant as much as they need.

There is a sense of recalibration in Gulf sovereign wealth fund investments. As these funds shift their investment strategies and public investments, do you think the rest of the world will be affected?

It’s a fact. This is one of the factors driving up interest rates because the Gulf was one of the world’s major exporters of capital. Now, the region has massive expenses and needs to import more to protect its countries and feed its people. The same is happening in China, where the economy isn’t doing well. The Gulf is a very important region, and one can only hope that peace returns soon.