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Harvard's Kenneth Rogoff Predicts Serious Social Unrest Due to Income Disparities In The U.S

02/10/2011 01:01 pm ET | Updated May 25, 2011

Harvard economist Kenneth Rogoff, co-author of a best-selling book on financial crises, This Time It's Different, told Forbes today in an exclusive interview that the high unemployment rate and high levels of debt in the U.S. will sooner or later trigger serious "social unrest from the income disparities in the U.S."

The Obama administration has "no clue," he told me, what do about this terrible disparity in the economy that is bound to erupt sooner or later.

"I don't understand why people don't wake up to the crisis they are creating," he said to me just minutes after appearing at a Council on Foreign Relations round-table on "Currency Wars."

"It's human nature to think that capital inflows will keep coming and push asset prices higher. It's hard for people to resist" their ingrained belief that everything is fine. Right now, Rogoff, who studied financial crises over a period of 800 years, does not predict a "breakdown" or bubble bursting similar to the financial meltdown that resulted from the speculative housing bubble of 2005-08.

Someday, the current upward moves in "commodity inflation, energy inflation and food inflation" will morph into "headline inflation" which will feed into core inflation and "spill out into a possible trade war -- not necessarily yet into a currency war, both Rogoff and Raghuran Rajan, University of Chicago economist and former IMF official, agreed today.

Trade wars are the way populist political policies get expressed, explained Rogoff to an audience of investment bankers and money managers at the CFR headquarters on Park Avenue. A high rate of unemployment can lead to trade wars -- which could be expressed someday in currency wars according to Rogoff.

The talk of currency wars, it was suggested, is due to the "lack of ammunition" from monetary and fiscal policy to find a solution to the current problems.

Rajan also emphasized that unless the Chinese allow their currency to float higher, the protests from other emerging nations like Brazil, Korea and India, will intensify their protests and competitive behavior. Already, it has caused Brazil and other nations to introduce capital controls. But, credit controls are not able to affect the quantity of money flowing to the EM nations.

So far, the thrust of the Bernanke quantitative easing has been limited to slightly boosting consumption by the consumer through the expansion of credit availability. "Consumption inequality is not as bad for an economy as income inequality," said Rogoff. Actually, the dollar, despite volatile moves up and down, has only depreciated on a net basis by 5% as a result of the Fed's quantitative easing.

Further easing will depreciate the currency with the goal of helping the U.S. to "grab a little more international trade," says Rajan. There are echos of the 1930s and 1970s currency wars -- but not the same intensity. Still, other nations have followed the Fed down, transmitting the monetary easing policy to the rest of the world.

"It's not a macroeconomic problem," says Rogoff.. It's a political problem."

Rogoff admits he can't explain why people can't accept the lessons he learned from studying 800 years of financial crises. The two general conclusions I learned in reading This Time It's Different: terrible meltdowns that cause a severe loss of wealth require several years of recovery time before normal economic activity returns; and any nation like the U.S., which has a large ratio of debt to GDP, can expect its rate of economic growth to slow down by a considerable amount.

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