SUMMER is at hand in the world’s big financial centres, but the mood is hardly bright. Stock prices have been sliding for weeks in response to gloomy economic news. Factory output has slowed across the globe. Consumers have become more cautious. In America virtually every statistic, from house prices to job growth, has weakened.
This week Larry Summers, who until December was Barack Obama’s chief economic adviser, gave warning that America was halfway through a lost decade similar to Japan’s in the 1990s. Japan suggests that ageing societies may prefer to sacrifice the young to a long period of slow growth rather than erode the savings of older voters.
Amazingly, the author of a study claiming the U.S. housing collapse is now worse than during the Great Depression warned Wednesday that the market likely will continue to fall for the rest of the year before going stagnant. Paul Dales, senior U.S. economist for Capital Economics, predicted home prices would fall another 3 percent over the rest of 2011 before potentially hitting bottom.
Today, across America, debt levels are still more than 100% of GDP (see chart above). After the Great Depression, America reduced debt quickly without messy defaults or painful austerity. From 1945 to 1955, the it is estimated that America’s debt load was reduced by 50 percentage points, from 116% to 66% of GDP. If that reduction were applied today, that would be enough to move America’s budget to surplus by 2013 without any new austerity programme.
Why was it so much easier to cut debt in the immediate aftermath of the Great Depression?