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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

October 12, 2011 at 10:15 AM

Debt overhang: One big weight keeping the economy down

I’ll call your attention to Harris Collingwood’s article in The Atlantic: “The recovery’s silent assassin: How debt deleveraging is killing the economy.” It points to a little-discussed phenomenon after three decades of debt-driven growth: As households, businesses and governments pay down debt at the same time, the economic crisis will only linger and perhaps get worse. This isn’t the only problem facing the economy, but it’s a big one.

Using one woman’s life changes as an example, he writes:

Millions of Americans are taking similar steps. Some 8 million U.S. consumers stopped using bank-issued credit cards in 2010, according to the credit-reporting agency TransUnion. The average credit-card balance has fallen 10 percent this year from 2010, to $6,472; U.S. consumer debt has dropped for 12 consecutive quarters, from a peak of $14 trillion in early 2008 to $13.3 trillion last spring, mainly because of mortgages repudiated or abandoned. People are cutting visits to the hairdresser, buying used cars without financing, and living on surplus cheese as they trudge toward the promised land of a debt-free existence.

Suppose everyone did what Heather Anderson is doing? And that the federal government, just as virtuously, did the same? And Europe too? What if everyone deleveraged at once? Guess what–that is exactly what’s happening in the wake of the Great Recession. For better or worse.

The party’s over. And those who worry about a Japanese-style “lost decade” should remember that Japan has universal healthcare and an unemployment rate below 5 percent. Also, massive deleveraging by the federal government, particularly if it doesn’t mean cutting the costs of the military, corporate welfare, overseas empire and Bush-Obama tax rates, will lead to the same results as in Britain: More recession.

For the federal government, there’s never been a better time to borrow at low rates and invest in infrastructure, education and research to get the economy going again. That it won’t happen is a political, not an economic, roadblock. Beyond that, we lack the common metrics or mindset to manage contraction. But no fake Greenspan boom is coming again.

And Don’t Miss: America’s Biggest Airlines Ranked Best to Worst || 24/7 Wall Street

Today’s Econ Haiku:

Occupy they may

But the oligarchs billions

Occupy D.C.

Comments | More in Debt, Deficit, Deflation, Housing, Income/living standards, Recovery

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