As credit crunches ever harder on the global economy, Jonathan Ford explains in our lead opinion this month why the Wall Street crash of 1929 is a less significant analogy to the situation today than the Japanese crisis of 1989—the year which marked the start of a 13-year decline in the Nikkei index of leading Japanese shares.
As in late-1980s Japan, Ford argues, banks have now lent too much money to bad borrowers. Having made big losses, they are concerned about more bad debts coming down the line, eroding their capital. This has made them extremely reluctant to lend—even to one another—and may set in motion a pattern of “deleveraging malaise” that traditional mechanisms, such as the lowering of interest rates, cannot break.
Is the world set to become debt-averse in a way that threatens growth across the entire global economy? It’s a possibility, he believes, that we discount at our peril.
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Very nice piece as far as it went. But a bit Hamlet without the Prince. What made the Japanese deleveraging so slow and so painful was Tokyo’s failure to offset the negative macroeconomic effects of the financial crisis was a large and sustained programme of fiscal stimulus.
The US risks following the same path,I fear.The country certainly has massive opportunities for increased federal spending in many areas which could have a rapid counter-cyclical effect, for instance, extending and enhancing unemployment compensation, increasing grants to the states to avoid the need for them to cut spending in the face of falling tax revenues and boosts in social security payments to poor senior citizens hurt by rising fuel and food prices.There are also of course major long-term infrastructure, energy conservation and environmental needs which could be addressed.However, despite the glowing achievments of a few academic economists, policymakers understanding of fiscal policy has regressed substantially over the 45 years since I landed in America and –the pre-Keynesian–no anti-Keynesian– shibboleths inhibit rational political discussion.
So expect a considerable period of slow growth in the US.
Goldman Sachs says that total US debt is 346% of GDP
http://www2.goldmansachs.com/gsam/docs/instgeneral/general_materials/outlook/global_fixed_income_outlook.pdf
Household 97%
Business 194%
Government 56%
Total 346% of GDP
How does Jonathan Ford come up with his number that total US debt is only 221% of GDP.