Government, Individual Debt is a Worse Problem Than We Might Have Thought

Sometimes you have to admit you were wrong. I originally thought the past recession would unwind, leading to a new round of growth, on the pattern we almost always have seen in past recessions, whic is to say that, by now, we should be seeing much more robust job and gross domestic product growth.

I was wrong. This one is different. See this  or this. 

Of course, some will point to the 1970s "stagflation" as the model, where we have both higher inflation and stagnant economic growth. What might be different this time is the stunning role debt seems to be playing.

"Today, U.S. consumers have more mortgage and credit-card debt than they did five years ago, and the U.S. budget deficit is worsening," says the Wall Street Journal. "At the same time, European governments are having to throw billions more euros at Greece to keep it afloat."

One of the changes I notice is that I am, possibly for the first time, seeing acknowledgement across the political spectrum that the debt and deficits do really matter. True, there is some skepticism about public willingness to make the needed sacrifices. But possibly for the first time there is a common recognition that Greek style unrest could happen in the United States, and probably will, if one assumes that "spending less, much less" is a key part of what is required to remove the debt problem.

"The fundamental problem is that reversing the trend of piling on the debt requires some combination of cutting spending, growing income or the economy, and inflation," the Journal notes. On the job creation front, businesses aren't hiring or investing because they know consumers are unable to respond to the supply.

Some economists would argue that recovery from a specifically financial crisis takes about seven years, on average. Roughly half of the time, a financial crisis leads to a "double dip recession." Economist Gary Shilling says the next recession won't be a double dip; it will be a new recession. That comes in 2012. See this.

Government, Individual Debt Hamstrings Recovery - WSJ.com: (subscription required)