January 23, 2012


Predictions about the death of American hegemony may have been greatly exaggerated (Daniel W. Drezner, January 22, 2012, Foreign Policy)

[T]here are three macrotrends that are worth observing now before (I suspect) they come up in the State of the Union: 

1)  The United States is successfully deleveraging.  As the McKinsey Global Institute notes, the United States is actually doing a relatively good job of slimming down total debt -- i.e., consumer, investor and public debt combined.  Sure, public debt has exploded, but as MGI points out, that really is the proper way of doing things after a financial bubble:

The deleveraging processes in Sweden and Finland in the 1990s offer relevant lessons today. Both endured credit bubbles and collapses, followed by recession, debt reduction, and eventually a return to robust economic growth. Their experiences and other historical examples show two distinct phases of deleveraging. In the first phase, lasting several years, households, corporations, and financial institutions reduce debt significantly. While this happens, economic growth is negative or minimal and government debt rises. In the second phase of deleveraging, GDP growth rebounds and then government debt is gradually reduced over many years....

As of January 2012, the United States is most closely following the Nordic path towards deleveraging. Debt in the financial sector has fallen back to levels last seen in 2000, before the credit bubble, and the ratio of corporate debt relative to GDP has also fallen. US households have made more progress in debt reduction than other countries, and may have roughly two more years before returning to sustainable levels of debt. 

Indeed, the deleveraging is impressive enough for even Paul Krugman to start sounding optimistic: 

the economy is depressed, in large part, because of the housing bust, which immediately suggests the possibility of a virtuous circle: an improving economy leads to a surge in home purchases, which leads to more construction, which strengthens the economy further, and so on. And if you squint hard at recent data, it looks as if something like that may be starting: home sales are up, unemployment claims are down, and builders' confidence is rising.

Furthermore, the chances for a virtuous circle have been rising, because we've made significant progress on the debt front. 

...with Mr. Obama taking steps to re-open the borders unilaterally.  

Posted by at January 23, 2012 6:54 PM

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