Photo: Raphael Goetter
It’s of no comfort to the millions of Americans who are unemployed, but the fact of the matter is that the US economic recovery has been extraordinary.
From the dark days of late 2008/early 2009, the economic recovery has been surprisingly strong, given the crash conditions that went into the slump.
As this chart rom Carmen Reinhart and Ken Rogoff makes clear, the US GDP recovery is well above historical systemic crises.
Even on the employment front, the US recovery has been impressive.
Oregon economist Josh Lehner made this chart comparing the employment trajectory of the US recovery vs. other financial crises in recent history.
In the chart, the US recovery is the bright red line. We’ve recovered job losses faster than any other post crisis economy, with the exception of Japan.
Photo: Josh Lehner
And of course on a global basis, the comparisons look great.
It’s been uneven, but compared to Europe and China, the US economy (blue line) has been a workhorse.
Photo: Business Insider, Bloomberg
It’s because of this impressive performance, that hedge fund manager Ray Dalio has called this the ‘Beautiful Deleveraging’.
And make no mistake, there has been deleveraging. While some people like to talk about how we’ve only “kicked the can” because government debt is up so much, the truth is that total debt-to-GDP (when you include all private and public debt) has declined nicely in recent years. It’s now at a 6-year low.
How did the US accomplish this extraordinary feat?
Basically a combo of the following: String-free bailouts, easy monetary policy, and a refusal to embrace the austerity obsession that’s gripped the rest of the world.
People complain about all of these things, but the fact of ths matter is that they work.
But now the US economy faces its first real test of the entire recovery. Serious policy decisions have to be made in a short period of time, because if they’re not, then the US will experience a sharp dose of austerity, and the economy will succumb to the same illness that’s gripped much of the world.
This chart from Goldman nicely shows what’s at stake. With no deal, the drag on GDP will be over 3%. Even with a deal, the drag will be over 1.4%.
Photo: Goldman Sachs
Unfortunately, history is pretty cruel to countries that practice premature austerity.
Richard Koo of Nomura is the foremost expert on balance sheet recessions (having analysed Japan extensively) and what he shows is that periods of premature austerity saw renewed recessions and higher deficits.
Photo: Richard Koo
It doesn’t have to be a total disaster. The CBO has recently made clear that there are probably ways for the US to get some additional revenue without tanking the economy, but the risks are significant.
And realistically, this is probably the last huge test of the crisis recovery. There are signs that the US economy is breaking out of its “liquidity trap“, meaning we may be heading to more normal times when monetary policy can actually help stimulate the economy.
But right now, if politicians do nothing, we’ll see austerity, and if politicians do something, we might still see austerity.
The recovery has been amazing, but they might blow it.
SEE ALSO: A complete guide to the fiscal cliff >
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