It’s hard not to admire the economy’s resilience. After the Great Recession, there was a palpable fear that the economy would perform poorly. The downturn was the worst since the Great Depression of the 1930s, when the annual unemployment rate hit a high of 25 percent. But nothing like that has happened recently.
Given this record, it’s plausible that the U.S. economy — and maybe the global economy, too — has escaped another severe slump. The Federal Reserve and other important central banks (the Bank of Japan, the European Central Bank and the Bank of England) have kept interest rates low.
The strategy has been to sustain the recovery, allowing consumers and companies to regain confidence and, for the least employable workers, to find jobs. In that sense, economic policy is also social policy. Federal Reserve Chair Jerome H. Powell has repeatedly argued that prolonging the economic expansion — now the longest in U.S. history, in its 11th year — is needed to spread low unemployment’s benefits.
Yes, at some point, there will be another recession. We haven’t yet conquered the business cycle. But the next downturn need not be a disaster.
Since World War II, there have been 12 recessions, as dated by the National Bureau of Economic Research (NBER), a group of mostly academic economists. The NBER usually declares a recession if the economy’s output or gross domestic product declines for two consecutive quarters.
It can be argued that the present slow rate of economic growth is safer than a burst of faster growth that, though initially pleasurable, creates instability by encouraging financial speculation. That’s what happened with the housing crisis of the early 2000s. Credit standards had weakened, and millions of homeowners defaulted on their mortgages.
Could it happen again? Well, yes. Under certain circumstances, some sort of global credit collapse is conceivable. With global growth already so slow, any negative shock, such as a worldwide pandemic, could tip countries into recession. Indeed, many economists think the seeds of a crisis have already been planted.
“There can be no doubt that we have been experiencing a global credit market bubble that . . . [results from] an unprecedented and prolonged period of ultra-easy monetary policy,” writes economist Desmond Lachman of the American Enterprise Institute for the Bulwark, a conservative website.
The same dynamic applies to stock markets. Low interest rates induce investors to put their money in stocks, pushing prices up. Global stock markets are “frothy,” says Lachman. “U.S. equity prices have increased now by more than threefold since their nadir in March 2009.”
The amounts of new credit are sizable, according to data from the Institute of International Finance (IIF), a research and advocacy group for banks and other financial institutions. In late 2019, the IIF estimated total global debt at nearly $253 trillion, up from slightly more than $200 trillion in 2012. These figures include government, business and household debt.
The crucial questions involve how much of this debt is going to solid borrowers with the ability to repay or whether it’s fueling dubious loans for risky projects by weak borrowers. In some countries (the United States, Brazil), the added debt comes from governments. Elsewhere, the heavy borrowing has favored households (South Korea) or businesses (China), including state-owned enterprises.
The implications for economic stability are plain. If countries can’t develop self-generating sources of economic demand — that is, unless they can wean themselves off credit-induced demand — they risk becoming vulnerable to doubts that, eventually, lenders won’t continue lending.
Either borrowers default or lenders cut off credit to protect their money. This leads to a credit squeeze that, depending on the economy’s condition, could be weak or powerful. Then the government — often the central bank, such as the Federal Reserve — intervenes to prevent a full-fledged collapse. That’s what happened in the 2008-2009 financial crisis.
Any verdict on the economy’s true state must be tentative. It depends on the basic strengths of the United States and on how (or whether) the credit injections translate into sustainable growth — for us and for much of the rest of the world. Economic interdependence is a cliche, but it’s also a reality. We depend on other nations, and they depend on us.
Read more from Robert Samuelson’s archive.