← Blog Tue Apr 29, 2014 - 12:42 am - 0 comments

Fighting debt: How the U.S. is doing it better


FORTUNE — Throughout the U.S. recovery we’ve seen economic data bounce in peaked highs and lows. Real GDP growth since the financial crisis has been as high as nearly 5% year over year and as low as 0%. I expect the sluggish and volatile recovery to continue for years to come. Why? In one word: deleveraging.
The U.S. economy has been going through a deleveraging not seen since the Great Depression. Back then, total debt reached 300% of GDP. It continued to drop over the next two decades to 150% of GDP before rising again in the early 1950s.

The deleveraging of the Great Depression was accomplished thanks to a combination of household austerity, inflation, and government stimulus. Household austerity occurred thanks to elevated savings rates along with pay-downs and defaults on debt during the 1930s while rationing to support the war effort had similar effects in the 1940s. Additionally, breaking away from the gold standard helped raise prices and therefore reduced the real value of America’s debt. Lastly, the government spending from various New Deal schemes to the vast mobilization during WWII contributed to keeping total GDP growth positive.

Published on FORTUNE
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