The U.S. economy is in the “early stages” of a depression, one which will be much more severe than the Great Depression, Nobel Prize winning economist Paul Krugman warns.
“We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression,” Krugman writes in the New York Times.
“But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense,” he wrote in the Times.
This third depression will emerge as a result of the failure of government economic policy.
“Around the world ... governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending,” writes Krugman.
“Unlike governments of the past, which tried to balance budgets in the face of a plunging economy, today’s governments allowed deficits to rise. And better policies helped the world avoid complete collapse: the recession brought on by the financial crisis arguably ended last summer.”
But, Krugman notes, future historians will say that this wasn’t the end of the third depression. “After all, unemployment — especially long-term unemployment — remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down,” writes Krugman.
Other elite opinion-makers seem to concur with this tragic hypothesis. The Washington Post is reporting that this past weekend’s G-20 Summit was a “prelude to a depression.”
If not another Great Depression, many experts are warning that the United States could slide back into a recession.
Yale economist Robert Shiller, who predicted the housing bust, has warned that the economy still hasn’t escaped the possibility of a double-dip recession.
“We just went through a Great Depression scare,” he told Bloomberg. “The Fed and the government took on extraordinary measures to prevent that," he said. "But I think our confidence is still vulnerable.”
And confidence is the major driver of the economy, Shiller says.
He defines a double-dip recession as another downturn before the economy gets completely back to normal. “I think there’s a significant possibility of that,” Shiller said.
President Barack Obama warned his counterparts from the Group of 20 nations to not reel in measures to stimulate their economies too quickly. The United States fears doing so could endanger the global recovery. Some nations in Europe and elsewhere are shifting their focus on cutting deficits — especially in the wake of Greece's debt crisis, which rattled world markets.
Treasury Secretary Timothy Geithner said during the weekend that world leaders must work together to make sure the global recovery stays on track, the Associated Press reported.
Asked if the global economy could slip back into another "double dip" recession, Geithner said the answer to that question hinges on decisions made by world leaders.
"It is within the capacity of the people who are going to be in those rooms together in the next few days to avoid that outcome," he said.
One of the mistakes made in the 1930s was that countries pulled back their recovery efforts too soon, prolonging the Great Depression, he said.
Geithner said the United States doesn't want to see that happen again.
"What we want to do is continue to emphasize that we are going to avoid that mistake," he said. "It's only been a year since the world economy stopped collapsing ... it will take some time to heal."
Although the world economy has recovered from the worst financial and economic crisis since the 1930s, many challenges remain, Geithner said.
"The scars of this crisis are still with us," Geithner told reporters. "If the world economy is to expand at its potential, if growth is going to be sustainable in the future, then we need to act together to strengthen the recovery and finish the job of repairing the damage of the crisis."
Meanwhile, Vice President Joe Biden defended the Obama administration when it comes to fiscal restraint in a year when spending is polling higher than usual among voter concerns, swamppolitics.com reported.
Biden said the Obama White House has introduced a proposed budget freeze and pushed for a debt commission that Republicans ultimately rejected, swamppolitics.com reported.
"We are on our way out of this recession," Biden said.
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