Derek Thompson - Derek Thompson is a senior editor at The Atlantic, where he oversees business coverage for the website. Follow him on Twitter: @DKThomp. More
How did the road out of recession lead into a cul-de-sac? And why, all of a sudden, is the world economy falling apart? The answer is all about growth and debt.
Is the stock runoff for real? Are we falling into another recession? What the heck is going on, anyway?If you find yourself confused about the market meltdown, you've got company. Dow crashes, like Monday's 600 point plunge, are notorious black boxes. A few thousand investors acting on a hundred indicators rarely reveal a single, shining Truth. But this appears to be more than a one-time crash. The United States and Europe, twin engines of the global economy, are close to falling back into a recession.What we're seeing is the confluence of two challenges that are both economic and political in nature. There is growth crisis in the United States. There is a debt crisis in Europe. And there isn't a single government that knows how to solve either.
MONDAY'S CARNAGE; WASHINGTON POST GRAPHIC
But wait. It gets worse. "We've run out of options from government," says Barry Bosworth from the Brookings Institution. "Interest rates are zero. Quantitative easing has had a limited impact on the recovery. There is no prospect of consensus about fiscal policy, which will probably become contractionary over the next year."
In short, we're stuck in a world of no growth and no options.
But wait. It gets worse. Europe is rotting from the outside in. Germany's hot recovery is cooling. French banks face significant exposure to Spain and Italy's troubles. The United Kingdom's experiment in austerity is backfiring. The city of London, which was even more finance-focused than New York City before the crash, is literally burning as austerity and months of negative growth unnerve the city's young unemployed population.ARE WE DOOMED?If the U.S. and Europe are at the edge of a cliff today, it is a shorter cliff than in 2007. The good news is that we have less room to fall. The bad news is that nobody expects a soft landing. There will be no more fiscal stimulus. There is less room for monetary stimulus. The only sure antidote to our crises is time. Europe's fundamental problem is debt in a handful of states. The continent needs to find a way to offer these states access to the broad euro market. If Greece can borrow at closer to the Euro rate rather than the Greek rate, they'll be safer. Three years after Europe's richest government absorbed the risk of private banks, they will have to absorb the risk of smaller governments.In the U.S., we have all but run out of new ideas. Government is becoming a drag on the economy. Our trade deficit is a huge drain of capital. Washington can't resolve the housing crisis for people who are underwater, and businesses are increasingly looking overseas to invest.
If you're looking for silver linings, best to take the long view. Financial crises can be decade-long affairs, as families, businesses and banks build back to normalcy. But there is every reason to expect full recovery. Unlike Japan, which has lost two decades to a financial bust, we have a young workforce with a steady stream of immigrants and a culture of risk and entrepreneurship. The road out of recession has led us back to the brink of recession. But even in stalled recovery, the United States is the world's leader in education and innovation. In the long run, if you can wait for it, the road leads back to growth.
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