A Decade of Deleveraging?

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There are several theories on how long it will take for the U.S. economic recovery to pick up. Noam Scheiber considers two alternative views of consumer psychology and how each model would predict the path Americans can expect going forward. One theory from Japanese economist Richard Koo says that we could be in for an extended period of weak consumer spending as people pay down their debts in response to the credit bubble's pop. It could take as long as a decade before spending returns to normal levels. Scheiber explains Koo's theory:

Koo's view is that consumers and businesses who take on enormous debt during a bubble abruptly shift gears once the bubble bursts, spending very little while they pay off loans. Moreover, this stinginess continues until the process of debt-repayment (economists call it "deleveraging") is complete, creating a huge drain on the economy. In the case of Japan, whose real estate and stock markets collapsed in the early '90s, this took over a decade. During that time, Koo argues, the only force propping up the economy was massive amounts of government stimulus. He tells a similar story about the Great Depression.

Read the full story at the New Republic.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
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