The process of reducing the rich world’s debt burden has barely begun
Jul 7th 2011 | WASHINGTON, DC | from the print edition
[Greg Ip] FOR Federal Reserve officials, marking down America’s economic outlook has become a depressing routine. A year ago they projected growth of about 4% this year and next. By last month they had chipped those numbers down to 2.8% this year and 3.5% next. “We don’t have a precise read on why this slower pace of growth is persisting,” said Ben Bernanke, the chairman. But he ventured that “balance-sheets and deleveraging issues” may be stronger headwinds than expected.The same diagnosis may explain similar disappointments in other highly indebted rich countries. In late 2009 the Bank of England reckoned Britain would be growing by 4% this year. It now thinks it will grow by closer to 2%; the private-sector consensus is a mere 1.5%. The Bank of Spain has avoided similar climbdowns by starting out pessimistic and remaining so.
In a study early last year, the McKinsey Global Institute, the consultancy’s research arm, noted that combined public and private debt burdens had reached historic highs in many rich countries. Based on previous episodes of debt reduction, it reckoned that once deleveraging began, countries would on average spend the next six to seven years whittling those debt ratios back by around 25%.