The U.S. and its allies, in an effort to reduce their growing debt burdens, may be cutting spending and raising taxes too quickly, says New York Times columnist David Leonhardt.
The fiscal austerity may erase the tenuous global economic recovery, just as occurred in the 1930s, he writes.
“If they (government leaders) are right, they will have made a head start on closing their enormous budget deficits,” Leonhardt acknowledges.
But, “If they’re wrong, they may set off a vicious new cycle, in which public spending cuts weaken the world economy and beget new private spending cuts.”
Between 1936 and 1938, U.S. spending cuts and tax hikes together totaled 5 percent of GDP. But European nations lifted spending ahead of World II.
Now all governments are planning to reverse their fiscal stimulus at once – to the tune of 2 percent of GDP worldwide from 2009-11, the International Monetary Fund estimates.
That leaves no country to lead the world out of recession. Even China has begun to withdraw its monetary and fiscal stimulus.
On the monetary policy side, the Bank for International Settlements is concerned that central banks will wait too long to tighten policy.
“They have a tendency to be late, tightening financial conditions slowly for fear of doing it prematurely or too severely,” the BIS, which oversees central banks, said in a report.
© 2017 Newsmax Finance. All rights reserved.