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US Recovery on Track — for 2033

By    |   Friday, 03 August 2012 07:23 AM

Americans retiring now may never enjoy the income that comes from high interest rates. Economists explain that interest rates rise when economic growth is high, and recent research shows that the United States is now set for a generation of slow growth and low interest rates.

Based on more than 200 years of data, economists have found that growth slows for an average of 23 years after government debt tops 90 percent of gross domestic product. This event happened in the United States in 2010, after the Obama administration piled on debt as the economy slowed.

In only two years, debt grew 35 percent as the economy stagnated. The result is a debt overhang that has taken other countries more than two decades to work through in the past.

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New research has shown that interest rates can remain at low levels throughout the long workout period. In about half the cases from the past 200 years, interest rates on long-term government debt fell below 2 percent when debt became unmanageable and remained near that level for the entire period.

Rates stay low because there are few investment opportunities in a slow-growth economy. Without reasonable expectations of high returns, private-sector investors reduce the number of projects they take on.

The United States seems likely to follow this historic pattern. Rates will pick up when economic growth moves steadily higher. Given current demographic trends, that growth will not happen for decades. Spending will be shifted toward healthcare and government, while more people accept lower standards of living they consider to be adequate and worry-free.

Until the number of people supported by the government through disability, welfare and other programs drop, the economy will grow slowly. History shows that a full recovery will be more than 20 years from now.

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Friday, 03 August 2012 07:23 AM
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