UN: Fiscal Austerity and Deleveraging Threaten a Global Recession

Img: December 2011 UNCTAD Policy Brief
In UNCTAD's December Policy Brief (United Nations Conference on Trade and Development), they warned that deleveraging and fiscal austerity could push the world back into recession. Read the full report here or the article at un.org. This isn't a new issue. Many hedge fund managers (Ray Dalio) and economists are concerned that mis-management of the private and public sector debt deleveraging cycle could risk an economic crisis (and social tensions). The chart shows government revenues and expenditure and fiscal balance of developed economies from 1997-2010 as a percentage of current GDP (weighted average).

"On The Brink: Fiscal Austerity Threatens a Global Recession

Due to sluggish private demand, several advanced economies are hovering on the brink of a second bout of recession. Yet, in many of these countries political attention has turned to ways to cut fiscal deficits and reduce the domestic public debt. This has created a dangerous accumulation of risks for the world economy. The private sector can only successfully deleverage (i.e., reduce its debt) if someone else is willing to take on higher debt and support demand. If the private and the public sectors try to deleverage simultaneously, they must either find debtors elsewhere, or the economy will tailspin into a depression. As the developing world is both unable and unwilling to accept the role of debtor of last resort, dangerous pressures are building up. Unless there is a rapid policy turnaround, the world is in danger of repeating the mistakes of the 1930s. In today’s highly integrated global economy, the contractionary contagion will affect all countries. Emerging and developing economies need to prepare contingency plans."

Related articles:

Steve Forbes Interview: John Mauldin On The Debt Supercycle (4/11/2011) - Forbes.com
John Mauldin And The Zen Of Deleveraging (4/5/2011) - Forbes