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Breaking the Negative Feedback Loop

June 7, 2012 by Four Percent

Lawrence Summers, Reuters With the past week’s dismal U.S. jobs data, signs of increasing financial strain in Europe, and discouraging news from China, the proposition that the global economy is returning to a path of healthy growth looks highly implausible. It is more likely that negative feedback loops are again taking over as falling incomes lead to falling confidence, which leads to reduced spending and yet further declines in income. Financial strains hurt the real economy, especially in Europe, and reinforce existing strains. And export-dependent emerging markets suffer as the economies of the industrialized world weaken. The question is not whether the current policy path is acceptable. The question is, what should be done? To come up with a viable solution, consider the remarkable level of interest rates in much of the industrialized world. The U.S. government can borrow in nominal terms at about 0.5% for five years, 1.5% for 10 years, and 2.5% for 30 years. Rates are considerably lower in Germany, and still lower in Japan. Read More

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