May 7, 2021

News Analysis: Downgrade of U.S. Debt Echoes the Nervousness of Global Markets

Governments on both sides of the Atlantic have avoided grappling with fundamental problems, counting on renewed growth to help borrowers who cannot afford to pay and creditors who cannot afford to walk away.

But four years into this age of financial contagion, the global economy cannot seem to pick up steam. Every promising leap seems to end with a sickening thud. The easy answers are exhausted, and political leaders face a rising tide of anger that is constraining their ability to make more difficult choices.

S.P. said Friday that it was losing faith in America’s political leaders. After all, the movements of markets are collective predictions of future prosperity, and the continuing sell-off of riskier assets suggests that investors, too, are losing hope.

“Europe’s plan was to have growth fix the problem. America’s plan was to have growth fix the problem. And that’s not going to work,” said Kenneth Rogoff, an economics professor at Harvard. “I think it’s really starting to sink in that we’re not anywhere near an endgame.”

The United States and Europe face parallel debt problems. Here, banks and investors are pitted against homeowners. There, banks and investors are pitted against nations. In both cases, governments have struggled to rebalance their books.

There is no surplus of economic strength to throw at the problem. The United States and Europe ran up great debts in the years of plenty, living well and promising to pay later, even as they made expansive promises to aging populations.

“The restorative forces of the economy are very weak and the immediate forces that will be in place are worsening the problem,” said Joseph E. Stiglitz, an economist at Columbia University. “We already know it’s not going to be a V-shaped recovery. I had said in my book that it would be more of an L-shaped, slow recovery. I think the answer now is a Japan-style malaise.”

The weakness of the American economy is most evident in the lack of jobs. Only 55 percent of working-age adults held full-time jobs in July, the lowest level in modern times. Some 25 million American adults want but cannot find full-time work, the government said Friday. The unemployment rate fell slightly, but mostly because 193,000 people stopped searching for jobs.

Consumer spending makes up 70 percent of the nation’s economic activity, and people without jobs spend less money. For more than a year the government has reported that the economy was expanding more quickly than employment, fueling hope that hiring would follow.

But last week the government said in a new estimate that it was mistaken, and that the economy actually had expanded at an annual rate of only 0.8 percent during the first half of the year — about the rate of population growth.

Falling home prices also shadow the recovery. Total household wealth remains 12 percent below its prerecession peak, according to the Federal Reserve. Consumer spending has not suffered a comparable decline, suggesting that people still see brighter days ahead. If they are wrong or if they lose faith, economists say, spending could dip even more sharply — and with it, the broader economy.

Corporate profits have climbed to record heights, but companies are not hiring. Long-term prosperity depends on investment in research and equipment and workers. But short-term fears are driving a turn toward austerity, said Gary P. Pisano, a professor at Harvard Business School.

“The dynamic that our government has gotten trapped in, companies are trapped in as well,” he said.

Professor Stiglitz said that falling stock prices could exacerbate the problem.

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