ForexNewsNow.com (New York) – In order to put the current US economic troubles in perspective, it’s helpful to open a chapter in US history books to examine a time in the past when the US was beset by similar economic problems.
When President Franklin Roosevelt launched his New Deal program in 1933, the result was a 27% decrease in industrial production and an increase in the unemployment rate from 9.6% to 13.6% a few years later in 1937.
Fast forward to today: the US is running a 10% deficit and a debt to GDP ratio of around 100%, economic growth is crumbling with a mere 0.8% economic expansion in the first two quarters of 2011 and unemployment is hovering around 9.2%. There are some parallels between the US today and the US in 1937.
How can we avoid what happened in the 1930’s?
According to Nicolas Baverez, French economist and historian, Western economies are currently stuck in the dilemma of choosing between debt reduction or growth. Debt reduction implies cuts in spending which ipso facto slow down economic activity just when growth should be the top priority.
States are currently dealing with the mistakes made back in 2008-2009. The headlong rush towards indebtedness, which could not have been avoided at the time, should have been balanced with new economic growth models based on credit.
The bottom line is that both the EU and US have mismanaged the sovereign debt crisis.
Solutions still exist
An agreement on medium-term debt reduction in the United States should avoid both a new recession and increased inflation.
In Europe, the truth must be admitted about the mismanagement of sovereign debt issues and they must accept a moderate inflation of around 4% per year, and accelerate structural reforms, including giving a new direction to the economic governance of the euro zone.
Finally, it is imperative that developed and emerging countries coordinate their economic activities with the G20. Otherwise, the scenario of 1937 will repeat itself, which would lead to recession, mass unemployment, and other undesirable geopolitical repercussions.