The spectacular collapse of the Wall Street investment bank in September 2008 had led to the deepest economic contraction since the 1930s. According to Livemint, the US and European economies were pulled back from the brink after central banks flooded them with free money, tax revenues were used to bail out financial institutions and governments supported aggregate demand by stepping up public spending.
The bill has now been presented. The massive increases in their budget deficits and public debt have brought the Western economies to the brink of a fiscal crisis. The value of the stock of outstanding government debt in most developed economies is now close to or more than the value of their annual output, compared with the widely accepted prudent limit: a debt-gross domestic product (GDP) ratio of 60%.
On Saturday, credit rating agency Standard and Poor’s downgraded the US to AA+, the first downgrade for the nation since 1941, primarily because US public debt is now $14.3 trillion and set to increase.
The global equity markets, US bond markets and the dollar index will provide clues, when investors come back to their trading screens on Monday, about how they have responded to these events. Most economists do not expect a sudden collapse in the style of Lehman—which is anyway a rare and unpredictable outlier event—but the risks of a double-dip recession in the West have risen in the past two weeks. Growth is already slowing in these countries, and austerity budgets ensure that governments can no longer spend their way out of trouble….
Find out the rest at http://www.livemint.com/2011/08/07223949/Is-world-economy-nearing-anoth.html?atype=tp
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