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Out of Ammunition to Combat Recession?

STANFORD – Economic forecasts for 2017 project continued frailty in the global economy, and subpar growth for most countries and regions. Obvious economic problems include Europe’s weak banks, China’s distorted property market, political uncertainty in the West, historically high private and public debt – 225% of GDP, according to the International Monetary Fund – and the reluctance of heavily indebted Greece and Portugal to comply with IMF programs.

Additional global economic risks, such as a major oil-market disruption that could drive prices up, are not as obvious, and thus receive less attention. Economists call such events “shocks” precisely because they come unexpectedly and can have far-reaching consequences.

Unprecedented long-term monetary stimulus and massive spikes in public-debt burdens have left governments poorly equipped to manage the next economic downturn when – not if – it arrives. The next recession probably will not be as bad as the last one, but advanced economies will be far better prepared for it if they undergo gradual monetary-policy normalization and fiscal consolidation in the meantime.

With respect to monetary policy, the United States’ unemployment rate, at around 5%, is close to what most economists consider full employment, and the Federal Reserve is widely expected to raise its target interest rate again in December. But the Fed is moving at a very slow pace.