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Lack of Credit Growth Need Not Be a Disaster

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According to a recent study of all nine post-World War II U.S. recessions by Barclays Capital, in the first year of recovery, net new borrowing almost always lags behind the increase in nominal gross domestic product, incomes and profits so that debt as a proportion of GDP falls, the Journal points out.

The reality, however, is that this glimmer of optimism is grounded in a false premise; namely, that foreclosures, defaults and delinquencies (debt destruction) are accurately stated. Because the government and the Federal Reserve are either directly or indirectly supporting so much of it, this debt destruction is being under-reported and so a false picture of economic health and recovery has emerged.