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Retail sales drop; latest sign of weak recovery

Retail sales fell for the third consecutive month in June, the latest sign of the U.S. economy is only inching along in the recovery process. Sales dropped 0.5 percent last month and if that weren't enough, the three-month losing streak was the first since 2008, a rather ominous sign.

You can't blame consumers, who are spooked by the current state of affairs. It's tough to rationalize spending when the jobs market is stuck; the total economy is growing by a scant 1.9 percent annually; housing is only just starting to bottom after peaking six years ago; and daily reports out of Europe put the global economic recovery at risk.

With those worries swirling, consumers are still focused on chipping away at debt. Remember that the financial crisis of 2008 may have started with an asset bubble in housing, but that bubble was accelerated by the debt bubble that accompanied it. Private sector debt rose from 112 percent of GDP in 1976 to a peak of 296 percent in 2008. The ratio had fallen to 250 percent by April, which is where it was in 2003, but it's clear that the private sector has a long way to go in the deleveraging process.

Harvard economist Kenneth S. Rogoff calls the recent period "the second great contraction," the first being the Great Depression and one from which "there is no quick escape...the real problem is that the global economy is badly overleveraged." My colleague Alain Sherter notes that one way to accelerate the deleveraging process is to transfer wealth from creditors to debtors. "The government would write down the value of distressed mortgages in return for a share of the upside when home prices rebound." But with a political system deadlocked and worries about the nation's $15 trillion debt heightened, the possibility of fast-tracking deleveraging seems remote.

When Rogoff and his co-author Carmen M. Reinhart wrote their seminal work on financial crises, "This Time is Different: Eight Centuries of Financial Folly," there seemed to be disbelief that advanced economies like the U.S. and Europe would encounter a similar pattern. Even some economists were slow to acknowledge that the recession that the economy just suffered was quite different than those in the past. (They appear to have gotten on board with the idea: a survey by the National Association for Business Economics found that economists are worried about narrowing corporate profits; the potential impact of Europe's financial crisis; and the impending fiscal cliff.)

No matter how much we think we have learned from the past, there is no escaping that "financial crises are protracted affairs." According to Rogoff and Reinhart, the post-crisis slow-growth period usually lasts as long as the boom that preceded it, though sometimes even longer. The U.S. housing boom spanned 7 years (prices doubled from 2000 - 2007), which means that a best-case scenario could mean that it will be June 2016 before the economy returns to pre-recession levels of growth, employment and output.

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