A special report on the world economy: : The long climb | The Economist

A special report on the world economy: : The long climb | The Economist
...
Shock has given way to relief.

The persistence of debt

But the relief is likely to be short-lived. Just over a year ago, the day Lehman Brothers filed for bankruptcy, the world economy fell off a precipice. When you are falling, you do not look up. Only when you hit bottom can you stop and contemplate the cliff you must now climb.

This special report will argue that although a “new normal” for the world economy is now in sight, it will be different from the old normal in a number of ways. Demand in rich countries will remain weak and emerging economies will not be able to compensate. The report will explain why many governments will have to keep their stimulus packages going for longer than expected, or face entrenched unemployment that will permanently lower their economic potential. Public debt will rise so that private debt can fall. The banks, the report will show, will remain cautious about lending again, which will slow up the recovery but also make companies more careful about their investment; and the securitisation markets that became so fashionable during the boom will recede, though not disappear altogether.

A persistent shortfall in demand will weigh on supply. By the time this crisis is over, as many as 25m people may have lost their jobs in the 30 rich countries that belong to the Organisation for Economic Co-operation and Development (OECD). The danger is that several million may never regain them. The mobilisation of capital will be fitful as the financial system copes with past mistakes and impending regulation. The travails of finance, in turn, may prevent the recovering economy from backing and exploiting innovations.

Like Japan’s bubble years, the years that led to the global financial crisis have left a heavy legacy of debt on the balance-sheets of banks and households, especially in Britain and America. It is this legacy that allows past losses to depress future gains. Fisher, again, put it best: “I fancy that over-confidence seldom does any great harm except when, as, and if, it beguiles its victims into debt.” There is no better example of that than American consumers. ...