Martin Wolf notes that (a) trade data suggests that the current recession is as bad as the Great Depression but (b) our response has been much better. So are we out of the woods?
Robust private sector demand will return only once the balance sheets of over-indebted households, overborrowed businesses and undercapitalised financial sectors are repaired or when countries with high savings rates consume or invest more. None of this is likely to be quick. Indeed, it is far more likely to take years, given the extraordinary debt accumulations of the past decade. Over the past two quarters, for example, US households repaid just 3.1 per cent of their debt. Deleveraging is a lengthy process. Meanwhile, the federal government has become the only significant borrower. Similarly, the Chinese government can swiftly expand investment. But it is harder for policy to raise levels of consumption.
The great likelihood is that the world economy will need aggressive monetary and fiscal policies far longer than many believe. That is going to be make policymakers — and investors — nervous.
I think he’s right. Green shoots aside, economic fundamentals continue to look pretty dismal. And since world leaders don’t seem to have the mettle to face up to this, it probably means those green shoots are going to turn brown again pretty quickly. But I sure hope I’m wrong about that.