Page 46 - Accelerating out of the Great Recession

THE DAMAGED ECONOMY

need to deleverage leads to pressure on asset prices and income
owing to a drop in demand. This, in turn, makes it harder for
debtors to repay, amplifying the deleveraging problem still fur-
ther. (For more on this topic, see the sidebar on Irving Fisher in
Chapter 2.)
It is more likely that we can manage a relatively orderly
deleveraging process, but the drag on growth in the real econ-
omy will still be significant for many years to come. As the
example of Japan has shown, an economy can experience two
lost decades, even without experiencing an actual depression.
We say two decades because Japan has actually experienced
seven recessions over the past 20 years. Although there were
only 19 recessionary quarters, recovery was so slow from each
one that over two decades Japan essentially suffered almost
nonexistent economic growth. And all this took place against
the background of a booming world economy (thanks, signifi-
cantly, to the U.S. consumer) from which Japan benefited
through its export industries.
Today, we face a globally connected economy, and it remains
to be seen if other parts of the world economy can find ways to
compensate for the sustained drop in demand in the United
States.

■ REBALANCING OF GLOBAL TRADE FLOWS ■

As we have said, many countries have run significant trade
deficits over the past decade. Deficit countries include the
United States (4.6 percent of GDP in 2008), Spain (10.1 per-
cent), the United Kingdom (3.6 percent), Australia (4.9 per-
cent), and Greece (14 percent).

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