Page 59 - Accelerating out of the Great Recession

ACCELERATING OUT OF THE GREAT RECESSION

These factors are combining in a way that has important
consequences for companies and their leaders. We now consider
each one in more depth.

The Expectation of Fiscal and Monetary
Stimulus for Many Years to Come
Governments and central banks are likely to pursue an expan-
sionary policy for many years to come. They will try to com-
pensate for the drop in aggregate demand that has been caused
by the need for consumers and banks to pay back their debts.
Some people estimate that consumers and banks need to pay
back around $7 trillion across the globe—an amount equivalent
to more than 10 percent of global gross domestic product
(GDP).
We expect that governments and central banks will continue
their efforts to stabilize their economies by funding additional
demand, maintaining low interest rates, and continuing aggres-
sive monetary stimulus efforts—following in the footsteps of
Japan after its real estate and stock market bubbles burst in
1990. Japan’s central bank kept interest rates at very low levels,
while public debt increased from 69 percent of GDP in 1990 to
an expected 227 percent in 2010.
In their study cited in Chapter 1, Professors Reinhart and
Rogoff demonstrated that financial crises are usually associated
not only with unemployment and a significant decline in out-
put but also with a substantial deterioration in government
finances. On average, across their sample, government debt
increased by more than 80 percent in the three years following
a crisis.
Given the scale of the current downturn and the unique debt
problems in major economies, things could be even worse this

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