[REBORN FROM THE ASHES][comment][12.21]

豆腐店的86UID: 2512956

13# prettywraith

“I fancy that over-confidence seldom does any great harm except when, as, and if, it beguiles its victims into debt.”句子意思大概明白，“as，and if”这里起什么作用？？？

我觉得这个句子里面，when, as, if 是三个并列的意思
就是说 他觉得过分的自信很少会带来太大的危害，除非当（when，as），或者如果（if）它误导性的欺骗那些受害者以致负债。

其实也不知道对不对，只是表达自己的想法·~
望大家一起来解决·`

番茄斗斗UID: 2720914

23# 番茄斗斗  

The outburst of the economical crises last year brought companies and countries under torturing. This year, shock is giving its way to relief. However, the author warns, whether cri ...
qxn_1987 发表于 2009-12-22 08:18

谢谢QXN～～时态的问题我老是忘记多留意呵。。

qxn_1987UID: 2610437

31# 豆腐店的86

呃。。我也认为是并列。。

adammaksimUID: 2675466

a shadow of its former self 是个习语  意思是瘦得只剩下骨头~ 15# tequilawine

zhengchangdianUID: 2563082

8# aladdin.ivy
每次都很想看你的comment，但是你的字号好小啊，看的我眼睛好痛啊~~:L

zhengchangdianUID: 2563082

8# aladdin.ivy

1.What kind of psychological state are you in when suffering the economic crisis, have you ever feel confused by this recessionary economy, atrophied stock market as well as the increasing unemployed rate which were wrought by the financial breakdown?

有点疑惑哦：recessionary economy 和后面的atrophied stock market, unemployment rate 应该不是并列，而是包含关系吧？

2.from which might make you reckon that China is passing away form（from） this crises and bring you some kind of hope.


3. 结尾部分也写得很有新意哦，希望看到你更精彩的论证呢~~

Comment很不错呢，继续加油哈！

zhengchangdianUID: 2563082

Questions：
1. why does the author mention the "string theory" ? I mean the real physical string theory.

2. what does the author mean in the ending ?

海王泪UID: 2673613

My Sum-Up
Thesis: The world economy is recovering from financial disaster. But it will not return to normal as we know it.
(Pessimist)
1.Financial crisis are not only the sole province of the banking industry but also job market, fiscal expenditure.
2.The world economy is fitfully getting back to normal, but it will be a “new normal” because not every change wrought by the financial breakdown will be reversed.
3.Former banking system and especially the securitization markets make physical capital worse.
4.Government intervention is needed but is embarrassed by fiscal strain.
(Optimists)
5.Some forecasters believe the economy will bounce back to the “old normal” according to the string theory from Milton Friedman.
6.Friedman’s piece of string represents the demand while the rigid board symbolizes the supply. While spending is strong enough, everything will be OK.

String theory

(Introduction and critique)
7.When the lain idle resources are fully used again, the economy can grow faster than normal in a period until it reaches the scale before crisis

8.However, the string theory can come unstuck in two ways. The remained lack of demand will reduce the level of potential output or even its rate of growth
9.Labor kept out of working equates to the weaken skills and thus shrinked output. In addition, their back to work needs time.
10.Capital and savings will not be active when demand remains weak.
11.Labor and capital in bad condition result in a lower ceiling on production and an alarming gap after crisis.
12.The situation is very serious if the “10%” law continues to take effect.
(The mechanism)
13.Financial crisis pose a threat to national incomes. It also a seriously and continually hurt economy.
14.Shattered assets and remained liabilities in balance-sheet cause the continual erosion in economy.
15.Lost decade in Japan serves as a good example.
16.The scenario of post-war recession can help understand the mechanism.
17.The protracted slog of most Japan’s companies keeps the balance-sheet recession for a long time
18.The world economy has palpably improved and financial shock seems to have given way to relief.

The persistence of debt

19.But the relief is likely to be short-lived because the world economy again fell.
20.This report will argue that the world economy will meet a new normal, which demand, stimulus packages, unemployment, debt, banks and security markets are different from the old normal.
21.Shortfall in demand weighing on supply and massive unemployment will continue. The financial system should copes with past mistakes and impending regulation.
22.Heavy legacy of debt on the balance-sheet allows past losses to depress future gains.

My comment

Well, I am not interesting in the Macroeconomic. Special terms seem familiar to me but in fact I cannot clearly understand them in our real world. It is too complicated. The real world contains so many premises and complicated factors. Their relationship would glitch my head until experts tell me what truly happened “this time”. As what the report says, the new normal is different from the old normal. Frequently changing world makes economists’ opinions vary from time to time or person to person.

By comparison with complex and changeful macro phenomenon, people’s behavior in micro angle is more stable, because human nature seldom changes in our history. Pursuit for great wealth, enormous egos, greed, passion and controversy vary from forms but they keep the similar essence as before.

In the light of the excellent words from Irving Fisher about the evil debt, I would talk about crisis in micro angle about the behaviors of over-confident debtors.
Generally speaking, over-confident debtors often waste social resources. When people or companies have excessively easy access to others’ money, psychologically they may invest or speculate at very high risk. If they fail, they can just borrow again. Again and again, their debt is bigger and bigger. At the very last moment, application to bankruptcy is available. These golden-collars are under the protection of law. Their loaners, banks, won’t tightly chase them or even hurt them in rude ways as those usurers from Las Vegas. Since failure in speculation or investment is not too terrible, hardly can they refuse to become desperado.

Above might be a little exaggerated. Some people or companies may refuse applying bankruptcy to keep their credit. But the consequence to economy could be still terrible as the examples illustrated in paragraph 17 about Japanese companies in the lost decades. It is just a protracted slog. Balance-sheet is easily ruined but difficultly paid off.

Although the banks and security markets were born for more effective use of money and resources in our society, the system of debit and credit also cause lots of problems. It is a long way to go. Our long climb will continue. As what the report said, “The mobilization of capital will be fitful as the financial system copes with past mistakes and impending regulation.”

Sentences and Phrases

Yet students of economic turmoil will find their subject matter conveniently close to hand.

That phrase has caught on,
even if people disagree about what it means.

Friedman’s piece of string represents the demand side while the rigid board symbolizes the supply side.

The result is a lower ceiling on production.

Even when the economy begins to expand, it may not regain the same pace as before.

Financial crises can pose such a threat to national incomes because of the way they erode national wealth.

Rather than file for bankruptcy, they set about paying down their stock of debt to a manageable level.

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.

fancywwUID: 2583671

comments：
The article mainly concerns on the "new normal" state of the world economy after crisis. It casts doubts on Friedman's String Theory. It says that the world economy can hardly go back to the level before the crisis, or the level it should reach without the crisis. It gives advice on how the government, banks and companies should do.We should learn from the past lessons like Japan's bubble year.

Mr. Fisher puts tow sentences that mean a lot. The first is:overinvestment and overspeculation…would have far less serious results were they not conducted with borrowed money.”  And the second one is:"I fancy that over-confidence seldom does any great harm except when, as, and if, it beguiles its victims into debt." although my major has little relation to economy, and I do not know much about economy, I think that things like overinvestment and overspeculation always accompany with debts. And when people are over-confident, they tend to ignore how much they have borrowed, because they always thought that they could make more and pay the debt.


vocabulary：
Epicureans:
of or relating to one devoted to sensual pleasure
Saddle:
a : to place under a burden or encumbrance  b : to place (an onerous responsibility) on a person or group
Shenanigan:
1 : a devious trick used especially for an underhand purpose; 2 a : tricky or questionable practices or conduct ? usually used in plural  b : high-spirited or mischievous activity
Ruminate:
1 : to go over in the mind repeatedly and often casually or slowly; 2 : to chew repeatedly for an extended period
Catch on:
1 : to become aware  : LEARN;  also   : UNDERSTAND; 2 : to become popular
Sanctum: a sacred place
Exchequer: 国库  Treasury：财政部
Hobble： to move along unsteadily or with difficulty;  especially   : to limp along
Harbour:
1 a : to give shelter or refuge to  b : to be the home or habitat of  *the ledges still harbor rattlesnakes*;  broadly   : CONTAIN;   2 : to hold especially persistently in the mind
Shutter:
to close by or as if by shutters  *corporations shuttering their production plants
Unstuck:
brought into a state of disarray, discomposure, or incoherence   
Mothball:
a condition of protective storage (樟脑丸->保存，封存)
Atrophy:
decrease in size or wasting away of a body part or tissue;
Infrastructure:
the system of public works of a country, state, or region
Reckon:
count,estimate,compute;
Trajectory:
1 : the curve that a body (as a planet or comet in its orbit or a rocket) describes in space
2 : a path, progression, or line of development resembling a physical trajectory
Travail:
1 a : work especially of a painful or laborious nature  : TOIL  b : a physical or mental exertion or piece of work

敛寒影UID: 2613052

The article talks around the topic that the recessions caused by economy crisis and the character of reversed world economy, which would not resemble the five years preceding the crisis. The article describes a theory that linked the economy to a piece of string stretched taut on a board,the more forcefully the string is pluched,the more sharply it snaps back.The lasting shortfall in demand will strain on the spending to curtail the use per unit of output, explain properly why the unemployment will remain high after the economy crisis be subdued.Besides the main idea of the article,the author also demonstrates that the right to be correct is not a flow but a stock,although I am not totoally understand the reason.
This theory is not the same as I considered that the market economy could adjust itself to get a balance ultimitly,with the trending of demands and spending corrolate with each other.However,the author regard that the ceiling on production would get lower and do not attain the point before the crisis.I still believe that the demand is corresponding with level of gaining and spending ability,with the recover of economy in the world,hoping we can have a glorious economy as crisis before.

aladdin.ivyUID: 2596664

8# aladdin.ivy  
每次都很想看你的comment，但是你的字号好小啊，看的我眼睛好痛啊~~:L
zhengchangdian 发表于 2009-12-22 12:20

哦，我以后一定都用大大的字号哈~！
zhengchangdian的眼睛要紧啊:loveliness: ，呵呵，欢迎挑错~！

kulewy531UID: 2603031

A special report on the world economy

The long climb

Oct 1st 2009 From The Economist print edition

The world economy is recovering from financial disaster. But it will not return to normal as we know it, says Simon Cox (interviewed here)

NEWPORT BEACH, California, is not a bad place to contemplate the future of the world economy. Its information office promises nine miles of pristine sand, fine dining for devoted epicureans and an atmosphere of laid-back sophistication. Yet students of economic turmoil (confusion, agitation) will find their subject matter conveniently close to hand. California’s unemployment rate has doubled to 12.2% since the start of 2008. Saddled with the worst credit rating in the country, the “Golden State” is cutting spending on schools, prisons and health care for the elderly, as well as closing parks and laying off staff for three days a month. It will pay its workers a day late at the end of the fiscal year so that the expense will show up in next year’s budget. Financial shenanigans are not the sole province of the banking industry.

Newport Beach is also the home of Pimco, the biggest bond manager in the world, which handles $840 billion on behalf of pension funds, universities and other clients. In May the company held its annual “Secular Forum”, in which it tries to peer five years into the economic future. After two days of rumination (comtemplation), Pimco’s laid-back sophisticates(这里是讽刺吗？) concluded that the financial markets may well “revert to mean”, which is a statistician’s way of saying that what comes down must go up. But the next five years will not resemble the five preceding the crisis. Not every change wrought by the financial breakdown will be reversed. The world economy is fitfully getting back to normal, but it will be a “new normal”.
Click here to find out more!

That phrase has caught on, even if people disagree about what it means. In the new normal, as defined by Pimco’s CEO, Mohamed El-Erian, growth will be subdued and unemployment will remain high. “The banking system will be a shadow of its former self,” and the securitization markets（证券化的市场）, which buy and sell marketable bundles of debt, will presumably be a shadow of a shadow. Finance will be costlier and investment weak, so the stock of physical capital, on which prosperity depends, will erode.

The crisis invited a forceful government entry into several of capitalism’s inner sanctums, such as banking, American carmaking and the commercial-paper（商业票据） market. Mr El-Erian worries that the state may overstay its welcome. In addition, national exchequers may start to feel some measure of the fiscal strain now hobbling California. America’s Treasury, in particular, must demonstrate that it is still a “responsible shepherd of other countries’ savings”.

The notion of a “new normal” is convincing, even if you do not agree with every particular. But some forecasters now harbour higher expectations. They think the economy will bounce back to its old self, almost as if nothing had happened. They draw inspiration from the work of the late Milton Friedman, who showed that in America deep recessions are generally followed by strong recoveries. He likened the economy to a piece of string stretched taut on a board. The more forcefully the string is plucked, the more sharply it snaps back.

Friedman’s piece of string represents the demand side of the economy: the sum of spending by households, firms, foreigners and the government. The rigid board symbolises the supply side. When spending is strong enough, the economy’s resources are fully employed, allowing it to realise its full potential. As the workforce grows, capital accumulates and technology advances, this limit expands over time.
String theory

In a recession demand falls short of supply, leaving a sorry trail of unemployed workers, shuttered factories and unexploited innovations. But when the recovery arrives, Friedman suggested, it is all the more forceful because these resources have been lying idle, waiting to be brought back into production. The economy can grow faster than normal for a period until it reaches the point where it would have been without the crisis, when it reaches its full potential again (see chart 1, scenario 1).

Friedman’s story is heartening, but it can come unstuck（松开） in two ways. If the shortfall in demand persists it can do lasting damage to supply, reducing the level of potential output (scenario 2) or even its rate of growth (scenario 3). If so, the economy will never recoup its losses, even after spending picks up again.

Why should a swing in spending do such lasting harm? In a recession firms shed labour and mothball（封存的） capital. If workers are left on the shelf too long, their skills will atrophy（萎缩） and their ties to the world of work will weaken. When spending revives, the recovery will leave them behind. Output per worker may get back to normal, but the rate of employment will not.

Something similar can happen to the economy’s assembly lines（生产线）, computer terminals and office blocks. If demand remains weak, firms will stop adding to this stock of capital and may scrap some of it. Capital will shrink to fit a lower level of activity. Moreover, if the financial system remains in disrepair, savings will flow haltingly to（stop flowing to） companies and the cost of capital will rise. Firms will therefore use less of it per unit of output.

The result is a lower ceiling on production. In the IMF’s latest World Economic Outlook, its researchers count the cost of 88 banking crises over the past four decades. They find that, on average, seven years after a bust（不理解） an economy’s level of output was almost 10% below where it would have been without the crisis.

This is an alarming gap. If replicated（repeat） in the years to come, it would blight（枯萎）the lives of the unemployed, diminish the fortunes of those in work and make the public debt harder to sustain. But even worse scenarios are possible. A financial breakdown could do lasting damage to the growth in potential output as well as to its level. Even when the economy begins to expand, it may not regain the same pace as before.

Financial crises can pose such a threat to national incomes because of the way they erode national wealth. From the start of 2008 to the spring of this year the crisis knocked $30 trillion off the value of global shares and $11 trillion off the value of homes, according to Goldman Sachs, an investment bank. At their worst, these losses amounted to about 75% of world GDP. But despite their enormous scale, it is not immediately obvious why these losses should cause a lasting decline in economic activity. Natural disasters also wipe out wealth by destroying buildings, possessions and infrastructure, but the economy rarely slows in their aftermath. On the contrary, output often picks up during a period of reconstruction. Why should a financial disaster be any different?

The answer lies on the other side of the balance-sheet. Before the crisis the overpriced assets held by banks and households were accompanied by vast debts. After the crisis their assets were shattered but their liabilities remained standing. As Irving Fisher, a scholar of the Depression, pointed out, “overinvestment and overspeculation（过分投资和投机）…would have far less serious results were they not conducted with borrowed money.”

Japan found this out to its cost in the 1990s after the bursting of a spectacular bubble in property and stock prices. For a “lost decade” from 1992 the economy stagnated, never recovering the growth rates posted in the 1980s. Richard Koo of the Nomura Research Institute in Tokyo calls Japan’s ordeal a “balance-sheet recession”.

The typical post-war recession begins when the flow of spending in the economy puts a strain on its resources, forcing prices upwards. Central banks raise interest rates to slow spending to a more sustainable pace. Once inflation has subsided, the authorities are free to turn the taps back on.

But in a “balance-sheet recession”, what must be corrected is not a flow but a stock. After the bubble burst, Japan’s companies were left with liabilities that far exceeded their assets. Rather than file for bankruptcy, they set about paying down their stock of debt to a manageable level. This was a protracted slog which, by Mr Koo’s reckoning, did not finish until 2005. In the meantime Japan’s economy stagnated. By 2002 its output was almost 23% below its pre-crisis trajectory.

Since Pimco’s forum concluded in May, the world economy has palpably improved. In many ways the new normal is beginning to look a lot like the old, vindicating Friedman’s plucking model. China is outpacing expectations. Goldman Sachs is making hay. The premium banks must pay to borrow overnight from each other is now below 0.25%, the level Alan Greenspan, a former chairman of the Federal Reserve, once described as “normal”. Companies in Europe and America are selling bonds at a furious pace. A few months ago financial newspapers were debating the future of capitalism. Now they are merely discussing the future of capital requirements. 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.

生词归类：
表衰退、萎缩意思的词语：Atrophy, decline, diminish, recede, weaken, shrink, blight
表停滞、被遏制意思的词语：Stagnate, subside，mothball（这个有点勉强）
表影响、加重意思的词语：saddled，weigh on

Comments:
One of my teachers, a professor of Tulane University, once introduced a theory called “bubble bath” on financial crisis, which he claimed to be his own invention. In his speculation, a financial crisis to a society is the same as a baby to a baby, which washes clean the dirt on its body and keeps it from fatal diseases. During the crisis, improper regulations and weak enterprises were washed out and new suitable rules were adopted, and in this way, the world’s economy progress.  According to his study, he asserted that Japanese’s living standard ha improved greatly since the 1992 crisis, though the country’s GDP remained still. In the light of his views, the world is more likely to getting back to “new normal”

dingyi0311UID: 2627919

My comments
The author in this report express his opinion to the economic status now in the American. Even the economic will return normal, as the reporter spoke in this article, it is a “new normal”, which means that the economic will return back to a level that is lower than what is it like before the depression. because the ecomomic bubble produce a fake growth. the growth is result of over priced assets hold by bank and householder and acompaned by vast debts. It is also explained why the economic can not return to the previous level and why so large amount of money was knocked off in the recession.

This article make me recall that some people oppose the government involvement in the market, they want they market to be completely free. However, the problem is that the mechanic of free market do not work properly. Banks and investors may maximize their profit in a very risky way. It will only effect those single investors if the high risk investment is limited in small scale, it yet will be destructive to the whole economic of the nation if two many people involved and the financial bubble was over blowed.

Since this will affect the stable of the economic of the society. The government have very reason to impose supervise on those high risk investment activity. Just like that even we all are enjoy freedom in the society, we can do anything we can if it does not hurt other people, but it does not mean that we need no laws to regulate people’s behavior. The high risk delt lended by the bank obviously have the potential to harm the interest of many innocent people-causing high rate of unemployment. It should be intervened.

hugeseaUID: 190158

比较好以及比较难理解的句子：

1. Saddled with the worst credit rating in the country, the “Golden State” is cutting spending on schools, prisons and health care for the elderly, as well as closing parks and laying off staff for three days a month.

2. “The banking system will be a shadow of its former self,” and the securitisation markets, which buy and sell marketable bundles of debt, will presumably be a shadow of a shadow.

3. In addition, national exchequers may start to feel some measure of the fiscal strain now hobbling California.

4. I fancy that over-confidence seldom does any great harm except when, as, and if, it beguiles its victims into debt.

Comments

For me, this is a tough article. It took me a long time to finish this report. I agree with the author’s point of view that there is a long way for the world economy to get back to normal.

And, the author reckons that the recession has bottomed out and the world economy is recovering -- yet it's not growing fast enough, or strongly enough. I doubt if the world economy really has hit the bottom? The author says “Since……May, the world economy has palpably improved.” However, I’m not as optimistic as the author, and I would rather believe that the improvement is a temporary phenomenon and actually an illusion. There may be second, or even third, subprime crisis, because no one knows how serious the crisis is.

都说了不是又八UID: 2728357

4th article

Comment


Barack Obama has been famous for its brand smile. The mild and amenable smile suggests a person with little aggression and hostility. Saddled with the several incidents, occurred from the day Obama sit on the throne, that he took a low entrance into breaking the ice on the relationship between America and the countries over the world. He has been paying endeavor, but I have to doubt the persistence of his overfriendly policy.

Who knows what America would do after the recession is controlled within government’s hand. My answer would be a shift on the aggressive path to another supremacy.

And the first, the last paragraph are always the best ones. Worth reading.



The long climb

The world economy is recovering from financial disaster. But it will not return to normal as we know it, says Simon Cox.


Newport Beach, California, is not a bad place to contemplate the future of the world economy. Its information office promises nine miles of pristine sand, fine dining for devoted epicureans and an atmosphere of laid-back sophistication. Yet students of economic turmoil will find their subject matter conveniently close to hand. California’s unemployment rate has doubled to 12.2% since the start of 2008. Saddled with the worst credit rating in the country, the “Golden State” is cutting the spending on schools, prisons and health care for the elderly, as well as closing parks and laying off staff for three days a month. It will pay its workers a day late at the end of the fiscal year so that the expense will show up in next year’s budget. Financial shenanigans are not the sole province of the banking industry.


Newport Beach is also the home of Pimco, the biggest bond manager in the world, which handles $840 billion on behalf of pension funds, universities and other clients. In May the company held its annual “Secular Forum”, in which it tries to peer five years into the economic future. After two days of rumination, Pimco’s laid-back sophisticates concluded that the financial markets may well “revert to mean”, which is a statistician’s way of saying that what comes down must go up. But the next five years will not resemble the five preceding the crisis. Not every change wrought by the financial breakdown will be reversed. The world economy is fitfully getting back to normal, but it will be a “new normal”.


That phrase has caught on, even if people disagree about what it means. In the new normal, as defined by Pimco’s CEO, Mohamed El-Erian, growth will be subdued and unemployment will remain high. “The banking system will be a shadow of its former self,” and the securitization markets, which buy and sell marketable bundles of debt, will presumably be a shadow of a shadow. Finance will be costlier and investment weak, so the stock of physical capital, on which prosperity depends, will erode.


The crisis invited a forceful government entry into several of capitalism’s inner sanctums, such as banking, American car making and the commercial-paper market. Mr. El-Erian worries that the state may overstay its welcome. In addition, national exchequers may start to feel some measure of the fiscal strain now hobbling California. America’s Treasury, in particular, must demonstrate that it is still a “responsible shepherd of other countries’ savings”.


The notion of a “new normal” is convincing, even if you do not agree with every particular. But some forecasters now harbour higher expectations. They think the economy will bounce back to its old self, almost as if nothing had happened. They draw inspiration from the work of the late Milton Friedman, who showed that in America deep recessions are generally followed by strong recoveries. He likened the economy to a piece of string stretched taut on a board. The more forcefully the string is plucked, the more sharply it snaps back.


Friedman’s piece of string represents the demand side of the economy: the sum of spending by households, firms, foreigners and the government. The rigid board symbolizes the supply side. When spending is strong enough, the economy’s resources are fully employed, allowing it to realize its full potential. As the workforce grows, capital accumulates and technology advances, this limit expands over time.


In a recession, demand falls short of supply, leaving a sorry trail of unemployed workers, shuttered factories and unexploited innovations. But when the recovery arrives, Friedman suggested, it is all the more forceful because these resources have been lying idle, waiting to be brought back into production. The economy can grow faster than normal for a period until it reaches the point where it would have been without the crisis, when it reaches its full potential again.


Friedman’s story is heartening, but it can come unstuck in two ways. If the shortfall in demand persists it can do lasting damage to supply, reducing the level of potential output or even its rate of growth. If so, the economy will never recoup its losses, even after spending picks up again.


Why should a swing in spending do such lasting harm? In a recession firms shed labour and mothball capital. If workers are left on the shelf too long, their skills will atrophy and their ties to the world of work will weaken. When spending revives, the recovery will leave them behind. Output per worker may get back to normal, but the rate of employment will not.


Something similar can happen to the economy’s assembly lines, computer terminals and office blocks. If demand remains weak, firms will stop adding to this stock of capital and may scrap some of it. Capital will shrink to fit a lower level of activity. Moreover, if the financial system remains in disrepair, savings will flow haltingly to companies and the cost of capital will rise. Firms will therefore use less of it per unit of output.


The result is a lower ceiling on production. In the IMF’s latest World Economic Outlook, its researchers count the cost of 88 banking crises over the past four decades. They find that, on average, seven years after a bust an economy’s level of output was almost 10% below where it would have been without the crisis.


This is an alarming gap. If replicated in the years to come, it would blight the lives of the unemployed, diminish the fortunes of those in work and make the public debt harder to sustain. But even worse scenarios are possible. A financial breakdown could do lasting damage to the growth in potential output as well as to its level. Even when the economy begins to expand, it may not regain the same pace as before.


Financial crises can pose such a threat to national incomes because of the way they erode national wealth. From the start of 2008 to the spring of this year the crisis knocked $30 trillion off the value of global shares and $11 trillion off the value of homes, according to Goldman Sachs, an investment bank. At their worst, these losses amounted to about 75% of world GDP. But despite their enormous scale, it is not immediately obvious why these losses should cause a lasting decline in economic activity. Natural disasters also wipe out wealth by destroying buildings, possessions and infrastructure, but the economy rarely slows in their aftermath. On the contrary, output often picks up during a period of reconstruction. Why should a financial disaster be any different?


The answer lies on the other side of the balance-sheet. Before the crisis the overpriced assets held by banks and households were accompanied by vast debts. After the crisis their assets were shattered but their liabilities remained standing. As Irving Fisher, a scholar of the Depression, pointed out, “overinvestment and overspeculation…would have far less serious results were they not conducted with borrowed money.”


Japan found this out to its cost in the 1990s after the bursting of a spectacular bubble in property and stock prices. For a “lost decade” from 1992 the economy stagnated, never recovering the growth rates posted in the 1980s. Richard Koo of the Nomura Research Institute in Tokyo calls Japan’s ordeal a “balance-sheet recession”.


The typical post-war recession begins when the flow of spending in the economy puts a strain on its resources, forcing prices upwards. Central banks raise interest rates to slow spending to a more sustainable pace. Once inflation has subsided, the authorities are free to turn the taps back on.


But in a “balance-sheet recession”, what must be corrected is not a flow but a stock. After the bubble burst, Japan’s companies were left with liabilities that far exceeded their assets. Rather than file for bankruptcy, they set about paying down their stock of debt to a manageable level. This was a protracted slog which, by Mr. Koo’s reckoning, did not finish until 2005. In the meantime Japan’s economy stagnated. By 2002 its output was almost 23% below its pre-crisis trajectory.


Since Pimco’s forum concluded in May, the world economy has palpably improved. In many ways the new normal is beginning to look a lot like the old, vindicating Friedman’s plucking model. China is outpacing expectations. Goldman Sachs is making hay. The premium banks must pay to borrow overnight from each other is now below 0.25%, the level Alan Greenspan, a former chairman of the Federal Reserve, once described as “normal”. Companies in Europe and America are selling bonds at a furious pace. A few months ago financial newspapers were debating the future of capitalism. Now they are merely discussing the future of capital requirements. Shock has given way to relief.


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 securitization 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 mobilization 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.