Monday, October 11, 2010

Navigating the New Normal in Industrial Countries

We will come back to the implications of all this—and they are important. In the meantime, it is imperative to better understand why this situation has occurred. To this end, it is worth thinking about three previous-unthinkables and/or improbables: the importance of debt overhangs, the degree of structural change in industrial countries, and the extent to which financial normalization can complicate (and not just facilitate) economic normalization.
These three factors shed tremendous light on the challenges that industrial countries face. They also explain why policy has been so frustratingly ineffective. And they illustrate the growing tension between economics and politics. Indeed, think of them as pointing to blind spots in policies and markets that can and should be addressed, especially as their consequences can be with us for several years.
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