[E]ven if we do avoid full recession, slow growth in the developed world is quite likely because of the effects of financial deleveraging and the fiscal tightening. This would plausibly push up the unemployment rate.
With core inflation low in several countries, this increases the probability of outright deflation, which as Japan attests, could turn into a self-reinforcing downward spiral with lower demand, further falls in equity markets and even greater demand falls.
Sushil Wadhwani, “Japanese lessons on ill-timed fiscal tightening”, Financial Times, 9 September 2010.
Sushil Wadhwani has a PhD in economics (LSE) and is a former member of the UK Monetary Policy Committee. He now runs Wadhwani Asset Management.
