The Escape from Balance Sheet Recession and the QE Trap: A Hazardous Road for the World Economy

Foreword

The global economy underwent a major ordeal after the housing bubbles in Europe and the United States burst in 2007. Almost six years have passed since the Federal Reserve followed the Bank of Japan's lead a decade earlier and took U.S. interest rates down to zero, yet the unemployment remains elevated and industrial output has only recently recovered to the levels of 2008. In Europe, the unemployment rate is running near the euro-era high of 12 percent even though the European Central Bank (ECB) also cut interest rates to zero. The picture for output is even bleaker: Although German industrial production has recovered to the levels of 2007, output in France and Spain is no greater than it was in 1994, and in Italy production has fallen back to 1987 levels. United Kingdom industrial production is no higher than it was in 1992. In Japan, which was geographically far removed from the Western bubbles, the mood has improved since “Abenomics” was launched at the end of 2012, but industrial output remains stuck at the levels of 2003. Some have dubbed this situation “secular stagnation.”

Amid these economic difficulties, national policy discussions have been characterized by a severe lack of consensus. Even today, nearly seven years after the bubbles burst, the debate remains as tangled as ever. In the United States, the two main political parties are at loggerheads with each other over the fiscal deficit and the debt ceiling, and in Europe the fiscal consolidation thought ...