The latest offering from George “Minsky Moment” Magnus, senior adviser at UBS in London, focuses on that dismal word, “deleveraging”, which he describes as a “rare but significant influence over the course of the economic cycle”.
The deleveraging phenomenon tends to be self-reinforcing, and characterised by a protracted work-out of balance sheet repairs. Understood this way, it provides some conclusions about the deleveraging process, says Magnus:
First, it has to run its course, and time in this context is measured in years, not months or quarters.
Second, it may or may not induce a deep economic downturn, but it is most likely to be protracted, giving rise to 2-3 years (or more) of significantly below-trend growth in which unemployment will rise and capacity use decline. While it may be punctuated by quarters of positive GDP growth, “this does not mean recovery is at hand”....MORE
Friday, June 27, 2008
Magnus: Deleveraging and its two big deflationary forces
From FT Alphaville: