Saturday, October 22, 2011

the prognosis for economic recovery

Continued economic stagnation in Europe and the United States, along with renewed uncertainty about the health of the debt-ridden global financial system, has been raising fresh concerns about the prognosis for economic recovery and even the potential for a relapse into crisis. A big part of the problem, as Harvard economist Kenneth Rogoff pointed out in This Time Is Different: Eight Centuries of Financial Folly (Princeton University Press, September 2009), the best-selling academic book he coauthored with fellow economist Carmen Reinhart, is that we are working through a recession linked to a deep financial crisis—a powerful amplifying mechanism with long-lasting effects. Reinhart and Rogoff’s work, based on investigations of empirical data from 800 years of financial crises, shows that such downturns are exceptionally deep and long lasting, as well as unprecedented in the United States since World War II. McKinsey’s Bill Javetski and Tim Koller recently visited Rogoff in his Cambridge, Massachusetts, office to ask where we are in the recovery time line and why Rogoff thinks that a bout of moderate inflation may help the world regain economic health. Rogoff’s outlook—that the balance of current economic risks tilts “more to the downside than the upside”—is sobering but essential reading for business leaders and policy makers trying to make sense of today’s uncertain environment.

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