The Shadow of Depression
The risk that the world’s investors currently are trying to avoid by rushing into US, Japanese, and German sovereign debt is not a “fundamental” risk. Rather, the risk stems from governments’ refusal, when push comes to shove, to match aggregate demand to aggregate supply in order to prevent mass unemployment.
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BERKELEY – Four times in the past century, a large chunk of the industrial world has fallen into deep and long depressions characterized by persistent high unemployment: the United States in the 1930’s, industrialized Western Europe in the 1930’s, Western Europe again in the 1980’s, and Japan in the 1990’s. Two of these downturns – Western Europe in the 1980’s and Japan in the 1990’s – cast a long and dark shadow on future economic performance.