Developed economies are doomed to spend the coming years in an extended slowdown, with Japan entering its third lost decade, the U.S. doomed to stagnant growth while Europe plunges into recession, says Stephen S. Roach, chairman of Morgan Stanley Asia and Yale professor.
Economic downturns stemming from too much spending take much longer than normal cool downs in the business cycle.
"They are going to be lasting because of the damage done during these massive credit, property, and in the case of Europe, currency and interest rate bubbles for Southern European economies," Roach tells Business Insider.
Fixing the problems won't be easy.
Monetary policy measures such as flooding financial systems with liquidity and interest-rate cuts or even fiscal stimulus packages marked by spikes in government spending do not provide lasting improvement that structural changes do.
And structural changes don't come overnight.
"It is going to take really aggressive structural policies aimed at changing behavior rather than the big bazooka of monetary and fiscal stimulus, which the authorities have embraced as an answer to a crisis," Roach says.
"I think what we found in '08 and '09 is that aggressive monetary and fiscal stimulus can stop the crisis but it can't spark a sustainable recovery. There's no traction when you're in a 'liquidity trap' when interest rates are too low and debt loads are too high to get real actors in the economy to respond."
The U.S. economy grew 2.8 percent in the fourth quarter, the fastest clip in over a year although businesses spent the quarter restocking inventories instead of investing in more longer-term growth initiatives, which would suggest activity will cool a bit in 2012.
"The economy ended 2011 on a fairly positive note, but the composition of growth in the last quarter is not favorable for growth early this year," says Ryan Sweet, a senior economist at Moody's Analytics in West Chester, Pa., according to Reuters.
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