Talking about a “lost decade” brings back bitter memories for Latin Americans of a certain age. It takes us back to the 1980s, when accumulated debt problems led to recession and eventual hyperinflation. In the process, wealth was concentrated in the hands of a privileged few while poverty increased. Well-being dropped sharply. I imagine that talking about “ushinawareta juunen” has the same reaction among the Japanese, who for decades have dealt with a stagnant economy.
We may now face more “lost decades” in the U.S. and Europe; to be called “decennio perduto,” “décennie perdue” and so on, in diverse languages. The current crisis already has lasted almost four years; the 2011 crisis began in 2007-‘08. Today's fiscal problems have roots in the excesses that preceded the global crisis, in the incorporation of private debt during the aftermath of the crisis, and in the large public deficits necessary to avoid recession. Brazil has not decoupled from the problems of mature economies. The current policy debate depends on the severity and longevity of the global crisis.
The process tends to be long. It involves reducing debt over many years. A break with the past — a past of excess and bubbles — drove consumers and companies to seek lower debt in order to adapt to a new and more austere perception of wealth. The process of reducing debt has the unfortunate characteristic of being recessive. To pay debt, the consumer must spend less and companies must invest less. Sales drop, output retreats and unemployment rises.
The process is long because tightening is not an easy task. Reducing debt is always more painful than increasing it. Distributing outlays and benefits may involve disputes, but it is easier than managing cuts. Generally, there is no societal consensus about where to cut. Reactions are severe; groups are organized to prevent losses. Congressional disputes make it difficult to approve bitter measures. If the situation is serious, economic crisis leads to adjustment measures, which lose their sense of urgency as soon as the situation ceases to worsen ... And time goes by. The debt-ceiling debate in the U.S. evinced a lack of consensus on how to manage (future) austerity in order to stabilize debt. Democrats prefer higher taxes, while Republicans want lower spending. Quick approval of a fiscal adjustment will be very difficult. There will be years of back and forth in the process of digesting the excess debt. In Europe, the problem is equal, but worse. While the fiscal nature of the crisis is the same, the European debt is more acute. In the U.S., the trouble is finding ways to stabilize future debt; in some European economies, the problem is immediate: they can no longer find buyers to roll over their debt. Restructuring then becomes imminent, unless the International Monetary Fund or other European governments come to the rescue.
With the possibility of restructuring in Europe, the scenario of a decade of lost growth seems moderate.
The mega-pessimistic alternative is a disorderly restructuring (non-payment) of sovereign debt, leading to panic and run-on fears that the same could happen to other debts and/or could lead to a bank collapse. The obvious example is Lehman Brothers (memory always takes us back to the immediately preceding crisis) at the end of 2008, resulting in the deepest global recession since 1929. For Brazil, it makes a difference whether the future holds a lost-decade scenario for mature economies or a more acute crisis like Lehman Brothers. A long, though not acute, process holds the possibility of prevailing medium-term economic trends. An acute scenario is often dominated by a flight from risky assets and a run for safe havens (generally in the direction of previous comfort zones).
A lost-decade(s) scenario, with very low growth in both the U.S. and Europe, reinforces the global search for the consumer of last resort, who will gradually replace American and European shoppers. This consumer lives in emerging economies, particularly in those with large populations that are rapidly engaging in the global economy. We are talking about China (which needs to redirect its economy to the domestic market) and India, but also Brazil.
Global output will be increasingly directed toward consumption by populations in emerging economies, not the other way around. Export-led growth in emerging nations is probably behind us. Global investment will likely be directed toward emerging countries, with investors seeking higher returns than in their home countries.
In a world in which capital should flow to emerging economies in order to allocate excess savings (breaking the previous paradox in which they flowed from poor to rich nations), the current incipient trend in Brazil could last for several years. Capital inflows should finance increasing investment needs. But flows are expected to continue to pressure the exchange rate (keeping it appreciated, although not above the current level), which means that Brazil could be dealing with current-account deficits for some years to come.
In short, our world is changing, and the best scenario for mature economies is one of slow growth with no major financial crises. I am still evaluating the consequences of the deleveraging processes, and I'm not yet sure, but the Latin American experience has me convinced they last at least a full decade.
Ilan Goldfajn is the chief economist at Brazil's Itaú Unibanco and a partner at Itaú BBA.