Bad news

For Europe:

«Europe’s exposure to risky, emerging-market trade debt turns out to be six times its exposure to U.S. subprime mortgages. In some economies, including Britain’s, banks’ exposure dwarfs the national GDP... Austrian banks have emerging-market financial exposure exceeding $290 billion. Austria’s GDP is only $370 billion.»


and for all:

1.«Driven by the confluence of post-bubble shakeouts and increasingly robust global linkages, this recession is likely to be the worst of the post-World War II era. That means it could be more severe than the sharp downturns of the mid-1970s and early 1980s. Back then, it was the aggressive anti-inflation resolve of central banks that led to deep recessions. This time, an implosion of bubble-dependent global imbalances has done the trick.»

2.«Certainly, the United States will experience its worst recession in decades. The formerly mainstream notion that the U.S. contraction would be short and shallow—a V-shaped recession with a quick recovery like the ones in 1990–91 and 2001—is out the window. Instead, the U.S. contraction will be U-shaped: long, deep, and lasting about 24 months. It could end up being even longer, an L-shaped, multiyear stagnation, like the one Japan suffered in the 1990s... As the U.S. economy shrinks, the entire global economy will go into recession. In Europe, Canada, Japan, and the other advanced economies, it will be severe. Nor will emerging-market economies—linked to the developed world by trade in goods, finance, and currency—escape real pain.

This scenario is dangerous for many reasons. A number of central banks will be close enough to setting interest rates of zero that their economies fall into a triple whammy: a liquidity trap, a deflation trap, and debt deflation. In a liquidity trap, the banks lose their ability to stimulate the economy because they cannot set nominal interest rates below zero. In a deflation trap, falling prices mean that real interest rates are relatively high, choking off consumption and investment. This leads to a vicious circle wherein incomes and jobs are falling, with demand dropping still further. Finally, in debt deflation, the real value of nominal debts rises as prices fall—bad news for countries such as the United States and Japan that have high ratios of debt to GDP.»