The first is that the recession in the US and Western Europe is likely to be deeper than the one in 2001-02 as it is being driven by the process of deleveraging, of cutting debt and shrinking borrowing, first by consumers and then by companies. How deep depends on how afraid borrowers and lenders become. With US unemployment now 6.1 per cent of the labour force, however, we know that there is quite a way to go before things get as bad as in 1980-82 (when unemployment exceeded 10 per cent), let alone the 1930s (30 per cent-plus), with which this crisis is so often compared.

Second, we know we can compare the response from governments to this crisis with the ones seen in financial crises in Japan and Sweden in the 1990s, and of course the 1930s themselves. Japan, which from 1990 onwards saw the biggest falls in stock and real estate prices of any big industrial economy since 1929, suffered a ‘lost decade’ in which recession was never deep but it was long. Sweden, where banks collapsed and were nationalised in the early 1990s, suffered a very deep recession but recovered from it quickly. The difference lay in the speed of the public policy response.

It took Japan eight years before public funds were injected directly into its banks. In Britain, the US and elsewhere it has taken 15 months. In Japan, the full cost of bank rescues and tax write-offs of bad debts is estimated as having been almost 25 per cent of its GDP. The combined cost of taking Fannie Mae and Freddie Mac into government control and of the $700-billion Troubled Asset Relief Plan looks likely to be no more than 5 per cent of the US GDP.

Almost certainly, the cost will rise. More public money will have to be funnelled into US and European banks. President Barack Obama, if he is indeed elected, will surely introduce a massive new fiscal stimulus package, probably focused on rebuilding US infrastructure. So America’s federal budget deficit, already more than 3 per cent of GDP, is going to at least double, but could well rise further than that during 2009-10. That bigger deficit and government debt will be echoed on the other side of the Atlantic, and will impose tight constraints on the ability of governments to implement other spending or tax-reform plans, including hoped-for measures to cope with climate change.

The third thing we can say, though, is that any worries that this explosion of public debt will be inflationary are, at best, premature. Throughout this decade, the forces of inflation and deflation have been engaged in a struggle for dominance. This recession is bringing the forces of deflation back into a dominant position. Central banks will cut short-term interest rates repeatedly and sharply to try to discourage that deflation.

Hence the fourth thing we can say, with some confidence, is that the halving of the oil price that has occurred since June and the dramatic drops in other commodity prices are likely to be only the beginning. Demand is slumping in the rich, industrial world which makes up 60-65 per cent of global GDP; it is also fading in China.

The fifth point that can be made is whether painful recession or slower growth in particular countries will turn into something even more dramatic is likely to be answered by politics, not by economics, especially in countries where oil and commodity slumps hurt badly. During the East Asian crisis of 1997-98, the worst slump occurred in Indonesia, because the crisis led to the overthrow of the long-time dictator, Suharto, and then to years of chaos and conflict before democracy and eventually stability were restored.

The sixth and final point that can be made amid the inevitable fog of recession is that countries that are flexible and adaptable, but with robust public institutions, will fare best. This means that anyone who assumes that this slump marks the end of American leadership, the beginning of the transfer of power to Asia or the BRICs, the demise of dollar hegemony could well be proved wrong. This is an American recession, but America is actually one of the countries best placed to absorb it, dust itself off and then recover.

The author is a former Editor of The Economist.

policyworld(dot)bw(at)gmail(dot)com

(Businessworld issue 04-10 Nov 2008)