As credit crunches ever harder on the global economy, Jonathan Ford explains in our lead opinion this month why the Wall Street crash of 1929 is a less significant analogy to the situation today than the Japanese crisis of 1989—the year which marked the start of a 13-year decline in the Nikkei index of leading Japanese shares.
As in late-1980s Japan, Ford argues, banks have now lent too much money to bad borrowers. Having made big losses, they are concerned about more bad debts coming down the line, eroding their capital. This has made them extremely reluctant to lend—even to one another—and may set in motion a pattern of “deleveraging malaise” that traditional mechanisms, such as the lowering of interest rates, cannot break.
Is the world set to become debt-averse in a way that threatens growth across the entire global economy? It’s a possibility, he believes, that we discount at our peril.