The global economy faces a massive reallocation of capital, resources and employment – a process that will take years and arguably is being harmfully delayed by current policy.
As it has in every period of economic or financial stress in the past 20 odd years, monetary and government policy has concentrated on easing conditions in order to stoke demand, while with few exceptions, policy towards the shape of the economy has tried to keep obviously overgrown industries such as housing, automobile manufacturing and finance from shrinking.
But shrinking is exactly what huge swaths of the global economy almost certainly need to do.
So massive have been the interventions – think about the US support for housing and China's cap on its currency – that we really have very little idea what the "real" economy, if such a thing can be said to exist, actually looks like.
"What do we know about aggregate demand?" William White, Chair of the OECD Economic and Development Review Committee, asked at a conference in February organised by the Reserve Bank of India.
"The answer at the moment is virtually nothing because of the effects of all the balance sheet [programmes] we have never seen before," he said.
"What do we know about aggregate supply? The answer is virtually nothing.
"Cash-for-clunkers in the US where the consumption household spending ratio [at its peak] is 80 per cent. This is madness.
"Short time working in the auto industry in Germany when those jobs will never come back? Holding down the exchange rates in China to keep export jobs still functioning when we all know that longer term this is not going to be sustainable?"
White, a former chief economist at the Bank for International Settlements, has argued convincingly that successive interventions by central bankers, led by the US Federal Reserve, seeking to cushion fallout from one bubble or another has simply led to further distortions in the economy and, as Austrian economists would put it, "malinvestment".
This poor investment and consumption in the US and in export-oriented industry almost everywhere else, now needs to wither.
The great debate now is whether this asymmetric policy – cushioning on the way down but not blocking on the way up – can be succeeded by a policy where central banks exert pressure on asset prices as they inflate. It is not a matter of central bankers knowing the "right" price for an asset, but, as they should, controlling the amount of credit being created.
Central banks and banking regulators seemed to be blissfully unaware during the bubble exactly how much credit was being created by the shadow banking system of derivative-enabled securitisation. Asset prices were at the time some of the best sources of evidence that something was amiss and the idea that this should be outside their remit is risible.
Outsiders can, of course, talk until they are blue in the face about the policy we ought to have, but perhaps more interesting is what will happen because of the policy we actually are going to have to live with.
There seem to be three alternatives as to how this will work out.
Those responsible for the current policy argue that it is the right path, that it will ease a transition to a differently shaped global economy, with less consumption in the West and more in Asia, and that the alternative to keeping alive a failed model was too dire.
Let's call that the right policy, right outcome possibility.
The second alternative is that it's the wrong policy precisely because it will work. The current mix of fiscal and monetary stimulus will reignite some bubble or other which will distract us from our current problems, lead to re-employment and strong economic growth and only bite us when the new bubble explodes some five years or so down the line. That explosion would be worse because the build up of debt to keep the circus afloat will be greater. Let's call this the "Bubble Next Time" argument.
The final alternative is that it is the wrong policy and it will not work. We may have reached the limits of effectiveness for a set of policies that depend on falling interest rates and rising levels of debt to artificially drive demand. We may finally have arrived at the place Japan reached long ago. Low interest rates and quantitative easing may simply not be all that effective when both borrowers and lenders realise it's in their interests to trim sails.
Or, a sovereign debt crisis may show that we have reached the point where the creditors will no longer play their assigned role. That, rather than euro zone pantomime, is the most interesting angle on the Greek debt crisis.
- The author is a Reuters columnist. The opinions expressed are his own