While we cannot say for certain that deleveraging will occur today, we do know empirically that deleveraging has followed nearly every major financial crisis in the past half-century. We find 45 episodes of deleveraging since the Great Depression in which the ratio of total debt relative to GDP declined, and 32 of them followed a financial crisis. These include some instances in which deleveraging occurred only in the public sector; others in which the private sectors deleveraged simultaneously (See Appendix B; Historical episodes of deleveraging). The historic episodes of deleveraging fit into one of four archetypes: 1) austerity (or "belt-tightening"), in which credit growth lags behind GDP growth for years; 2) massive defaults; 3) high inflation; or 4) growing out of debt through very rapid real GDP growth caused by a war effort, a "peace dividend" following a war, or an oil boom.

The "belt tightening" archetype was by far the most common of the four, accounting for roughly half of the deleveraging episodes. If today's economies were to follow this path, they would experience six to seven years of develeraging, in which the debt-to-GDP ratio declines by around 25 percent. Deleveraging would begin two years after the start of the crisis, and GDP would contract for the two or three years of deleveraging, then start growing again (Exhibit 4).

Eoin Treacy's view This report emphasizes the point, often cited at Fullermoney that the countries less affected by the excesses of the credit bubble are most likely have the better performing economies and asset markets. This has been borne out the by the leadership of the currencies and stock markets of Emerging Asian and commodity producing countries since October 2008. The USA and much of Europe continue to face the prospect of a lengthy convalescence.