But even so, the fall should be seen above all as a consequence of the unprecedented rise and the high valuations at the beginning of 2000. An orderly adjustment I repeat that the course of events today differs in many respects from what happened in the world economy in the late 1920s and early 1930s. At that time, economic policy was tightened, free trade was restricted and banks collapsed. Global economic activity went into a downward spiral of deflation, falling output and decreased employment. Thus, the drop in share prices was only one of several ingredients in the mixture of events at that time. Although world economic demand has been subdued and the recovery in activity is now rather sluggish, the fact remains that the adjustment after the latest upward phase and the high share values has been comparatively orderly. Overall economic policy is expansionary - not restrictive - in many parts of the world. With some minor exceptions, there have been no extensive political interventions that impede international trade. Moreover, the financial system has proved to be highly robust. The maintenance of an efficient payments system and the supply of credit from central parts of the financial system are, of course, important conditions for a further successive economic recovery. In the past it is disturbances in precisely these two functions that have caused real economic developments to follow paths that resulted in falling output and deflation. For an illustration of this we need only go back a decade or so to Sweden’s own bank crisis.
The picture is not as bright as last spring At the time of my previous meeting with the Committee, our discussion was coloured by some relief that the effects of the terrorist attacks on 11 September 2001 had not had a particularly marked impact on the world economy. The uncertainty among firms and households had subsided to some extent and there were signs that economic activity abroad was beginning to improve. An optimistic mood was spreading. Order books seemed to have stabilised and in some cases had even taken a turn for the better. Moreover, an expansionary economic policy in many countries was expected to provide an additional stimulus. At the same time, I pointed out that we could not be entirely certain that world economic activity would pick up. Among other things I mentioned that the economic imbalances in the United States were still large and stock market valuations were high. So there were a number of questions as to whether demand would in fact rise on a broad front. Last spring, the moderate economic slowdown in Sweden had meant that inflation here remained high and resource utilisation was still tight. GDP growth seemed to have bottomed out during the summer of 2001. Unemployment had stopped falling. Inflation had been noticeably above the Riksbank’s 2 per cent target for a time. This was partly because so-called supply shocks had raised the price level and led to temporarily higher inflation.