The early stages of past recoveries have been led by consumer spending, particularly for durable goods and residential investment. For example, in the first year of recovery following the deep recessions of 1973–1975 and 1981–1982, real consumer spending increased an average of 6.5 percent and residential investment rose an average of 38 percent. It is unlikely that we will experience this type of strength this time. Households have suffered unusually large shocks to both income and wealth and many remain highly leveraged (Chart 18). Although the household debt to net worth ratio has declined considerably from its peak, it is still around 26 percent, well above the already elevated average of the past decade (Chart 19). Moreover, even if consumers wanted to borrow, credit availability is still constrained and underwriting standards remain relatively tight. Real consumer spending increased at a 2.25 percent annual rate over the second half of 2009 and looks to be growing at about that rate in the first quarter of 2010. Given that the personal saving rate is still relatively low, it will be hard for consumer spending to grow more quickly without large increases in real labor income. But big increases in real labor income won’t be possible without a much stronger recovery in output. And a much stronger recovery in output is unlikely without stronger consumption. Residential investment did increase over the second half of 2009, boosted by relatively low mortgage interest rates, lower home prices and the first-time home buyer tax credit.

Assessing its impact is difficult. Opinions may differ as to whether volatility in capital flows and exchange rates is excessive or, rather, a pure reflection of variations in fundamentals. By the same token, movements in asset or commodity prices can be seen to reflect the balance of supply and demand forces, or, alternatively, to be the product of speculative activity. Looking at the behaviour of most countries during the crisis, however, it is very apparent that they felt threatened by the instability of capital flows and, accordingly, sought to protect themselves from its consequences. The provision of international liquidity, in particular, has been severely disrupted during the crisis. Emerging (and some industrialised) countries have suffered from acute dollar liquidity shortages which had to be remedied, inter alia, through a network of currency swaps between central banks. The crisis is a powerful reminder that liquidity – both domestic and international ‐ can never be taken for granted. In today’s world, most international liquidity is privately provided and represented by claims on private institutions. Interbank markets play a crucial role in this process. The more capital markets become integrated at the short end, the more international liquidity is provided by the private sector. 2  BIS Review 127/2010  The importance of global private liquidity conditions was apparent in the period which followed Lehman’s failure. Output and trade fell across the world with astonishing simultaneity. It seemed natural to assume, at the time, that “traditional” forms of contagion – through goods or capital markets – were at work.