Four years into the financial crisis, it is becoming increasingly clear that the biggest deficit is not in credit, but credibility. Markets can adjust to a downgrade of global growth, but they cannot cope with a spiralling loss of confidence in leadership and a growing sense that policymakers are disconnected from reality. What needs to be done to move away from the precipice?

At the root of today’s credibility deficit is a failure to come to grips with the long, slow growth period that is typical of post-financial crisis recovery. Too many decisions, for example the recent withdrawal of monetary stimulus by the European Central Bank and US Federal Reserves have been predicated on overly rosy growth projections. Time and again, policymakers counted on rapid post-crisis recovery to help them avoid painful decisions on how to deal with badly overstretched private and public balance sheets, whether household debts in the US or sovereign debts in the periphery of Europe. Time and again, rapid growth did not materialise or – if there was a burst – did not last. Every effort to delay a critical decision has ended unsatisfactorily. One is reminded of the Peanuts cartoon character Charlie Brown, who never seemed to figure out that his placeholder Lucy would always pull the ball away at the last minute so as to enjoy watching him lose his balance. So the downturn has treated US and eurozone leaders, with each successive stumble further undermining their credibility.

By far the main problem is a huge overhang of debt that creates headwinds to faster normalisation of post-crisis growth – that is why post-financial crisis growth is typically very slow. It is better to think of the global economy as going through a “Second Great Contraction” (the Great Depression being the first) involving credit and housing, and not just output and unemployment.