The economy has reached the end of an era — not just the end of a business cycle — and it faces challenges even more profound than a recession and financial crisis.

During the past quarter century, bloated private sector balance sheets have become ever larger relative to incomes, but the era of the big-balance-sheet economy is now over. A transitional period of debt reduction and asset deflation has begun — a period that will last at least several years and perhaps a decade. It will bring financially severe recessions, spotty recoveries, poor profits and chronically high unemployment as the economy undergoes a painful healing process. Massive government intervention in the financial markets will prevent a crippling breakdown of the financial system, but it will not prevent enduring economic difficulties. This new period is a depression, but fortunately, it will be a contained depression.

A depression can be defined as...