The old-fashioned answer is "When the market clears". That is, when gluts are eliminated, balance sheets repaired, debts repaid and pent-up demand builds to the point where it can't be postponed and people spend again and the economy rebounds.
The biggest threat to markets not clearing is the banks' balance sheets. As the BoE noted in it's Feb09 inflation report:
"UK banks need to restructure their balance sheets,reducing their overdependence on wholesale financing and realigning the scale of their loans relative to their deposit base.That in turn will require adjustment to private sector balance sheets — in part by the non-bank financial sector, but alsothrough higher saving and lower spending by households and companies"
But of course to do this, the banks need money to repay their wholesale loans. The best way to do this is have the household sector repay some of their debt, which in turn allows the bank to use the money received to repay some of their wholesale debt. But whenever someone suggests this (I've been writing posts urging people to repay their debt since early Feb), the Paradox of Thrift is invoked. When Bush urged Americans to "go shopping" in the 2001 recession, he was invoking the Paradox of Thrift. Greenspan urging Americans to invest in housing and abandon the traditional American 30-year fixed year rate mortgages in favour of variable-rate mortgages, so they saw a rise in disposable income (temporary as long as interest rates remained low), was also acting on the Paradox of Thrift and trying to keep consumption going.
It's perfectly true that if everybody stops spending (households, businesses and government), the economy spirals down in a vicious cycle. However, lets get a few things clear. This is not the 1930's. In the UK at least, we now have a full-blown welfare state, and government spending automatically increases in a downturn on things like unemployment benefit, housing benefit, mortgage help and so on (the so-called automatic stabalisers), which support a degree of consumption in the economy. And governments can always expand spending beyond that on public works (the Olympics-related spending being an example).
As long as government stands ready to take up the slack, there isn't any danger of a spiral down. But recovery depends on the private sector clearing - without the private sector clearing you get a stalemate and stagnation.
The best way to illustrate this is the Japanese example. Japanese businesses took on a tremendous amount of debt in the 1980's. Their debt to equity ratio was 4 (they were financing about 20% of assets with equity and 80% with debt). In US companies in the 80's the ratio was 1.02 (equity was financing 49.5% of assets). When Japan went into recession in the early 1990's, after some hesitation the Japanese government embarked on a Keynesian expansion. As Stephen King points out, they managed pretty well to avoid a collapse 1930's style: "growth was very low but not entirely absent; unemployment rose, but not too far; and per capita incomes were maintained at a high level by international standards.". It was a success, as they prevented the spiral down.
But they still lost a decade in stagnation and barely-there growth, and in the meantime the government debt kept climbing (Japan's debt as a % of GDP is forecast to be 217% in 2009). People focus on the stupendous Japanese government debt and shudder and claim that thus we shouldn't go down that path. But their government debt rose so much only because it took so long for the private sector to clear. If they had cleared in about five years instead of a decade, they wouldn't have the public sector debt they have now.
The problem was not in the government action (they did what they had to do), but in the private sector which took forever to repay debt and thus "clear". Worse, in a deflationary situation, debt becomes harder and harder to repay as incomes and corporate revenues fall, so the longer you leave it, the worse it gets.
The conclusion must therefore be that we should encourage our private sector to clear as fast as possible, while letting the government take the strain. Those whose disposable income has increased thanks to interest rates being cut should do their bit for their country (and themselves) and repay debt as fast as possible, including overpaying their mortgages if they are allowed by their mortgage terms. We'll have a few bad quarters, but at some point a tipping point will occur. The banks will clear their wholesale loans and start to think about profits again (which they can't make unless they lend again). When households repay their debts they will find disposable income jumps as their monthly debt commitments disappear, and they will spend some of the money freed up. Pent-up demand will build (purchases of things like cars can only remain at current depressed levels if existing cars last about 27 years, which they are not designed to do). Obviously it will help a lot if those who have no debt carry on spending as normal and are not panicked into drawing in their horns.
What happened in Japan was that corporations hesitated to clear their debt and carried on like zombies, while some Japanese households who had no debt cut back on spending in a panic. If we do this the other way round (people with debt clear it at speed while people with no debt continue as normal), we should be out of this recession as rapidly as we got into it. Of course if this doesn't happen, this could drag on for years.