Richard Koo - A "Balance Sheet Recession"

Nomura Research Institute's Richard Koo says that what the world is experiencing right now, a "balance sheet recession," is different from traditional recessions. However, Japan recently experienced a similar type of recession, and Koo says we can learn a lot from that country's experiences. Interviewed by Daniel Erasmus at King's College, April 2010.

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[drkevincampbell]

We are following the same path as Japan. Deflation here we come!

[Neophite101]

Our situation is very similar to Japan's, with the exception that we've got more households and commercial real estate firms underwater. However, they had the advantage of cash flow from exports and they started with less government debt. Since our aggregate demand is going to remain depressed until enough people correct their balance sheets, we are going to find fiscal stimulus necessary to prevent decline into a more severe depression.

[infinummjb]

If you are actually bankrupt (having cash-flow or not - it doesn't matter) than you should be liquidated. If company stays "open" instead of going under than it is breaking the LAW and CEO should be punished by jail time.

But since countries break its own LAW and allow bankrupt companies to operate regardless of negative balance sheet than no wonder there is a depression without recovery.

Bankruptcy has to be swift and unconditional or else you get long-lasting Japanese style depression.

[objectivistathlete]

@Neophite101 Exactly, the economy will remain depressed until people correct their balance sheets... that is why we need a depression without fiscal stimulus. Allowing prices to fall and debt to be wiped out will correct that problem. The problem is the government bailouts, fiscal stimuli, and monetary stimuli have been preventing this from happening.

[crbower]

In the UK teachers are striking for a few percent what people have to wake upto is there is likely to be a 50% cut in pensions currently being provide and future pensions as well as a series of other austerity measures so this private sector stimulus can be achieved. Its going to be brutal, but perhaps the past few dacades were just too good ? The plus side is we come out stonger and more competitive, the down side, well thats social.

[crbower]

Fiscal stimulus however, doesn't mean not cutting pay and pensions of public sector works. Indeed quite the opposite. Fiscal stimulus needs to encourage the private sector to invest and spend by creating opportunities for a nation's companies.  So we take money from social, health, welfare on one hand, wash it through a number of companies and then create a better economy serving the populations of those countries.

[whosforachat]

All these comments show that economics is a pseudo science. You don't hear physicists having arguments like this.

[ahooahoo7777]

@panopticonartist , I don't know what history books you read, but France had more casualties in WWI, on the allied side, except for Russia, and Russia had four times France's population. Also France's main economic counterpart Germany, was saddled with incredible war reparations, hindering Germany's ability to become productive again, which in turn hindered France's. Just 10 years after WWI, with the tremendous loss of men in their prime, you expect France to recover using the trick of Fiat?

[mrzack888]

@inquirer011 u r wrong. it's baby boomer demographics that created the boom. it's globalization and easy capital flow that created this boom. the problem is that most of the boom went into bubbles such as housing and bad derivatives. regardless, if it weren't for government Tarps and QEs, then we would be in a deflationary spiral and gold would be sitting at 500 bucks an ounce or even lower. The only way out of this is a massive debt default throughout the entire system.

[inquirer011]

The description of a balance sheet recession is consistent with Austrian School economics analysis -- cheap money from the central bank creates a boom and mal investment. The recommendation is different though -- don't stimulate, just let the market adjust, letting firms who must go bankrupt.

Look at the US 1921 depression short and quick.

[MarcusCMarcellus]

Brilliant. Too bad he's wrong. The West is not in a balance sheet recession but in a full-blown currency crisis as evidenced by the inflation we are experiencing and what is coming down the pike. I like Koo and enjoyed his book. His errors were important in helping me see what is really happening in the US and EU - and it ain't what Japan went through. If only we were so lucky!

Natural deleveraging is not deflation.

[VanostranIV]

Just read up a little into iceland's addiction to inflation in the 1980's.