Richard Koo - A "Balance Sheet Recession"
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- เผยแพร่เมื่อ 2 ต.ค. 2024
- 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.
This is still the best brief explanation of the financial crisis that I know of. It is succinct, rational, easy to grasp, and a powerful narrative of what went wrong and continues to go wrong.
And four and a half years later the private sector are *still* deleveraging, underlying interest rates are still 0%, and most first world economies are still stagnant or in recession; and now the slow down in the BRICS is happening also (for the same reasons). And here in the UK the government is exactly replicating the disaster in Japan - by concentrating on the current account deficit (and now they've convinced the Labour Party that they must do the same) and continuing to shrink government investment. Meanwhile the UK private sector is down from 500% of GDP debts to just 375% of GDP.
...liked your blog! 12 years+ later they are STILL holding on to QE balance sheet. And we're taught Economics (the forking Central Bank should be the highest most sophisticated practitioner of Macro) is a quantitative science! LOL. It's a political institution! They are first and foremost reps for Wall Street. Arbiters of "return". Read Desmond King and Jacob's "Fed Power".
Richard is right under the paradigm that governments should prevent recession and default. The healthiest thing for the economy, though, is for negative-net-worth businesses to default and thereby for the excess debt to be whipped out. This way real supply/demand-value can be added once again through the evolution of new businesses under the profit-selection mechanism of markets, rather than taking a big risk betting that the pet projects of politicians will be valuable.
This is gold in 2020. Looks liek most western countries will follow the Japan path.
I could listen to him talk all day. Great explanation.
@yjfoo23 Koo said nothing about consumers not spending and nothing about printing money. He said private business was not borrowing and investing, because it was paying down debt. Savers have nothing to invest in, because business won't borrow. Governments can do the borrowing. Savers have somewhere to park their savings. The government contracts to build infrastructure, keeping the economy going until the private sector has paid off its debt and things are back to normal.
This is a brilliant exposition of modern fallacies about Macroeconomics, in its simplicity. And Koo's enthusiasm about his subject is contagious. The video brings to mind Kalecki's famous saying: "Economics is the science where they confuse stocks with flows!"
Yes, but the logic of Japanese corporates is questionable. Why pay down debt with 0% cost when they could have bought complementary business in export markets generating positive cashflows.
@@numbereight886 Νο, the corporate logic is impeccable, as Koo explained. When your company's balance sheet is red (liabilities far exceeding assets) then your first priority is to bring things back to black, which means paying down corporate debt through whatever positive cash flow you can manage. If no positive cash flow exists you might as well give up - unless you can find temporary protection under a Chapter 11 kind of scheme. So, paying down debt is the right thing to do at the Micro level, at the corporate level. But it's actually very bad news at the Macro level, at the level of the national economy, since the economy continues to worsen. And someone has to step in and compensate for what the private sector is unable to do.
I like his hair.
Very interesting. Bill Mitchell endorses Koo's explanations but also explains (in October 2009) some points, where Koo is not not quite correct in relation to the MMT explanatory framework. I don't know if Mitchell has produced later blogs on Koo. Link: bilbo.economicoutlook.net/blog/?p=5345
@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.
How many parallels can be drawn between the effect of the devalued business investments of back then in Japan and student loan debt today in the US?
Well I guess Japan is not just technologically more advanced it is financially ahead of us as well.
The analysis is very piercing and most probably correct. The question is if fiscal stimulus (e.g. anaesthesia) is the answer or if pain and liquidation is better.
The truth is that there will be different sets of losers/winners either way.
@yjfoo23 "For example, if u just got fired, would u contract to build a swimming pool to stimulate ur economy?" No, I wouldn't do that. But if one of my children lost his job, and another child had a hoard of money, which he couldn't invest anywhere to earn more that 0.05% return, because business was not borrowing or investing, I would borrow that child's money (at say 0.055%) and employ the out-of-work child doing house/garden maintenance for me, until things got better.
There is a simpler and more elegant explanation. As a disciplined, and hard working people, Japan's economy grew explosively and so did their monetary base, and the value of all assets till 1990. Not only was it unsustainable, a correction of of the same magnitude of the explosive growth was due. If nature has it's way, you let the death plunge happen, things are fine in two years. If you fight nature, keep rates at 0, repeatedly stimulate, you just end up creating 2 decades of long slow decay
I don't believe that's possible. Government or private, the bills come due and someone pays or gets stiffed. Are you suggesting that the government should just spend like a drunken sailor and then eventually tell the lenders to take a hike? If this is what Japan has done all they have accomplished is to ward off the inevitable total collapse for a short time.
I think at this point everyone has figured out that Keynesian economics is doomed to failure.
the usa is also a consumer type economy 70% of usa gdp is consumer spending japan is a exporter economy for the usa to go on they just print more and export inflation japan actually need to export things or services or else their economy will implode, actually japan just dug their own grve by closing nuclear plants now they have no cheap power and a 200% debt to gdp
usa isnt japan the usa has a thing called the petro dollar and usa companys are moresolid and have more options because they are connected to the usa dollar, furhter more japan did alot stupid mistakes and they followed their honor like feelings and not letting their companys fail and keep huge debt from 80s
@whoo689
That "money" never existed in the first place. Precisely because money rarely takes the form of cash, "money supply" is actually the sum of the promises that money will be there. The "money" is just a number in a computer. So firms start repaying debt en masse, the money supply decreases because all the loans that used to be assets for the banks melt away.
this guy is really smart, Japan is going nowhere with their 0% interest rates. I buy construction equipment in Japan, I buy every year circa 500,000 USD worth of machines and pay them in 12 monthly installments of 41,600 USD. This is good for me, i don't need a huge cash flow, but their economy cannot move like this.
I very much believe in what I write, as does 5000 years of history. Giant central govts that try to run everything (current liberal philosophy in America) has never worked and never will. History is far smarter than you or I. Big govt = Welfare and poverty for all, always has, this time is no different.
You are wrong, when prices fall down, the government debt increases too cause the government income falls. Greece shows you what happend when you try to safe money in this situation. All in general you just wrong.
What a tragedy, now that Japan was getting out of the whole, the natural disaster happenned, pulling their ecomony back down. I wonder what is the "moraleja" of this? Do you see that happenning to the usa too?
Business has to be allowed to fail. This is the essence of capitalism: those producers who correctly anticipate consumer preferences live to see another day. Resources are scarce!!!! Those who know how to apportion them correctly (I.E. profitably...I.E. in a manner consistent with what people desire) are rewarded by consumers with continued access to resources---to keep on keepin' on via profits.
Why were all these Japanese firms whose balance sheets were upside down allowed to continue operating? Surely they were being subsidized by the government in some fashion.
It is not the job of taxpayers to subsidize ineptitude. What's more, it is not the job of government to act as Inept Resource Allocator of Last Resort. After all, if entrepreneurs with specialized knowledge in their particular markets routinely fail, there is NO REASON to believe government employees far removed from these markets can do better.
End result? Scarce resources are wasted. The inept entrepreneurs are rewarded with access to even more scarce resources to waste. The pool of resources available to QUALIFIED entrepreneurs has shrunk. Fewer goods and services that would benefit people (according to their own estimates, as reflected in their purchasing decisions) get produced. People as a whole suffer loss. Quality of life declines.
How to fix? Let failing businesses and inept entrepreneurs FAIL. This is the way of capitalism. And this is the way humanity was gradually but inexorably rescued from the constant threat of starvation, disease, and general impoverishment that had characterized its ENTIRE HISTORY until the Industrial Revolution some 250 years ago. Our modern lives are a MIRACLE compared with what has gone before.
Let. Them. Fail.
But money is neutral in the long run, it shouldn't effect the traditional market mechanism you mention. If a consumers shop at a business, it will survive. If the biz doesn't provide value to consumers, it fails. This is true even during inflation.
Richard Koo is explaining an endogenous instability that results from exuberant private credit creation...it is a flaw in the private money system the market operates in. When debt is deleveraged it destroys money. Koo is suggesting that during these times, gov should balance that destructive with nominal creation.
Nearly all economists agree, including libertarians such as Friedman, who suggested helicopter money to offset the rare super-imbalance. In ordinary recessions, adjusting the price of money up and down is sufficient.
It certainly is a flaw in the private money system. But, the system itself isn't self-contained to the private sphere. Private actors (lending institutions) who create money beyond sustainable and viable levels are continuously rewarded for their errors and risk taking when things go bad---they are bailed out, propped up, etc. by public/government actions.
So the system isn't really private, and the result is that those making poor decisions are left in place to continue making errors. Specifically, I'm speaking of the lending institutions. Instead, let them fail, and watch what happens next time around: much more prudent decision making by those who replace them.
And society is better off, because those marginal loans made to the riskiest (i.e. least viable business enterprises...i.e. those who produce at a loss....i.e. who produce desired goods inefficiently, or produce undesired goods) will not be made in the first place. Scarce material resources (land, labor, time, knowledge/technology) will be put to more productive use. More goods will be available during any given time frame, and society will be wealthier by being able to consume at a higher base level. ---Questions of whether this is morally desirable or not aside for purposes of the present discussion.
Anyhoo, this is how I see it.
Sean Kennedy I mostly agree with what you've written, although allowing the system to fail today would probably do more damage than its worth.
The structure needs to be changed. Two things that would go a long way is, allowing individuals to have a checking account at The Fed, and outlaw borrowing with the intent to purchase a financial asset.
Your comment is incorrect on a number of levels, and you are missing the entire point of this video.
In 1989, Japanese real estate was worth 50% of the entire global market, when it crashed. There was a massive debt overhang.
First, businesses are protected from failure by law in a number of ways.
The essence of modern capitalism was the creation of the limited liability corporation. Prior to that, owners had unlimited liability, but under limited liability many people can pool their resources and be assured by law (and government) that their losses will be limited. So capitalism is not about letting failing companies die, it is about shielding risk-takers.
Second, as Koo made clear, there are two kinds of "bankruptcy" - with and without cash flow. The companies' liabilities were higher than their assets, but they were still making money: they had cash flow. They weren't being subsidized by government, they had money flowing in.
The idea that entrepreneurs fail because of better or worse knowledge is wrong: it is far more about access to capital, and having the resources to weather a downturn. Perfectly sound companies can be weakened and undermined by the failure of other companies. Individual entrepreneurs are limited to their own interests, while people working in government have a broader responsibility. It has nothing to do with smarts, and it often has to do with luck.
Money is not a scarce resource. It can be printed for virtually no charge by central banks, which are a lender of last resort. When everyone is deleveraging - paying off debt at once - it means that money is flowing to banks and not through the economy on other goods.
It is called "debt deflation". And all of the claims you make for capitalist development was hand in hand with the development of government. Every rich country became rich through protectionism. The Great Depression ended because of government spending, and the end of disease was often the result of public health programs paid for by government with vaccines that had no patent (like polio).
it's hard to make apples to apples comparison. He's probably right in that Americans are debt minimizing. However, everything else is different. Japan's hole was with their businesses. America, it's the consumer mortgage holders who are underwater.
Almost ten years from a moment that material was published. Is anyone here able to explain me who may loose money if Japan commercial banks forgive all debt, that they have created? Who that will be exactly? I don't understand probably something, or Mr. Koo present outdated way how banking sector operate these days.
Richard Koo shows some interesting ideas about economy, but I believe he is fundamentally mistaken in claiming that interest rates are zero or near zero. That may be correct in interbank lending or provision of central banks for banking system. However, interest rates of the financial system for real economy are dramatically and significantly higher.
So the solution is for govt to take on more debt when private sectors pay down theirs.
Inflation can actually stimulate business, because business stands to lose if they don't act in the economy.
Still happening in USA in 2021...
Instead physicists argue about schrodinger's cat.
my prediction was right. china will be the next japan.
Because in free market economy, you cannot force private sectors to invest more or households to spend more. That's why governments have to spend during the depression. Otherwise, deflationaly death spiral.
Post-COVID I wonder if we will be entering into this territory in the near future - A "Balance Sheet Recession" in major economies worldwide. Thank you for the video.
Important lessons right here. We can only hope people in positions of power in the West actually learn this material. Japan is climbing out of these dark days, and contending with the Fukushima to boot, its a massive job but the trend is positive. Japan will emerge stronger and more robust, economically and in terms of its infrastructure, in the long term.
This explains why QE during the financial crises didn't cause inflation in the CPI.
@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?
9:23 “this is a completely different disease, it’s not common cold, it’s pneumonia”, mind blown
@macroman52 The money u pay ur son is money u could have spend on something that u cherrish more like a vacation on a cruise ship or whatever. All in all the economy of ur family doesn't improve. Whatever gain ur sons make is a loss u incur.
@macroman52 Road repair is not investment. It's like maintenance in order to keep the status quo. Let's say u got a new microwave which makes ur cooking more efficient, however it breaks down after 1yr usage. U spend $20 to fix it. In the end u're not better off than before because ur microwave still functions the same way, and u're $20 poorer, which u could've spent on something else like dinner at a steakhouse or new pair of jeans.
@yjfoo23 What about all the government money misallocated into the legal system, another way the government is a wealth producer. Establishing and enforcing the system of property rights is necessary for capitalism to work - more wealth is created with the legal system than in its absence. But this is just basics. Koo's point is different. Listen again, where he says "what happens if everybody saves at the same time", i.e. when everybody saves but no one borrows and invests what is saved.
5000 years of history is is quite a lot of story, large part of it myths, legends and wishful thinking. History is more or less bunk. We do not live in past, we live in present and try project in near future.
This video aged very well. We are at least 15 years in that balance sheet recession and we still think it's a structural problem. If only someone listened to that in 2010 we may well have overcome it by now.
brilliant. explains exactly what's happening today with Fed action. and why we are seeing fiscal n monetary policies merge
This video doesn't address what happens when you emerge from this policy with a massive federal deficit. The policy merely transfers the problem from highly leveraged corporations (ie: financial institutions such as Nomura) up to the sovereign level, where EVERYONE is then expected to repay.
Also, it increases the overall leverage burden because the public sector allocates capital inefficiently and increases waste. It's a clever argument, but ultimately only from a self-serving banker.
Koo is claiming that Japan has already "climbed out" in 2005, but does this really seem to be the case?
It doesn't seem to be so... prices in Japan have not yet cleared.
There is a certain amount of irony in lowering interests rates and flooding the market with money and expecting it to help when low interest rates and cheap money were a major cause of the bubble and the inevitable bust in the first place. That hand was played long ago.
@ahooahoo7777 This is what France decided in the 30s- they stuck to the gold standard and let failing companies failed. Things weren't fine in two years, rather, their growth stagnated and they were ultimately overpowered militarily.
@macroman52 Remember the money u use to help out ur jobless son is money u have to pay back someday with INTEREST. Also remember our interest rates are artificially suppressed by the govn't. If interest rates were really 0.05, then that means general prices are coming down @ 2%/yr. Then that means the real rate of interest u're paying is 2.05%. All in all, the gain of ur jobless son is a lose from u. It doesn't do the economy of ur family any good AS A WHOLE. Same for the country.
@macroman52 Remember one thing: the govn't doesn't produce, it spends whatever it takes/borrows from the private sector. When the private sector is saving it means it is building capitals for later investment because capital had been misalocated in the past and has gone to waste. In the mean time If the govn't just borrows to build infrastructure then that means capitals are further misalocated. For example, if u just got fired, would u contract to build a swimming pool to stimulate ur economy?
There was double digit deflation in the 1920 recession but with no QE or stimulus it didn't result in a "death spiral" of deflation. The free market corrected itself and the recession was over in under 2 years.
Keynesian macro 101, everyone is bankrupt, the gub-m'nt is bankrupt, and we need to borrow and spend, print and spend, tax and spend spend SPEND!!!
actually the benchmark is the rates on the bond market. 2% is barely inflation and bonds are being issued with sub-2% rates. So he is correct. For housing, its around 3.5% which is still very very low. The point is that Koo is correct about balance sheets. Right now banks still have a lot of "toxic assets" that are causing them to fail the Treasury stress tests. There is a reason that Treasury kept delaying the results of the stress tests, its because bank balance sheets are horrible.
@UtwoBed - he answers that clearly, from about 8mins onwards. Governments need to open the purse strings and resist the tempatation to cut budget deficits (or maintain surpluses), to force the GDP back to regular levels, which in turn gives everyone a better sense of security in the health of the economy. As he says, government policy needs to do the OPPOSITE of the private sector (who are hamstrung paying down their balance sheet debts) and spend big.
@yjfoo23 A big gain for me is this: By keeping my son working (on borrowed money) he keeps his self-respect and working habits and is ready to get a better job when the economy recovers. If I ignore him, save myself some interest costs, take a vacation, he could sink into a state of permanent unemployablity. Then he is a burden on my "household society" for a long time, which would likely cost me more. We (he and I) will pay back the debt when the economy improves.
@yjfoo23 How exactly is Keynes wrong, or more relevant how is Koo wrong. How exactly do you know "spending momney doesn't grow the economy"? Or if you haven't got any argument, you can try some more abuse.
I see you have changed the topic to bailouts cause inflation. Go ahead and prove it, making reference to the present inflation (or lack of).
@yjfoo23 Spending to build or repair roads, for example, is investing in future wealth creation. The interstate freeway system was a massive wealth creator over the last 50 years, wouldn't you agree?
OK Great, they figured it out. Now how about sharing with the rest of the world what the hell you did to fix it?????
Mr. Koo is right and his arguments also explain why the austerity programms for Greece, Spain, Italy and Porutal will lead to more debt, more poverty and chaos. Thanks to Germany Europe will be suffering more and more. Keynes was right, if the economy is in a slump, the government has to help out. Mr. Koo explained is very well! Thanks for this great video!
[IF the recession was caused in large part by the very things that are claimed to cure a recession]
It depends what you mean caused by the thing that cured it. you have to be a bit more specific.
Govt spending is never the answer. Look how well it has worked in Cuba, NKorea, and the Soviet Union. Disasters
@macroman52 It sucks to be you. Keynes is completely positively 100% wrong. You better change your major!
Wow
@macroman52 Building roads MIGHT increase productivity in the future in a developing country where no roads were there to begin with, but I'd argue it'd be much better done by private investors because govn't is almost always less efficient and more corrupt than private sector. Anyhow, in developed countries roads are already there. U can't just build a road to no where and generate no economic benefit like Japan did. Interstate freeway is less efficient than railway and cost tonnes of $.
Perfectly informative video, I am glad I heard it from Mr. Koo.
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.
So Japan ever managed to climb out ? Public debt at 230% to GDP, GDP growth around zero, 50% tax rate, declining demography. average penis size ~3.7''. I just can't see how that can play out well. This is not the type of recovery that we should be looking forward to.
lol, very smart expamples. I hope you don't believe what you write! ;)
I guessed you missed the part when he said it was a different type of inflation. The 1930s depression was also different from the 20s. Not all recessions are the same. Some can be corrected by the market. Some cannot.
Pain, liquidation and *price clearing* - the latter which many analysts feel is essential.
history may dissagree with you though.
@yjfoo23 Well-maintained roads help everybody thru lower travel costs. Perhaps private toll roads or railways are better. They would be financed by borrowed money. Koo claims the private sector is NOT borrowing/investing at the moment. So the actual road/railway built or maintained by government borrowing and private contractors are better than leaving workers and resources idle and having bad roads and no new railway. Idle workers are a cost too, now and in the future.
PAUL KRUGMAN WAS RIGHT..!!!! YEEEEEEE
this is what's happening to the USA
his paper on this issue is also great...
Thank you
Good video
How so?
Is that you Ray Dalio?
I'm curious in what sense? the content or the way he speaks?
@@veggix8084 Context
@@veggix8084 That is all in his book. Big debt crisis
@@langa1533 oh! worth checking the book out?
@@veggix8084 it's a must read!!! Highly recommended
It doesn't sound like Mr. Koo believes in a free market economy. What he is saying is that only the government can save the day. He would do well in Obama's administration. Keynesian economics is what got us into this mess to begin with.
2023
This is so important in 2023 in US. Richard Koo has just made a predicition of a hard landing in US
What's sad is this isn't new news...back in the Great Depression Irving Fisher came up with "Debt Deflation" that basically the private sector has taken on too much debt, and thus they wont spend (they have debt to pay off) so we get the "deflationary spiral" Keynes spoke of. But it only has happened twice, that I know of....30s and now. And as the crisis drags on confidence gets shaken and makes it all worse.
Recessions do right themselves, except when we get in this scenario
@yjfoo23 Congratulations on not hearing what Mr Koo said. Did you hear what was happeningto private sector "saving and investing" - it turned into saving and not investing. Koo agrees with you 100% in the normal times, but sometimes it goes wrong. Keynes discussed it 70 years ago - maybe there is nothing to be done, but try to understand the problem first.
@yjfoo23 Actually, I cherish my son having some useful work to do, and an income, more than I cherish taking a vacation. And both my son and I gain - I get a better maintained hosue and garden (which might also be more valuable to me than a vacation).
@macroman52 Do YOU(as a person) spend your way into prosperity? Lol! Use your brain! Spending ISN'T investing.
8:15 crowding out effect would then occur due to government spending right????
Just read up a little into iceland's addiction to inflation in the 1980's.
7:58 "nothing haaaaarppens"