Balance sheet recession basics not your fathers economic cycle january 01, 2012 about. Richard koo, the chief economist at japans nomura research institute, is widely regarded as an expert on the dangers of balance sheet recessions, a term he coined to explain why japans. Being a consumer driven economy this decline in debt remains the most important component of our economic plight. Balance sheet recession as the otherhalf of macroeconomics richard c. A worker making face masks at a new balance facility. Japans economy was the envy of the world before succumbing to one of the longestrunning economic crises in financial history that would come to be known as the lost decade.
By discrediting the conventional view that monetary policy is effective in combating a postbubble recession, richard koo has made an invaluable contribution to. The balance sheet also takes into account accumulated depreciation of those assets, and that helps bring the true value of the assets closer to the number used for book value purposes. Sep 21, 2014 the theory of a balancesheet recession implies that when impaired corporate balance sheets weaken the private sectors appetite for borrowing and investment, the government must fill the gap. So whats our new balance sheet, after weve unloaded a lot of those assets. But his fears may be overblown in his new book, says hector reid.
Nomura economist richard koo is out with a new presentation given at the institute for new economic thinking in berlin. Another feature of a balance sheet recession is that it is that there is a lack of borrowers not a lack of lenders. The feds assets before and after the great recession. The boom phase is often visible in excessive appreciation of assets price see. Overview crisis response monetary policy normalization feds balance sheet federal reserve liabilities recent balance sheet trends open market operations central bank liquidity swaps lending to depository institutions fed financial reports other reports and disclosures information on closed programs. Japans struggle with uncharted economics and its global implications by richard c. Jun 08, 2010 nomura research institutes richard koo says that what the world is experiencing right now, a balance sheet recession, is different from traditional recessions.
Koos theory is related to economists like walter bagehot, hyman minsky, charles kindleberger, who similarly to austrian economists introduced a boom and bust cyle or financial instability theory caused by excesses of the financial sector. Koo chief economist nomura research institute october 14, 2012 these are extraordinary times. In a balance sheet recession caused by too much privatesector debt, the government should also use its resources to catalyze debt workouts and debt reductions. A balance sheet recession comes to pass when a plunge in asset. Compare global experiences during the balance sheet recession and find out what is needed for a full recovery. According to this part of the definition, the balance sheet recession has not ended. This is one of the best economics books i have read regarding the problems now facing world economies. As izabella kaminska writes, new balancesheet easing from the ecb is almost surely on the. How different does the feds balance sheet look now compared with before the great recession. When interest rates were cut and the pound devalued, the economy was able to recover.
In the last 8 months theres been a ton of research validating the theory and arguments of the balancesheet recession. Indeed, we have been in the grips of precisely this adverse feedback loop for more than a year. In a balance sheet recession, private sector is deleveraging and as a result there are no takers for monetary stimulus. For decades, market participants have closely studied the evolution of the federal reserves balance sheet to understand more clearly important details concerning the implementation of monetary policy. Balance sheet recessions and the global economic crisis.
The federal reserves balance sheet contains a great deal of information about the scale and scope of its operations. The great depression was a balance sheet recession the. For example, in 1991, the uk experienced a recession caused by a demand side shock high interest rates and strong pound. The great depression was a balance sh eet recession. A better recession strategy is to invest in wellmanaged companies that have low debt, good cash flow, and strong balance sheets. Richard koos awesome presentation on the real reason why this recession is completely different. Balance sheet recession is a relatively new term outlining the factors involved in the aftermath of financial crashes which decimate the value of property and stock portfolios such as the 1929 crash, the japanese crash of 1990, and the 20078 global financial crash gfc. Balance sheet recessions and democracy bill mitchell. Japans lost decade is a balance sheet recession and has been raging for almost 2 decades now. With no borrowers, the economy will continue to lose aggregate demand. However, in a balance sheet recession, the problem is more fundamental than a temporary demand side shock. Even with zero interest rates, there are no borrowers of newly generated savings and debt repayments. Jan 14, 2015 the myth that we are suffering from a balance sheet recession is an example of poor economic analysis and, if allowed to go unchallenged, is liable to be accepted and lead to poor economic policy.
In the former variety, businesses remain fundamentally forward looking, and as much research. Koo lived in tokyo for years in his youth, and later attended the university of california, berkeley where he received a ba in political science and. Balance sheet recession argues that contrary to popular belief, it is this massive shift in corporate behavior, instead of structural problems, that is the root cause of both the deflation and the nonperforming loan problems that have troubled japan for so long. Recovering from a balancesheet recession economix blog. The term is attributed to economist richard koo and is related to the debt deflation concept described by. The escape from balance sheet recession and the qe trap by.
The myth of the balance sheet recession financial times. Keeping a strong balance sheet so you can take calculated risks and. Europe, uk and the us are all currently mired in a balance sheet recession bsr. Book value is the total value that would be left over, according to the companys balance sheet, if it goes bankrupt immediately. In this groundbreaking book, leading international economist, richard koo argues that far from being the sick man of asia, japan. Near zero interest rates and massive liquidity injections by the central banks are still failing to bring life back to so many economies in the developed world. Following the asset price collapse in 1990, japan is said to have experienced such a recession as corporations moved to repair their balance sheets which had been severely damaged in the property price crash at the end of the 1980s. Andrew schwartz senior vice president, csis external relations. Whats the best investing strategy to have during a recession. Countercyclical stocks do well in a recession and experience. Like nationwide debtfinanced bubbles, balance sheet recessions are rare and, left untreated, will ultimately develop into a depression. Recessions and depressions what happens when the economy doesnt grow, and gdp contracts. During an asset bubble, corporate and household balance sheets are highly leveraged as funds are borrowed to invest in assets.
While we ignore main street in favor of wall street its likely that the recession on main street will endure. Balance sheet recession hardback book oxfams online shop. Author and leading economist richard koo explains the unique political and. Richard koo, who coined the term balance sheet recession to describe the deleveraging cycle, isn. Book club discussion the escape from balance sheet. Garten, juan trippe professor of international trade and finance and former dean, yale school of management. Jan 10, 2012 koos ficus of research is balance sheet recession and how this typical recession made things worse in depression, japan crisis and now the 2007 crisis. Instead the problem was that few businesses applied for loans. Aug 01, 2011 your book respectively your balance sheet recession concept has been the talk of the town in 2009, as the global economy was in the middle of a severe contraction. He explains the factor connecting those two episodes was a.
Difference between balance sheet recession and financial. As i have long maintained, we are looking more and more like japan and the balance sheet recession they suffered. The balance sheet recession is not over seeking alpha. In a balance sheet recession, gdp declines by the amount of debt repayment and unborrowed individual savings, leaving government stimulus spending as the primary remedy. Nomura research institutes richard koo says that what the world is experiencing right now, a balance sheet recession, is different. Balance sheet recession basics not your fathers economic. The escape from balance sheet recession and the qe trap. The author, who developed the concept of balance sheet recession, expands upon it here to point out the limits of monetary policy in being able to stimulate growth. It shows that there are at least two kinds of recession. Oct 27, 2014 the escape from balance sheet recession and the qe trap is an essential guide for anyone interested in the future of the global economy.
The theory of a balance sheet recession implies that when impaired corporate balance sheets weaken the private sectors appetite for borrowing and investment, the government must fill the gap. The myth that we are suffering from a balance sheet recession is an example of poor economic analysis and, if allowed to go unchallenged, is liable to be accepted and lead to poor economic policy. Nov 14, 2011 csis held a briefing on the world in a balance sheet recession what post2008 u. The key factor contributing to the turnaround is the improvement in the health of japanese corporate balance sheets.
The book sets out a theoretical explanation for the demise of japan in the 1990s. Louis fed discussed the types of assets the fed held both before and after the great recession and showed how much of each asset the fed now holds. The holy grail of macroeconomics presents a brilliant and original framework for understanding. Nomuras chief economist richard koo wrote a book last year called the holy grail of macroeconomics which introduced the concept of a balance sheet recession, which explains economic behaviour in the united states during the great depression and japan during its lost decade. China risks balancesheet recession as stimulus impact.
Author and leading economist richard koo explains the. In effect, businesses have finally removed all bubble. In the united states, where mortgages account for most of the private debt overhang, the federal government should enact stronger measures to reduce principal balances on troubled. His father, koo kwangming, was an activist in the taiwan independence movement then living in exile in japan, and the brother of the prominent taiwanese businessman koo chenfu. The balance sheet recession an excellent presentation by richard koo, chief economist nomura research, where he explains why quantitative easing qe will not work in the gfc. In a balance sheet recession, fed pumping doesnt work. Koos ficus of research is balance sheet recession and how this typical recession made things worse in depression, japan crisis and now the 2007 crisis. A hazardous road for the world economy koo, richard c. Balance sheet recession as the otherhalf of macroeconomics. Balance sheet recession is the reason for secular stagnation. In order to distinguish this type of recession from ordinary recessions, it is referred to here as a balance sheet recession. Buy balance sheet recession hardback book, oxfam, koo, richard c.
It argues that when the causality runs from the corporate balance sheet problems. Use features like bookmarks, note taking and highlighting while reading the escape from balance sheet recession and the qe trap. Sep 28, 2011 for example, in 1991, the uk experienced a recession caused by a demand side shock high interest rates and strong pound. A process of balance sheet deleveraging has spread to nearly every corner of the economy. A term for the current rare disease the global economy is suffering from coined by richard koo in his seminal book the holy grail of macroeconomics where he provides a blueprint for our current malaise and provides what i think is the most comprehensive. Stimulus packages around the world however prevented the global economy to slip into a depression. Richard koo this book aims to warn the readers in the us, uk and japan about the upcoming dangers of qe trap, which is an unfortunate byproduct of balance sheet recessions. A book club sponsored event compare global experiences during the balance sheet recession and find out what is needed for a full recovery the escape from balance sheet recession and the qe trap details the many hidden dangers remaining as the world slowly recovers from the balance sheet recession of 2008. Balance sheet recessions and the qe trap financial sense.
The balance sheet recession, charted ft alphaville. Economists in the united states, europe, and japan differ sharply on what constitutes the correct policy response to the economic crisis. Popular recession books meet your next favorite book. The balance sheet recession concept does not appear in any economics or business textbook. Find out the definitions, history, and causes of recessions and depressions. A balance sheet recession is a particular type of recession driven by the high levels of private sector debt i.
Aug 26, 2011 in a balance sheet recession caused by too much privatesector debt, the government should also use its resources to catalyze debt workouts and debt reductions. This divergence in views stems from the fact that these economies are suffering from a rare type of recession, which has largely been overlooked by the economics profession. In the book, he provides a blueprint for our current malaise and provides what i think is the most comprehensive solution. During the height of the financial crisis, the feds balance sheet ballooned with toxic assets having different kinds of acronyms. If you want to be worried further, heres his paper, u.
The recession, in turn, deepened the credit crunch as demand and employment fell, and credit losses of financial institutions surged. I had previously read koos 2003 book balance sheet recession. Author of many books on japanese economy, his last book the holy grail of macroeconomics. Aug 02, 2017 the fed has tried to reduce its balance sheet six times in the past, with five ending in recession, mkm partners data show. The escape from balance sheet recession and the qe trap details the many hidden dangers remaining as the world slowly recovers from the balance sheet recession of 2008. The escape from balance sheet recession and the qe trap richard koos idea of a debt trauma may be a valid concern. And finally, the global financial crisis, or the great recession, is a balance sheet recession. The euro crisis collapse free exchange the economist. A balance sheet recession is a type of economic recession that occurs when high levels of.
A balance sheet recession is a type of economic recession that occurs when high levels of private sector debt cause individuals or companies to collectively focus on saving by paying down debt rather than spending or investing, causing economic growth to slow or decline. It is characterized by a change in private sector behavior towards saving i. Balance sheet recessions arise in the aftermath of an asset bubble. There is no specific academic theory or classification system for recession shapes. A mustread to an understanding of what japan went through and what the united states and europe may experience is koos latest book the holy grail of macroeconomics. This was seen in the 1929 us stock market crash and the 1990 japanese realestate bubble. Fed balance sheet reduction almost always ends in recession. In the 1970s, japan produced the worlds secondlargest gross national product gnp after the united states and, by the late 1980s, ranked first in gnp per capita worldwide.
A balance sheet is a financial statement that summarizes a companys assets, liabilities and shareholders equity at a specific point in time. This chapter argues that the key feature of these episodes is the bursting of a debtfinanced asset bubble, and that such balance sheet recessions take a long time to recover from. A hazardous road for the world economy kindle edition by koo, richard c download it once and read it on your kindle device, pc, phones or tablets. Compare global experiences during the balance sheet recession and find out what is needed for a full recovery the escape from balance sheet recession and the qe trap details the many hidden dangers remaining as the world slowly recovers from the balance sheet recession of 2008. How to solve a balance sheet recession ft alphaville. Jun 30, 2011 the balance sheet recession hypothesis is strongly associated with nomura chief economist richard koo. In this video from a recent dialogue with the fed, vice president and economist stephen williamson of the st. Author and leading economist richard koo explains the unique political and economic pitfalls that stand in the way of recovery from this rare type of recession that was largely. A literature summary on new balancesheet recession research. Aug 11, 2014 the great recession is often compared to japans stagnation since 1990 and the great depression of the 1930s.
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