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….(read more)
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Richard Koo is a prominent economist known for his theory on the “Balance Sheet Recession,” also known as the “Koo’s theory.” His work has gained attention and recognition in the economic field for providing a unique perspective on how countries and economies can recover from financial crises.
Koo’s theory focuses on the concept that during a balance sheet recession, businesses and households focus on reducing debt and repairing their balance sheets rather than spending or investing in the economy. This leads to a decrease in aggregate demand, as consumers and businesses hold back on spending, which in turn leads to a prolonged period of economic stagnation.
Koo’s theory gained prominence during Japan’s economic crisis in the 1990s, where he observed that despite low interest rates and government stimulus, the economy continued to struggle. He argued that the focus should be on encouraging debt reduction rather than stimulating spending. This approach contrasts with traditional Keynesian economics, which advocates for increased government spending to stimulate the economy during a recession.
In his influential book, “The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession,” Koo outlines the causes and consequences of balance sheet recessions and provides insights on how to navigate and recover from such economic downturns. He emphasizes the need for government support and policies that encourage debt reduction and provide stability for businesses and households.
Koo’s theory has sparked debate and discussion among economists and policymakers, with some advocating for a reevaluation of economic policies during times of recession. His work has also been influential in understanding and addressing the aftermath of the 2008 global financial crisis, as well as the ongoing challenges faced by economies during the COVID-19 pandemic.
As the global economy continues to navigate through periods of uncertainty and financial instability, Richard Koo’s theory on balance sheet recessions offers valuable insights for policymakers and economists. By understanding the dynamics of debt reduction and the impact on aggregate demand, countries can develop more effective strategies for recovery and long-term economic stability.
Overall, Richard Koo’s contributions to the field of economics have provided a fresh perspective on understanding and addressing the complexities of economic downturns. His insights have the potential to reshape the way we approach and respond to future financial crises, ultimately leading to more sustainable and resilient economies.
This is so important in 2023 in US. Richard Koo has just made a predicition of a hard landing in US
So the solution is for govt to take on more debt when private sectors pay down theirs.
2023
Perfectly informative video, I am glad I heard it from Mr. Koo.
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?
Still happening in USA in 2021…
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 explains why QE during the financial crises didn't cause inflation in the CPI.
Wow
9:23 “this is a completely different disease, it’s not common cold, it’s pneumonia”, mind blown
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.
This is gold in 2020. Looks liek most western countries will follow the Japan path.
Is that you Ray Dalio?
A lot of talk yet nothing changed after their 'relevation' moment. GDP chart is the same as it was 5, 10, 15, or 20 years ago. The truth this fine gentleman refused to admit is that Japan prosper and hot years are behind. Now the China is the new hot kid in the town. Who's next after them, only God knows. The constant change is the only permanent thing
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.
8:15 crowding out effect would then occur due to government spending right????
7:58 "nothing haaaaarppens"
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: http://bilbo.economicoutlook.net/blog/?p=5345
Thank you
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.
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!"
his english is so annoying
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.
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.
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.
Good video
his paper on this issue is also great…
How so?
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
I like his hair.
my prediction was right. china will be the next japan.
[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.
But the point is IF the recession was caused in large part by the very things that are claimed to cure a recession, common sense should tell you that any real lasting impact will be highly unlikely for the simple reason that card has already been played. The guys claiming to know how to cure a recession are the very same guys who were blind to the fabricated bubble that caused the recession in the first place and still refuse to accept the obvious causes.
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.
this freakin macro economists, voodoo believers can't do just nothing against failing society. money is not the solution, monetary distribution is an indicator and btw someone else's debt. and this distribution is in a deadlock. everybody has enough money, but no good entrepreneurs willing to go into debt (a promise of delivering value in future), making it a false feeling of safety. cut the believe that money is a safe harbor and make people engage in mutual beneficial endeavors.
Our govn't is one big mafia if you havn't noticed! And it has the monopoly to write law and use forces! I'm not ready to defend anarchy capitalism yet, but i'm leaning towards it. Because it is infinitely better than the monopoly mafia we have today. Think about all the protection money(tax) you have to pay, the the consequence of you not paying! Then think about ebay and the emergence of paypal and the rating system, and its main competitor Amazon. Think of them as mafia but none has monopoly.
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.
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.
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.
PAUL KRUGMAN WAS RIGHT..!!!! YEEEEEEE