Interview With Richard Koo Chief Economist, Nomura Research Institute
The World in Balance Sheet Recession: What Post-2008 West Can Learn from Japan 1990-2005 Richard C....
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Transcript of The World in Balance Sheet Recession: What Post-2008 West Can Learn from Japan 1990-2005 Richard C....
The World in Balance Sheet Recession:What Post-2008 West Can Learn from Japan 1990-2005
Richard C. Koo
Chief Economist
Nomura Research Institute
Tokyo
April 2012
40
60
80
100
120
140
160
180
200
220
240
260
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14
US: 10 Cities Composite Home Price Index
(US: Jan. 2000=100, Japan: Dec. 1985=100)
Note: per m2, 5-month moving averageSources: Bloomberg, Real Estate Economic Institute, Japan, S&P, S&P/Case-Shiller® Home Price Indices, as of Mar. 23, 2012
Composite Index
Futures
Japan: Tokyo Area Condo Price1
77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 9 7 98 99
Japan: Osaka Area Condo Price1
Futures
USJapan
Exhibit 1. US Housing Prices Are Moving along the Japanese Experience
2
20
30
40
50
60
70
80
90
100
110
01 02 03 04 05 06 07 08 09 10 11
Down42.0%
from Peak
84 85 86 87 88 89 90 91 92 93 94
(peak = 100)
Note: Peak of US Prices: Oct. 2007, Peak of Japanese Prices: Sep. 1990.Source: Nomura Research Institute, based on Moody's/Real Estate Analytics and Japan Real Estate Institute
Japan: Commercial Land Price Index in Six Major Cities
US: Commercial Property Price Index
"Pretend & Extend"
USJapan
Exhibit 2. US Commercial Real Estate Prices Also Falling to Japanese Levels
3
Exhibit 3. Drastic Rate Cuts Have Done Little to Revive Employment or House Prices
4
0
1
2
3
4
5
6
7
8
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
(%)
Sources: BOJ, FRB, ECB, BOE and RMB Australia. As of Mar. 23, 2012.
Australia
EU
US
UK
Japan
3.5
4.0
4.5
5.0
5.5
6.0
6.5
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.083
85
87
89
91
93
95
97
99
101
103
98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
(%, Seasonally adjusted, inverted)
Unemployment Rate(right scale)
Sources: US Department of Labor, FRB
(2007=100, Seasonally adjusted)
Last seen in 2005
Unemployment rate:Last seen in 1983
Industrial Production:Last seen in 1997
Industrial Production(left scale)
Exhibit 4. US Economy Is still a Long Way from Previous Peak
5
Exhibit 5. Euro-Zone Economy Is still a Long Way from Previous Peak
6
7.0
7.5
8.0
8.5
9.0
9.5
10.0
10.5
11.085
90
95
100
105
110
115
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Sources: Eurostat
(%, Seasonally adjusted, inverted)(Seasonally adjusted, 2005=100)
Industrial Production(left scale)
Unemployment Rate(right scale)
Last seen in 1997
Last seenin 2005
Exhibit 6. Except in Germany, Industrial Production in Europe Is still Weak
7
70
75
80
85
90
95
100
105
110
115
120
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Spain
France
Italy
Germany
(2005 = 100, Seasonally Adjusted)
Source: Eurostat
Level last seen in
2007: Germany
1997: France
1987-88: Italy
1996: Spain
Exhibit 7. Drastic Liquidity Injection Failed to Increase Money Supply (I): US
8
80
100
120
140
160
180
200
220
240
260
280
300
320
340
Monetary Base
Money Supply (M2)
Loans and Leases in Bank Credit
(Aug. 2008 =100, Seasonally Adjusted)
Down 25%
0.5
1.0
1.5
2.0
2.5
3.0
08/1 08/4 08/7 08/10 09/1 09/4 09/7 09/10 10/1 10/4 10/7 10/10 11/1 11/4 11/7 11/10 12/1
(%, yoy) Consumer SpendingDeflator (core)
Sources: Board of Governors of the Federal Reserve System, US Department of CommerceNote: Commercial bank loans and leases, adjustments for discontinuities made by Nomura Research Institute.
Exhibit 8. Drastic Liquidity Injection Failed to Increase Money Supply (II): EU
9
90
100
110
120
130
140
150
160
170
180
Base Money
Money Supply (M3)
Credit to Euro Area Residents
(Aug. 2008 =100, Seasonally Adjusted)
0.6 0.8 1.0 1.2 1.4 1.6 1.8 2.0 2.2
08/1 08/4 08/7 08/10 09/1 09/4 09/7 09/10 10/1 10/4 10/7 10/10 11/1 11/4 11/7 11/10 12/1
(%, yoy)
CPI core
Sources: ECB, EurostatNote: Base money's figures are seasonally adjusted by Nomura Research Institute.
Exhibit 9. Drastic Liquidity Injection Failed to Increase Money Supply (III): UK
10
70
100
130
160
190
220
250
280
310
340
Reserve Balances + Notes & CoinMoney Supply (M4)Bank Lending (M4)
Aug. 08'
(Aug. 2008 =100, Seasonally Adjusted)1
0123456
07/1 07/7 08/1 08/7 09/1 09/7 10/1 10/7 11/1 11/7 12/1
CPI (ex. Indirect Taxes)(%, yoy)
Down 16%
Sources: Bank of England, Office for National Statisics, UKNotes: 1. Reserve Balances data are seasonally unadjusted. 2. Money supply and bank lending data exclude intermmediate financial institutions.
Exhibit 10. Drastic Liquidity Injection Failed to Produce Drastic Increase in Money Supply (IV): Japan
11
-3-2-101234
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
(y/y, %) CPI Core
50
100
150
200
250
300
350
Monetary Base
Money Supply (M2)
Bank Lending
1990/1Q
(1990/1Q = 100, Seasonally Adjusted)
Textbook Economics
(Monetary PolicyEffective)
Balance SheetRecession(Monetary Policy NOT Effective)
QuantitativeEasing
Down 41%
Note: Bank lending are seasonally adjusted by Nomura Research Institute.Source: Bank of Japan
Earthquake
Exhibit 11. Japan’s De-leveraging with Zero Interest Rates Lasted for 10 Years
12
-6
-4
-2
0
2
4
6
8
10
-15
-10
-5
0
5
10
15
20
25
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Borrowings from Financial Institutions (left scale)
Funds raised in Securities Markets (left scale)
CD 3M rate (right scale)
(% Nominal GDP, 4Q Moving Average) (%)
Sources: Bank of Japan, Cabinet Of f ice, Japan
Debt-financedbubble
(4 years)
Balance sheetrecession(16 years)
Funds Raised by Non-Financial Corporate Sector
down87%
25
40
55
70
85
100
115
130
0
20
40
60
80
100
120
140
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
(Sep.1990=100, Seasonally Adjusted)
Real GDP(Right Scale)
Land Price Index in Six Major Cities(Commercial, Left Scale)
(Sep. 1990=100)
Sources: Cabinet Of f ice, Japan Real Estate Institute
Nominal GDP (Right Scale)
Likely GDP Path w/o Government Action
Last seen in 1973
Cumulative 90-05 GDP
Supported by Government
Action: ~ ¥2000 trillion
Cumulative Loss of
Wealth on Shares and Real Estate
~ ¥1500 trillion
Exhibit 12. Japan’s GDP Grew in spite of Massive Loss of Wealth and Private Sector De-leveraging
13
overall deficit ¥460
trillion
20
30
40
50
60
70
80
90
100
110
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Source: Ministry of Finance, JapanNote: FY 2011 includes 4th supplementary budget and FY2012 is initial budget.
Government spending
Tax revenueBubble Collapse
(Tril. yen)
cumulativecyclical deficit 90-05
¥315 trillion
Exhibit 13. Japanese Government Borrowed and Spent the Unborrowed Savings of the Private Sector to Sustain GDP
14
Exhibit 14. Premature Fiscal Reforms in 1997 and 2001 Weakened Economy, Reduced Tax Revenue and Increased Deficit
15
0
10
20
30
40
50
60
70
80
0
10
20
30
40
50
60
70
80
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Tax Revenue
Budget Deficit
Hashimotofiscal
reform Koizumi
fiscal reform
(Yen tril.) (Yen tril.)
(FY)
Global Financial
Crisis
*
Obuchi-Morifiscal
stimulus
Earthquake
Source: Ministry of Finance, JapanNotes: Latest f igures(*) are estimated by MOF. From FY2011, f igures includes reconstruction taxes and bonds.
unnecessaryincrease in
deficit:¥103.3 tril.
Exhibit 15. US in Balance Sheet Recession: US Private Sector Increased Savings Massively after the Bubble
16
Shift from 4Q 2006 in
private sector:9.00% of GDP
Corporate: 2.15%Households:
6.86%
Shift from 4Q 2006 in
public sector: 7.28% of GDP
-12
-10
-8
-6
-4
-2
0
2
4
6
8
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Housing Bubble
IT Bubble
(Financial Surplus)
(Financial Deficit)
(as a ratio to nominal GDP, %, quarterly)
Rest of the World
Households
General Government
Corporate Sector(Non-Financial Sector +
Financial Sector)
Financial Surplus or Deficit by Sector
Note: For the latest f igures, 4 quarter averages ending with 4Q/11' are used.Sources: FRB, US Department of Commerce
Exhibit 16. UK in Balance Sheet Recession: UK Private Sector Increased Savings Massively after the Bubble
17
Shift from 1Q 2007 in
private sector:6.77% of GDPCorporate: 0.88%
Households: 5.90%
Shift from 1Q 2007 in
public sector:6.45% of GDP
-12
-9
-6
-3
0
3
6
9
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Note: For the latest f igures, 4 quarter averages ending with 3Q/11' are used.Source: Of f ice for National Statistics, UK
(as a ratio to nominal GDP, %)
(Financial Surplus)
(Financial Deficit)
Rest of the World
Households
General Government
Corporate Sector(Non-Financial Sector +
Financial Sector)
Financial Surplus or Deficit by Sector
0
1
2
3
4
5
6
2007 2008 2009 2010 2011 2012
UKUSSwedenSwitzerlandJapan
(%)
*Note: Excluding Eurozone. As of Mar. 22, 2012.Source: Bloomberg
3%
1.3%
Exhibit 17. Global Bond Yields* Nearing Japanese Levels
18
Japanese Bond Yield
in 1997
Exhibit 18. Euro-Zone Bond Yields Are Diverging Sharply
19
0
5
10
15
20
25
30
35
40
2007 2008 2009 2010 2011 2012
Greece
Ireland
Portugal
Spain
Italy
France
Germany
(%)
Note: As of Mar. 22, 2012.Source: Bloomberg
Exhibit 19. Euro-zone in Balance Sheet Recession: Euro-zone Private Sector Increased Savings Massively after the Bubble
20
-8
-6
-4
-2
0
2
4
6
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Rest of the World
(as a ratio to nominal GDP, %)
Households
(Financial Surplus)
(Financial Deficit)
Corporate Sector(Non-Financial Sector + Financial Sector)
General Government
Note: For the latest f igures, 4 quarter averages ending with 3Q/11' are used.Source: ECB
Financial Surplus or Deficit by Sector
Shift from 3Q 2008 in
private sector:3.66% of GDP
Corporate: 3.12%Households: 0.54%
Shift from 3Q 2008 in
public sector:3.12% of GDP
Shift from 3Q 2007 in
private sector:17.65% of GDPCorporate: 12.24%Households: 5.41%
Shift from 3Q 2007 in
public sector:11.62% of GDP
-12
-9
-6
-3
0
3
6
9
12
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Note: For the latest f igures, 4 quarter averages ending with 3Q/11' are used.Source: Banco de España
(as a ratio to nominal GDP, %)
(Financial Surplus)
(Financial Deficit)
Rest of the World
Corporate Sector(Non-Financial Sector + Financial Sector)
General Government
Households
Financial Surplus or Deficit by Sector
Exhibit 20. Spain in Balance Sheet Recession: Spanish Private Sector Increased Savings Massively after the Bubble
21
Exhibit 21. Ireland in Balance Sheet Recession: Irish Private Sector Increased Savings Massively after the Bubble
22
-35
-30
-25
-20
-15
-10
-5
0
5
10
15
20
2002 2003 2004 2005 2006 2007 2008 2009 2010
Sources: Eurostat, Central Statistics Of f ice, Ireland
(as a ratio to nominal GDP, %)
Financial Surplus or Deficit by Sector
Corporate Sector(Non-Financial Sector + Financial Sector)
(Financial Surplus)
Rest of the World
HouseholdsGeneral
Government
(Financial Deficit)
Shift from 2007in private sector:29.60% of GDPCorporate: 14.99%
Households: 14.61%
Shift from 2007 in public sector:31.20% of GDP
-12
-9
-6
-3
0
3
6
9
12
99 00 01 02 03 04 05 06 07 08 09 10 11
Note: For the latest f igures, 4 quarter averages ending with 3Q/11' are used.Source: Banco de Portugal
Rest of the World
(Financial Surplus)
Households
Corporate Sector(Non-Financial Sector + Financial Sector)
(Financial Deficit)
General Government
(as a ratio to nominal GDP, %)
Financial Surplus or Deficit by Sector
Shift from 2Q 2008 in
private sector:8.65% of GDPCorporate: 5.20%
Households: 3.34%
Shift from 2Q 2008 in
public sector:5.40% of GDP
Exhibit 22. Portugal in Balance Sheet Recession: Portuguese Private Sector Increased Savings Massively after the Bubble
23
Exhibit 23. Sustaining Fiscal Stimulus in Democracy during Peacetime Is Difficult
24
Authoritarian Democracies
No opposition "Bond market might rebel"
(if any, quickly suppressed) "Big Government is BAD Government"
"Monetary Policy should work better"
"Aging Population"
"Should not use grand-children's credit card"
"Structual Reform is what is needed"
"Maastricht Treaty and Fiscal Compact"
"Must Avoid Greece's Fate"
...
Exhibit 24. Balance Sheet Correction in France Was Minimal
25
-8
-6
-4
-2
0
2
4
6
8
10
99 00 01 02 03 04 05 06 07 08 09 10
Sources: ECB, Eurostat
(as a ratio to nominal GDP, %)
Financial Surplus or Deficit by Sector
Rest of the WorldHouseholds
General Government
Corporate Sector(Non-Financial Sector + Financial Sector)
(Financial Surplus)
(Financial Deficit)
Shift from 2006private sector:3.43% of GDPCorporate: 2.85%
Households: 0.57%
Shift from 2006public sector:4.71% of GDP
-12
-10
-8
-6
-4
-2
0
2
4
6
8
10
12
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
General Government
Corporate Sector(Non-Financial Sector +
Financial Sector)
Households
Rest of the World
(as a ratio to nominal GDP, %, quarterly)
(Financial Surplus)
(Financial Deficit)
Note: For the latest f igures, 4 quarter averages ending with 3Q/11' are used.Sources: Banca d'Italia, Eurostat
Financial Surplus or Deficit by Sector
Shift from 3Q 2008 in
private sector:2.53% of GDPCorporate: 1.47%
Households: 1.06%
Shift from 3Q 2008 in
public sector:1.81% of GDP
Exhibit 25. Balance Sheet Correction in Italy Was Minimal
26
-15
-10
-5
0
5
10
15-15
-10
-5
0
5
10
15
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
(as a percentage of nominal GDP) (as a percentage of nominal GDP, inverted)
Financial Assetsleft scale
Financial Liabilities right scale
Note: For the latest f igures, 4 quarter averages ending with 3Q/11' are used.Sources: Banca d'Italia, Eurostat
Exhibit 26. Italian Corporates Are Back to Normal After 2 Difficult Years
27
Exhibit 27. Italian Households Are Not Affected by Crisis
28
-16
-12
-8
-4
0
4
8-8
-4
0
4
8
12
16
95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
(as a percentage of nominal GDP) (as a percentage of nominal GDP, inverted)
Financial Assetsleft scale
Financial Liabilities right scale
Note: For the latest f igures, 4 quarter averages ending with 3Q/11' are used.Sources: Banca d'Italia, Eurostat
Exhibit 28. Greek Private Sector Is Drawing Down Savings to Survive
29
-20
-15
-10
-5
0
5
10
15
20
25
01 02 03 04 05 06 07 08 09 10 11
(as a ratio to nominal GDP, %, quarterly)
(Financial Surplus)
(Financial Deficit)
Rest of the World
Households
General Government
Corporate Sector(Non-Financial Sector +
Financial Sector)
Note: For the latest f igures, 4 quarter averages ending with 2Q/11' are used.Sources: Bank of Greece, Eurostat
Financial Surplus or Deficit by Sector
Shift from 2Q 2008 in
private sector:1.18% of GDPCorporate: 4.27%
Households: -3.09%
Shift from 3Q 2008 in
public sector:1.82% of GDP
Exhibit 29. Greek Corporates Are Both Drawing Down Savings and Reducing Debt
30
-15
-10
-5
0
5
10
15-15
-10
-5
0
5
10
15
00 01 02 03 04 05 06 07 08 09 10 11
Financial Assets
Financial Liabilities
left scale
right scale
(as a percentage of nominal GDP) (as a percentage of nominal GDP, inverted)
Note: For the latest f igures, 4 quarter averages ending with 3Q/11' are used.Sources: Bank of Greece, Eurostat
Exhibit 30. Greek Households Are Both Drawing Down Savings and Reducing Debt
31
-20
-15
-10
-5
0
5
10
15-15
-10
-5
0
5
10
15
20
00 01 02 03 04 05 06 07 08 09 10 11
Financial Assets
Financial Liabilities
left scale
right scale
(as a percentage of nominal GDP) (as a percentage of nominal GDP, inverted)
Note: For the latest f igures, 4 quarter averages ending with 3Q/11' are used.Sources: Bank of Greece, Eurostat
75
100
125
150
175
200
225
250
275
300
325
350
2007 2008 2009 2010 2011 2012
Eurozone
US
UK
Eurozone
US
UK
Monetary Base(=Liquidity)
Money Supply
(Aug. 2008 = 100, seasonally adjusted)
Aug. 2008
Notes: 1. UK's reserve balances data are seasonally unadjusted. 2. UK's money supply and bank lending data exclude intermmediate f inancial institutions. 3. Base money's f igures of Eurozone are seasonally adjusted by Nomura Research Institute.
Source: Nomura Research Institute, based on FRB, ECB and Bank of England data.
US-like monetary
easing would allow ECB to
supply €945.5 bil. worth of
additional liquidity.
estimates
Exhibit 31. ECB Facing Balance Sheet Recession Can Supply Large Amounts of Liquidity without Igniting Inflation
32
Shift from 4Q 2008 in
private sector:5.76% of GDP
Corporate: 3.29%Households: 2.47%
Shift from 4Q 2008 in
public sector:6.86% of GDP
-18
-15
-12
-9
-6
-3
0
3
6
9
12
15
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
(Financial Deficit)
(Financial Surplus)
(as a ratio to nominal GDP, %)
Households
Rest of the World
Corporate Sector(Non-Financial Sector +
Financial Sector)
General Government
Financial Surplus or Deficit by Sector
Note: For the latest f igures, 4 quarter averages ending with 4Q/11' are used.Sources: Bank of Japan, Flow of Funds Accounts, and Government of Japan, Cabinet Of f ice, National Accounts
Balance Sheet Recession Global Financial
Crisis
Exhibit 32. Exit Problem (I): Japanese Corporates Increased Savings Again After Lehman
33
Exhibit 33. Japanese Corporates Are Increasing Savings
34
-25
-20
-15
-10
-5
0
5
10
15
20
25
30-30
-25
-20
-15
-10
-5
0
5
10
15
20
25
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
right scale
Note: For the latest f igures, 4 quarter averages ending with 4Q/11' are used.Sources: Bank of Japan, Flow of Funds Accounts, and Government of Japan, Cabinet Of f ice, National Accounts
Financial Liabilities
Financial Assets
left scale
(FY)
(as a percentage of nominal GDP) (as a percentage of nominal GDP, inverted)
Exhibit 34. Japanese Households Are Both Increasing Savings and Reducing Debt
35
-21
-18
-15
-12
-9
-6
-3
0
3
6
9
12-12
-9
-6
-3
0
3
6
9
12
15
18
21
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11(FY)
Note: For the latest f igures, 4 quarter averages ending with 4Q/11' are used.Sources: Bank of Japan, Flow of Funds Accounts, and Government of Japan, Cabinet Of f ice, National Accounts
Financial Assetsleft scale
Financial Liabilities right scale
(as a percentage of nominal GDP, inverted)(as a percentage of nominal GDP)
Exhibit 35. Exit Problem (II): German Private Sector Refused to Borrow Money after 1999-2000 Telecom Bubble
36
-20
-15
-10
-5
0
5
10
15
92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
(as a ratio to nominal GDP, %, quarterly)
(Financial Surplus)
(Financial Deficit)
Rest of the World
Households
General Government
Corporate Sector(Non-Financial Sector +
Financial Sector)
Notes: The assumption of Treuhand agency's debt by the Redemption Fund for Inherited Liabilities in 1995 is adjusted. For the latest f igures, 4 quarter averages ending with 3Q/11' are used.Source: Deutche Bundesbank
Balance Sheet
Recession
Telecom Bubble
Financial Surplus or Deficit by Sector
Shift from 3Q 2000
to 1Q 2005 in private sector:12.59% of GDPCorporate: 9.98%
Households: 2.60%
Shift from 3Q 2000
to 1Q 2005 in public sector:4.91% of GDP
Exhibit 36. German Corporates Are Saving More than Borrowing
37
-20
-15
-10
-5
0
5
10
15-15
-10
-5
0
5
10
15
20
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
(as a percentage of nominal GDP, inverted)(as a percentage of nominal GDP)
Financial Assetsleft scale
Financial Liabilities right scale
Notes: The assumption of Treuhand agency's debt by the Redemption Fund for Inherited Liabilities in 1995 is adjusted. For thelatest f igures, 4 quarter averages ending with 3Q/11' are used.Source: Deutche Bundesbank
Exhibit 37. German Households Are Refusing to Borrow
38
-12
-8
-4
0
4
8-8
-4
0
4
8
12
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
(as a percentage of nominal GDP, inverted)(as a percentage of nominal GDP)
Financial Assetsleft scale
Financial Liabilities right scale
Notes: The assumption of Treuhand agency's debt by the Redemption Fund for Inherited Liabilities in 1995 is adjusted. For thelatest f igures, 4 quarter averages ending with 3Q/11' are used.Source: Deutche Bundesbank
reason for weak German house prices despite record
low interest rate
Exhibit 38. Exit Problem (III): U.S. Took 30 Years to Normalize Interest Rate after 1929 Because of Private Sector Aversion to Debt
39
0
1
2
3
4
5
6
7
8
9
1920 21 2223 24 2526 27 2829 30 3132 33 3435 36 3738 39 4041 42 4344 45 4647 48 4950 51 5253 54 5556 57 5859 60
US government bond yieldsPrime BA, 90daysUS government bond yields 1920-29 average (4.09%, June 1959)Prime BA, 90days 1920-29 average (4.13%, September 1959)
Oct '29 NY StockMarket Crash
Jun '50 Korean War
Dec '41 PearlHarbor Attack
(%)
'33~New Deal
Source: FRB, Banking and Monetary Statistics 1914-1970 Vol.1, pp.450-451 and 468-471, Vol.2, pp.674-676 and 720-727
Exhibit 39. Japanese Money Supply Kept up by Government Borrowings
40
CreditExtended tothe Private
Sector¥601.6 tril.
CreditExtended to the
Public Sector¥247.2 tril.
(+106.8)
Foreign assets
(net)
¥74.1 tril.(+41.4)
Foreign Assets(net)
¥32.7 tril.
Credit Extendedto the Public
Sector¥140.4 tril.
Money Supply(M2+CD)
¥621.5 tril.
CreditExtended tothe Private
Sector¥501.8 tril.
(-99.8)
Other Liabilities
(net)
¥78.7 tril.(-74.5)
Other Liabilities(net)
¥153.2 tril.
Money Supply
(M2+CD)
¥744.4 tril.(+122.9)
Balance Sheets of Banks in Japan
December 2007
Total Assets ¥823.1 tril. (+48.4)Total Assets ¥774.7 tril.
December 1998Assets
Assets
Liabilities
Liabilities
Source: Bank of Japan "Monetary Survey"
Money Supply Is Kept Up by Government Borrowings (II)
Exhibit 40. US Money Supply Increased after 1933 because of Government Borrowings
41
CreditExtended tothe Private
Sector$29.63 bil.
Deposits$32.18 bil.
CreditExtended tothe Public
Sector$5.45 bil.
Other Assets$8.02 bil.
Reserves$2.36 bil.
Capital$6.35 bil.
OtherLiabilities$6.93 bil.
June 1929 Assets Liabilities
Total Assets $45.46 bil. Total Assets $33.04 bil. (-12.42) Total Assets $46.53 bil. (+13.49)
CreditExtended
to thePrivateSector
$15.71 bil.(-0.09)Credit
Extended tothe Private
Sector$15.80 bil.
(-13.83)
June 1936 Assets Liabilities
June 1933 Assets Liabilities
Deposits$23.36 bil.
(-8.82)
Deposits$34.10 bil.(+10.74)
CreditExtended
to thePublicSector
$8.63 bil.(+3.18)
CreditExtended
to thePublicSector
$16.30 bil.(+7.67)
OtherAssets
$6.37 bil.(-1.65)
OtherAssets
$8.91 bil.(+2.54)
Reserves$2.24 bil.
(-0.12)
Reserves$5.61 bil.(+3.37)
OtherLiabilities$4.84 bil.
(-2.09)
OtherLiabilities$7.19 bil.(+2.35)
Capital$4.84 bil.
(-1.51)
Capital$5.24 bil.(+0.40)
(= Money Supply)
Source: Board of Governors of the Federal Reserve System (1976) Banking and Monetary Statistics 1914-1941 pp.72-79
Balance Sheets of All Member Banks
Exhibit 41. Recovery from Lehman Shock Is NOT Recovery from Balance Sheet Recession
42
Source: Nomura Research Institute
?
Lehman Shock
Actual GDP Path
Current Location
Likely GDP Pathwithout Lehman Shock
Weaker Demand from Private Sector
De-leveraging
Stronger Demand from Government's
Fiscal Stimulus
(A)
(B)
Economic weakness from private-sector
de-leveraging
Economic weakness from policy mistake
on Lehman
BubbleBurst
Exhibit 42. Yin Yang Cycle of Bubbles and Balance Sheet Recessions
43
Source: Richard Koo, The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession , John Wiley & Sons, Singapore, April 2008 p.160.
(1) Monetary policy is tightened, leading the bubble to collapse.
(5) Private sector phobia towards borrowing gradually disappears,and it takes a more bullish stance towards fund raising.
(8) With the economy healthy,the private sector regains its vigour,
and confidence returns.
(9) Overconfident private sector triggers a bubble.
(7) Monetary policy becomes the maineconomic tool, while deficit reduction
becomes the top fiscal priority.
(6) Private sector fund demand recovers,and monetary policy starts working again.
Fiscal policy begins to crowd out private investment.
(4) Eventually private sector finishes its debt repayments,ending the balance sheet recession.
But it still has a phobia about borrowing which keepsinterest rates low, and the economy less than fully vibrant.
Economy prone to mini-bubbles.
(3) With everybody paying down debt,monetary policy stops working.
Fiscal policy becomes the main economic toolto maintain demand.
(2) Collapse in asset prices leaves private sectorwith excess liabilities,
forcing it into debt minimization mode.The economy falls into a balance sheet recession.
BubbleYin (=Shadow) Yang (=Light)
US
Spain
UK
Germany
Japan
Exhibit 43. Contrast Between Yin and Yang Phases of Cycle
44
Yang Yin
Textbook economy Balance sheet recession
Adam Smith's "invisible hand" Fallacy of composition
Assets > Liabilities Assets < Liabilities
Profit maximization Debt minimization
Greatest good for greatest number Depression if left unattended
Effective Ineffective (liquidity trap)
Counterproductive (crowding-out) Effective
Inflationary Deflationary
Normal Very low
Virtue Vice (paradox of thrift)
a) LocalizedQuick NPL disposal
Pursue accountabilityNormal NPL disposalPursue accountability
b) SystemicSlow NPL disposal
Fat spreadSlow NPL disposal
Capital injection
Source: Richard Koo, The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession , John Wiley & Sons, Singapore, 2008
5) Outcome
6) Monetary policy
7) Fiscal policy
1) Phenomenon
2) Fundamental driver
3) Corporate financial condition
4) Behavioral principle
8) Prices
9) Interest rates
10) Savings
11) Remedy forBanking Crisis