How the West is Falling Into the Same Trap as Japan in the 1990s of Failing to Understand the Strangeness of a “Balance Sheet Recession”
The world has witnessed an economic experiment since the global crash of 2008 and the ensuing Great Recession. China immediately provided a massive and sustained fiscal stimulus. The Western countries also initially provided a stimulus, but relatively quickly shifted to austerity and deficit reduction. The result: China is back booming, and the Western economies are struggling, with those cutting deeper faring worse.
INET advisory board member Richard Koo - says that the reason is that we are in a "Balance Sheet Recession," a very rare situation in the wake of bubbles that leave businesses and individuals underwater so they spend all available income paying down debt and do not invest for new growth.
Koo argues that this is almost exactly what happened in Japan after the collapse of their bubble economy in 1990, and that country spent 15 years of trial and error policies before they finally got back to private sector growth. The only thing that solved the problem was massive and sustained government investment to fill the void left by the private sector. Monetary policy did not work since businesses could not be lured back to invest with lower interest rates.
Koo is one of the world's leading authorities on this subject. He is Chief Economist of Nomura Research Institute with responsibilities to provide independent economic and market analysis to Nomura Securities, the leading securities house in Japan. He advised the Japanese government during their difficult era, and he now is doing all he can to help the West understand his point of view.