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Richard Koo on balance sheet recessions

By Mike Konczal

The specter of a Japanese lost decade is still floating out there. Paul Krugman has a post today about yelling fire in Noah's flood, with links to a talk by Adam Posen of the Bank of England.

I'd like to add a link to a talk by Richard Koo from a recent INET Conference, along with his presentation for the talk.

Here's a chart that is noteworthy:

It's a big chart to read, but what is worth noting is that despite the two efforts to introduce fiscal reforms to reduce the deficit (Hashimoto and Koizumi), the deficit immediately exploded. Great. As Koo argues, the economy will not enter self-sustaining growth until the private sector balance sheets are repaired. Even with zero interest rates, there are no borrowers of newly generated savings and debt repayments. With no borrowers, the economy will continue to lose aggregate demand. If you want to be worried further, here's his paper, “U.S. Economy in Balance Sheet Recession: What the U.S. Can Learn from Japan's Experience in 1990-2005.”

-- Mike Konczal is a fellow at the Roosevelt Institute. He blogs about finance, economics and other topics at Rortybomb and New Deal 2.0, and you can follow him on twitter.

By Washington Post Editors  |  May 25, 2010; 6:22 PM ET
 
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Comments

For those interested in a much longer explanation of Koo's work see here:

http://bilbo.economicoutlook.net/blog/?p=3225

Koo is a pretty good economic commentator. He gets that at the zero lower bound fiscal policy is pretty much the only show in town. That alone makes him worth reading. But his imagination is limited by his belief that the government is spending money that the private sector has saved. The truth is just the opposite. Ultimately, it is government spending that is giving the private sector its savings! The government is not borrowing anything. The government only ever borrows back what it has already spent.

Posted by: nklein1553 | May 25, 2010 11:07 PM | Report abuse

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