All Hail Richard Koo's Glorious Keynesian Revolution
Nomura's Richard Koo, whose work we have previously discussed extensively on Zero Hedge, is out and about presenting the case for unbridled deficit spending as usual. Amusingly, the big question according to Koo is "why are we not seeing more bubbles." Well, when oil hits $90 on Monday, coupled with 20% underemployment, hopefully the market will answer Mr. Koo's question. Also, Dow at 36,000 in 200 days should pretty much put an end to that debate. Some more practical observations: demand for loans is below zero (which is not news to anyone) i.e., demand for fund is still contracting even with zero interest rates. As always, Koo parlays this in a parallel with Japan, and how nothing has really worked for over 10 years. His key observation - if companies don't want to borrow when rates are zero, they should just return their equity capital to shareholders.
Some other upcoming parallels with Japan, in which commercial real estate dropped 87% - courtesy of a massive trade surplus, Japan used the excess cash to pay down debt. Alas, the US has the worst trade deficit in the world. So that comparison doesn't work. But it explains why US companies have hoarded the greatest amount of cash in history.
Yet the greatest insight by Koo is on the balance sheet recession which Japan lived through, and which according to Rosenberg and many others, we are in right now. "If the economy is suffering from a balance sheet recession, where the people are minimizing debt instead of maximizing profits, the economy will never enter a self-sustaining growth, until the private sector balance sheets are repaired. The second point is that if you try to reduce government spending in this type of environment, unless you are absolutely certain that the money that the government refused to borrow will be borrowed and spent by the private sector quickly, I am afraid fiscal reform will fail. In Japan we tried it in two occasions, in 1997 and 2001, and both ended in massive failure. In 1997 we listened to the IMF and OECD and those people who know nothing about anything [Greece are you listening]. They told us to cut the budget deficit. We tried that, the economy collapsed massively and then we hit the banking crisis, the budget deficit skyrocketed. And again we tried that in 2001, that didn't work either."
Full presentation by Koo:
And just some last words of caution on private borrowing from Morgan Stanley:
Buyer beware: Corporations issued $93 bn in March the largest monthly issuance since May 2009 when interest rates rose sharply and UST 10y yields peaked near 4%. Investment grade corporate issuance is up 14% year-to-date versus 2009 ($191.8 bn in 2009 versus $218.7 bn in 2010). What is interesting is that this increase in issuance is coming at a time when bond yields are at the top of the 9-month range. We see this as a clear signal that corporations are concerned about rising rates and are issuing bonds to lock in attractive funding while they can. On the demand side however, flows into bond funds continue at a record pace, despite a real risk to a move to higher rates. There is a clear dichotomy of views and we believe that the bond issuer will be the ultimate beneficiary and bond investors should be more wary.