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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."
However, in 2001, real Debt/GDP was not 400% for the developed world, and according to the BIS going on to double digit multiples of GDP by 2040 when accounting for welfare-state programs.
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.
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He's Koo Koo for Keynesianism!
I am Chumbawamba.
I don't care who you are, that's funny. :)
I am sure Koo really likes the idea of no reserve requirements.
No bubbles? How far do stocks, REITs, oil, or gold have to go before this idiot sees a bubble?
The answer is we have to go through it, and then they can look back at it a few years later and see the curve achieve cliff-like attributes after the peak. Of course, the worst news is they will look at them and not see the bubbles.
Keynesianism always operates on an eternal timeline with infinite resources, so that no matter what happens, it wasn't tried for long enough, and/or it wasn't tried on a grand enough debt scale.
Why would companies return capital to
shareholders? Management has been
taking the capital out themselves!
Forget the shareholders!
Everyone is bankrupt and he's talking profits. Japan is a bankrupt project nation , and now being bankrupt with grand ideas of an Asian Alliance with it's historic foe China. I'm sure thats gonna be a great relationship.. Not!
That is very good idea, management gets big rises, dividends grow so the shares price is going up! Then after one year when your shares go up 20% you sell some stock and pay back the loan! Everybody is happy! Except that nothing was created except some paper money.
koos for dog katcher
from a poster called cyclist
This crisis will propel gold in a spiked trajectory around the third week of April with a secondary spike in the first week of May.After it will cruise down into the first week of July at its support of around 1350.
The main market will also get into a blow off state as it is the beneficiary of European money fleeing the Euro.BKX is the canary and heading to 60.
I don't see any meaningful decline of the mainmarket in the sea of paper that is present.The change will come when the 30 year bonds crack the 113.
The market down turn will start around September with global shortages in food and energy on its heels.
Koo can go choke on a Kalifornia roll.
Koo is the only guy who "gets" it. There is no hyperinflation nor long-lasting recovery when there is no (not enough) demand for debt. The US government alone won't be offesetting lower credit demand by the private sector, just like in Japan.
your a government grade 18 expecting a raise .let me guess. lol
godfader
you know beans about economics
so more of the same . if the problem lingers on just keep digging the hole deeper
Although I suspect most readers here would disagree, I think Koo's thesis makes some sense..... as we see events unfold in the next several months, it might be good to keep Koo's thesis in the back of our mind as a reason for what is happening.
Koo's a moron. Everyone is trying to compare Japan to the U.S. to justify their macroeconomic perspectives yet when you question these clowns about the global systemic risk because Japan's Yen was NOT the world's reserve currency they stutter and stammer and say "it can't happen here" and other such nonsense.
His theory that you can expand deficits without actually putting everything on the books to increase those deficits nor can anyone call this a self-sustaining recovery until the balance sheets are forced to reflect actual valuations of the assets they are declaring. This bullcrap is going to implode sooner rather than later and I don't care how many guns you point at the FASB, eventually cash flow removes the mask of AAA to those securities and will destroy the institutions who claim them as part of their Tier 1 capital.
keynesians are either ignorant of the concept and nature of economic trade off, or, seek to exploit that ignorance in others.
Keynes was an economic terrorist
anyone follows him is either a criminal or at best just a complete grade AAA fool
Hahahahahahah, look at the billboard blurb behind him! "NEW ECONOMIC THINKING"!
Just let the shit hit the fan and don't worry about the consequences. It's pure sophistry to think governments can control economies.
best post here today.
The longer these govenments think they can control and mess with the inevitable the worse the melt down will be
How to Corner the Gold Market
TSF - March 30, 2010
http://www.tavakolistructuredfinance.com/Gold.pdf
How they cannot piece that together in all these years is frustrating and intentional. The only thing that does change over time are the debate and language to keep up with the lies in order to rationalize kicking the can just one last time.
Economics is simple to understand. They decided to make it a psuedo science contingent upon a masters needed in order to understand these few basic and ancient concepts of mercantilism:
1) Owing someone money is not good.
2) Someone owing you money is good until they cease making payments.
3) When you create a good through hard labor, innovation or invention we are then permitted to barter or sell that good in order to attain other goods based on the value of my good.
4) I can also choose to save the value of my good in gold or other monies perhaps to invest in a venture.
5) Gold has never been worthing nothing
6) Fiat currency, fractional banking, coin clipping and dilution of currency always ends disastrously.
7) The world does not need 1 man to grow corn, 1 to harvest and 8 to sell those ears of corn back and forth between one another 30 times while taking a nibble each time. It needs 7 of those men to realize the time for counting corn is over and they are required to return to the fields (U.S. manufacturing)
And finally in the early days of trade Capt. Kensington could not park his vessel just off shore and show the traders on shore the dozens cattle on board from a distance and ask to borrow against them..especially when all those cows are cardboard cutouts like they are today.
It's amazing some people still listen to this guy. His policies resulted in two decades (and continuing) stagnation in Japan, not to mention the US is not Japan (there are so many fundamental differences here: reserve currency, trade deficit vs. surplus, consumer vs. export oriented economy, financial vs. manufacturing, Western vs. Confucian culture).
A failed policy maker from a largely uncomparable economy has the best advice? Hardly. It's just his views of more money printing happens to agree with the Fed, which is looking for any support, however flimsy, of their fraud masqueraded as sound economic theory.
the japanese economy would have fallen into a depression if they had done nothing. You have obviously not even listened to him. Read this
http://www.house.gov/apps/list/hearing/financialsvcs_dem/richardc.koo.pdf
So, you're using his own defense of his policies to defend his policies? Sweet!
read the whole thing, tell me in which part you're disagreeing and why. Otherwise just STFU.
STFU? More Liberal/Keynesian debate tactics?
The point is that anything Koo says would, by default, show that he is correct. To say that if Japan had not blown up its debt and robbed the savings and retirement accounts of its fine people, they would be worse off is a specious argument which always beg for evidence. Saying it is so is not evidence.
The counter argument of letting the economy punish the bad players, seek real value, and then rebuild is just as valid. But they didn't do that so we'll never know. It may have been very painful, but the Japanese were savers and would have weathered it OK. Instead, the government has used those savings to finance this experiment.
The concept of ling chi is that each cut is neither fatal nor very painful. It is a slow death. This is what the Keynesians have done to Japan.
There, I explained it. That's my evidence and you can not prove me wrong. In fact, there is more evidence that Koo is wrong. Now, if you want to find someone who is an objective source to look at both arguments, I will be very interested. In the meantime, watch your potty mouth.
you have obiviously not read the paper that I've linked to. Neither have you understood what a balance sheet recession is.
LOL. Koo is always struggling to make his theories relevant. And that's all Koo is, a theorist. He presents no facts that back up his theory, only excuses for why they aren't working. He presents Keynesian economics as a science but forgets (or can not successfully manipulate) the human element (fear and greed) that will constantly work against his theory and that make economics as much an art as a science.
Dr. Hackenbush #295575, says it best,
The Keynesians found the prefect test subject in Japan and have totally screwed it up. Now, they will take what they learned from that failed experiment and try again in the US.
Remember, he is just one of many economist shills working the circuit. 'New Economic Thinking' indeed. How about hiring just one Austrian school economist? Macroeconomics has largely devolved into a quasi-religion often hiden behind equations, where the underlying assumptions of the equations are mostly absurd and factually incorrect (for example, think 'Keynesian multiplier').
I keep thinking people will begin tar & feathering people like that, but it doesn't seem to be pitchfork time yet outside of a few blogs like this one. Yet I still have my dreams.
Well, it's just obvious. The sheep are not spending all of their money like Koo needs to make his theories work.
Best line: "That's all right on the micro level". His idea is that every one should just take one for the team.
"His idea is that everyone should just take one for the team."
Mooooon Riiiver....whew!!! Thank you doc. Ever serve time?
What I can't figure out is why we hear about Richard Koo all the time, and not Richard Werner. Both live in Japan. Both have written books on the Japanese credit bubble and bust. The difference is that Werner, while not quite an Austrian, actually makes sense. Oh, wait, I guess that's why we never hear about him.
Koo vs. Werner:
http://the-free-lunch.blogspot.com/2010/02/to-martin-wolf-from-richard-w...
My biggest issue with Werner is that he seems to think that central bank-driven credit expansion is beneficial if only it's guided into the "right" places (i.e. small businesses). The Austrian argument is that all credit expansion (not created by the market) is harmful and leads to malinvestments. Perhaps despite himself, Werner wrote a very clear Austrian explanation of what happened in Japan in the 1980s and afterward.
Institute for Orthodox Economic Thinking
Koo-koo, here's a formula for you. (Current S&P Price) x (0.25) = (20 years of Japan)
It is no more a balance sheet recession than it was a balance sheet expansion. It is a reaction to the previous distortion. How's that "no need for savings because I have so much home equity" balance sheet expansion working for you? Koo is proof though that you can make a living selling economic theory, only tested on hyperbole....koo koo for koko puffs.
koo koo here is another
wealth + keynes = fuck all (disaster)
Someone enligthen me, because I don't see what is wrong with Koo's argument p.7 of the presentation (last few minutes of the video)
http://www.businessinsider.com/richard-koo-recession-2010-4#-8
(double post)
I think Koo's insight and explanation of the balance sheet recession is bang on the money as far as explaining what is happening.
However, he doesn't explain what to do about the resulting expanding government debt, which at some point needs to head into reverse, while the private sector again takes up the slack. The trigger for this to occur doesn't seem to be apparant, short of some new technological breakthroughs that would stimulate industry in an area to create wealth for the benefit of humanity.
Perhaps instead of spending money on bailouts, and patching roads, (which are essentially sinkholes), money should be distributed in various areas of R&D spending as broadly across the global economy as possible?
< 1 Edit for spelling>
Werner is an Austrian. If you ask him. (I once almost worked for him) he will tell you he is Schumpeterian. Schumpeter was the least Austrian of the Austrian School, but is still considered to be in the School.
I am Austrian/Endogenous, but Like Feteke, Schumpeter, and Werner I would like to criticize the tendency within the school to anchor itself exclusively in the writings of Hayek and Mises.
In theory I would state that Werner is correct. Given perfect knowledge and perfect credit rationing, we could have a fiat system that channels credit exclusively for GDP aggregating opportunities. In practice this is not the case. There will always be leakage and regulatory capure will always rear its head. Asset based money has the merit of taking away the need for this government oversight.
On a practical basis. It is easier to implement Werner's recommendations. They would not eliminate the boom/bust cycle, but they would substantially mitigate it (which is better than nothing)