The Bear Trio Gets A New Addition: Richard Koo... And He Is Pissed

Tyler Durden's picture

The pragmatic Nomura Keynesian addresses the recent change of Japan's Prime Minister, in what is possibly the best analysis on policy implications of the second coming of Naoto Kan. Yet where Koo shines through is his condemnation of the recent prudent approach defined during this weekend's G20 meeting, in which Europe has "just said no" to pursuing record deficits. Apparently the lack of a European desire to hit the Nitrokeynesian button and go all in on a bet Keynes is right (or, gasp, wrong) has made Koo so furious, he proclaims: "Premature fiscal consolidation is a threat to democracy." In essence, Koo, a devout Keynesian, is taking the false religion's argument one step further to its logical conclusion: that any change, be it today, tomorrow or whenever, will ultimately result in the collapse of the developed world's social fabric, once societies realize they have been fooled for ages by a ruling oligarchy of kleptrocrats. That, we agree with wholeheartedly. As Koo says: "Pushing ahead with these misguided policies risks a collapse of social and economic foundations and could even threaten the survival of democratic structures." Too bad Europe doesn't have our jolly Direct Bidder/Primary Dealer backstops to make sure no bond auction ever fails in perpetuity. Koo is 100% correct that the unwind is beginning as more and more people realize they would rather deal with the pain now, than a version thereof which is 1,000 times worse in a few years.

From Richard Koo's latest:

Premature fiscal consolidation is a threat to democracy

Pushing ahead with these misguided policies risks a collapse of social and economic foundations and could even threaten the survival of democratic structures. A good example is prewar Germany’s Brüning cabinet, which insisted on fiscal retrenchment and allowed the emergence of Hitler in the 1930s. The risk is especially high in Central and Southern European countries, which have a relatively short history of democracy.

Ultimately, I think the reason so many academics and pundits do not trust current low yields on government debt and expect them to rise suddenly is that they do not trust the market economy. When a price level set by the market persists for many years, we need to realize that there is an underlying economic structure supporting those prices.

What governments—including Japan’s new administration—should be thinking about is how to find promising public works projects and implement them in order to offset the deflationary pressures from private-sector deleveraging and provide the private sector with a sense of direction.

When private loan demand is nonexistent, the government must do whatever is necessary to find and carry out promising public works projects (including education and environment-related projects) without worrying about tax hikes.

And Cliff notes for the time challenged:

  • Naoto Kan, the new Japanese PM,  is not tied to a single economic theory or principles, and therefore has room to manoeuvre pragmatically as the situation dictates.
  • Kan is likely to support a weaker yen, which was opposed by his predecessors on the basis that as a trade-surplus nation, pushing the advantage could provoke deficit nations, possibly setting off a wave of protectionism and a currency death spiral.
  • On the other hand, Koo credits Kan for saving the Japanese economy in 1998 by compromising to allow a capital injection for the Japanese banking system to end a credit crunch—which “effectively delayed the birth of a DPJ government by a decade.”
  • Kan’s economic advisor is an Osaka University professor named Yoshiasu Ono, who shares many of Koo’s views about the need for governments to spend in order to boost demand during recessions
  • Koo thinks Japan’s private sector has finished repairing its balance sheet, and there is no risk of serious deflation
  • In order to stay competitive, Japanese stimulus needs to focus on hi-tech and science
  • Japan should not raise taxes but should continue to borrow—the private sector’s loan demand is minimal, and the government (in spite of its relatively high debt/gdp ratio) can still borrow for 10 years at only 1.3%.  Taxes would weigh on recovery
  • He thinks that the persistent low yields on government debt are a function of the high level of private savings that finance the debt, as the government is essentially the only borrower. 
  • Koo thinks the movement toward fiscal consolidation at this stage is a mistake that could lead to economic collapse and threaten the foundations of democracy, especially in Central and Southern Europe...

“What governments—including Japan’s new administration—should be thinking about is how to find promising public works projects and implement them in order to offset the deflationary pressures from private-sector deleveraging and provide the private sector with a sense of direction.

When private loan demand is nonexistent, the government must do whatever is necessary to find and carry out promising public works projects (including education and environment-related projects) without worrying about tax hikes.”

Full note:

 

h/t Jake