Richard Koo Calls For, Surprise, More Reconstruction Stimulus To Prevent Japan's Natural Disaster From Becoming A Man-Made Calamity
Richard Koo is back with his latest piece titled, not surprisingly, that "Fiscal Consolidation is Not the Answer" - alas, a decimated by (previously secret) debt European continent, and even America, is rapidly starting to disagree with this assessment, which stems from the faulty assumption that the economic "balance" achieved after 30 years of endless balance sheet expansion courtesy of ever declining interest rates is sustainable. Hint: it isn't. And until the world realizes that it is precisely this Fiscal Consolidation that is the answer, we will continue seeing bankers sell bits and pieces of Greece to each other, transfer payments in the US from the government ending up straight in Wall Street pockets, and broadly the Big getting Ever Bigger to Fail. Yet for those who still believe (Krugman) that one last hit is all it takes and after that it will be better, here is Koo's summary, on why Japan, which we continue to believe is the key macroeconomic variable over the near term, may be in very deep trouble unless it commences yet another (what number is that, #20, #50, is anyone even keeping score?) round of fiscal or monetary stimulus: "Fortunately for the Kan administration, Japanese institutional investors have been dealing with this surplus of private savings on a daily basis for more than 15 years and understand its macroeconomic implications. It is only because of their calm and calculated response to these conditions that the yield on 10-year JGBs remains at 1.2%. To prevent this natural disaster from becoming a man-made calamity (ie a recession), the government needs to push ahead with reconstruction efforts. With private savings surging, the necessary funds can be borrowed for now. Later, once businesses and households start looking to the future, funding can and should be shifted to tax hikes and budget reshuffles." That is the conventional wisdom. For all those who wish to read what will happen if and when Japan continues on this unsustainable path of converting private savings into public funding without regard for demographics, please read Dylan Grice (here, here and here).
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