Richard Koo on America's 2nd Balance Sheet Recession, and Why Monetary Policy Is 'Dead in the Water'

CrownThomas's picture

Nomura's Richard Koo explains what he believes is happening in America right now, namely dealing with a massive balance sheet problem. ie: A company may have cashflow, but its balance sheet is under water. He says that executives recognize this, so even at extremely low interest rates, they choose to save money and pay down debt.

On it's face it shouldn't matter if a few companies are doing this, but he points out that if everyone does it all at once, it changes the game. And he also claims this isn't the first time this has happened - where have we seen it before in the States? The Great Depression.

"people were no longer maximizing profits, they were minimizing debt. And even with zero interest rates, companies were paying down debt. In no business schools, or economics departments, anywhere in the world, have suggested that such a thing should take place"


He does advocate for a massive fiscal stimulus at the end of this conversation, which is where we part ways. But we do agree that this is the cycle we're currently in.  


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giggs's picture

Nice interview.

Odd to hear him describe large scale private sector delevering as a "disease."

spanish inquisition's picture

Disjointed mild rant to follow.

Too much vig in the economy. Financialization (corporatism, fascism, NWO,) has permeated all facets of society, you are paying it everywhere. There is a financial scheme/government organization to get in between you and every transaction you make for their cut.

I understand that by holding money at 0% it will be inflated away. But after the last 6 bubbles, I believe that it will still be worth more, longer than investing it in the fraud of the market waiting to get fleeced by the next engineered bubble.

If you are able, there is still time to get some seeds and start planting Victory gardens. Maybe the occupy people want to brand them Occupy Victory gardens, could be ZHVG's if you want. Should still have a year or two before you might have to farm in a greenhouse with well water before #4 goes.

Start making and doing your own stuff, Gahndi did pretty well with his non violent homespun protest and it gets peoples attention.

/end rant

SilverTree's picture

Keynesian economics at its___________.

dougngen's picture

He is essentallly correct in the premise that; if your balance sheet is underwater, people wont loan to you, and the correct action is to pay down your debt. Maybe if he applied his theory a national level, he would have to ask: what happens when the nations balance sheet is underwater? Who will loan us money because we are bankrupt? The only answer is to print money and devalue the currency. Or make the hard choice to get out of debt....

Marco's picture

The US has been bankrupt while getting new loans since the 70s ...

three chord sloth's picture

This is what happens when you think a depression is an avoidable, artificially induced disease, rather than a naturally occurring cure to the true disease of excess debt and financial 'innovation".

SilverTree's picture

I am hoping for deflation and planning for hyperinflation.

steve from virginia's picture


Koo's first supposition is where he should stop: "executives that use 1% money to pay down debt are stupid ..." companies don't earn money and are therefore worthless.

Here, the debt isn't the problem rather debt taken to waste petroleum for zero-returns is. Wasting does not repay anything and further borrowing obviousy cannot work. Where are we?

Clearly both fuel and credit are finite resources and are depleting: de-industrialization is underway.

Koo's economic disease is not the common cold or pneumonia but lung cancer. There is no coming back from the dead this time.

AnAnonymous's picture

What you aim at depleting resources, taking debt to waste resources with no return is not a problem, it is a very welcomed course of action.

And US citizens aim at depletion of resources.

steve from virginia's picture


Industrial activity itself is waste with no return. The only support for industrialization is the taking on of more and more debt. In fact it is the reason for it.

So-called 'modern economy' is monetization of waste.

Hulk's picture

Its a fresh of breath air to hear from someone who actually deals with Reality and understands it...


edit: Here's more reality (for those with the stomach for it), an excellent interview with David Stockman, "The emperor is naked"

bank guy in Brussels's picture

Old Richard Koo video from 2010 ... valuable for those not familiar with the quite sharp Koo, but what would be great is for ZH (or Crown Thomas, hint hint) to give Richard Koo an open invitation to present his current views on the issues in Europe, America and Japan as they have evolved up to the moment.

Even if Japan will finally soon 'blow up' as people have been (wrongly) predicting for many years, the fact is that Japan is a success story in dealing with financial crisis and debt overhang, largely because, after various false starts, Japan overall followed Richard Koo's ideas.

Perhaps it was luck, perhaps it was Japan's unique circumstances etc. ... but the fact is that Japan avoided disaster, with the key radical point is that they maintained the jobs and incomes of common Japanese people, even while assets were deflating and banks were clogged with bad debts.

Fukushima aside, things in Japan have been quite okay since the big crash of 1990, and 22 years is a good run by any account, and Koo is the great voice to explain why Japan's success might be imitated.

We should be so lucky in Europe or the Americas, but we are not following Koo's prescriptions, and most significantly, we are not protecting ordinary people's incomes in our own 'Keynesian' attempts - which might make all the difference.

Richard Koo is a great economic voice in the wilderness ... Though he is not a ZH-standard liquidationist type, ZH has been great in giving him a forum here from time to time, but more would be wonderful.

mind_imminst's picture

It only worked for as long as it has because they devalued more than everyone else and were able to maintain exports. Now that they are no longer a net exporter, Koo's policy magic will no longer work. Japan will implode. It worked for 20 years only because of special exogenous circumstances, not because it was good policy.

eddiebe's picture

The way I understand it, what Japan did ( increasing the money supply ) to weaken their currency in order to export their way out of their slump worked (somewhat), because other nations were booming. Now everybody is trying to weaken their currencies and nobody is buying like they were before, so that model won't work. It's a race to the bottom and the outcome I see is massive inflation til debt is reduced and a credible reserve currency is put in place.

Corn1945's picture

Calling Japan a success is totally mind-boggling. They face an insurmountable democraphics timebomb that makes servicing their gargantuan debt 100% impossible.

The smallest rise in interest rates bankrupts them totally and immediately.

On top of that their stock market basically collapsed and never came back.

They are on the brink of failure as a civilization but because it hasn't happened yet, they are a success???

AnAnonymous's picture

They face an insurmountable democraphics timebomb that makes servicing their gargantuan debt 100% impossible.


US citizens have dealt with debt as if their infinite growth fantasy was real.

More consumption could only lead to even more consumption.

There was no limit to the amount of debt you could load yourself because in the future, you could grow enough to repay any load of debt.

It is a fantasy when it comes to the physical world.

The more time flies by, the more undeniable it appears.

US citizens have been defaulting on the physical debt for decades now. There will be no substitution of resources as imposed by a debt repayment.

Once it is admitted (something that US citizens wont do indeed) it appears clearly that:

-US citizens are maxing out the credit cards. They aim at consuming the most before the dead end.

-there will be no debt to service in the future as you assumed it because that debt can not simply be serviced. It has been defaulted on for decades now.

Nothing different from a con artist who perfectly knows at any point of his ponzi scheme that he will not pay back on any of his debt because he simply cant.

In a near future, they will be people, nations that have consumed. A lot. Mostly through debt.

And the others. People, countries that consumed much less because they could not handle debt the US citizen way. They had to repay on it.

Japan is partof the first group. The debt problem does not exist because the debt can not be repaid.

smb12321's picture

Glad to see someone with sense. The demographic charts should terrify any investor in Japan. Japan is quiet for many reasons - a native affinity for acceptance and suffering along with a near 100% homogenous population.

We are now trapped in the same boat regarding interest rates (great point).  Many have predicted that we will NEVER raise them again since to do so would add hundreds of billions to the deficit annually.  Although most nations in Europe are losing pop, ironically Germany leads the continent despite an annual influx of 200,000 immigrants.  So much for their longterm outllok.


Cojock's picture

They can print as much yen as they like; buy back their debt with it, and simply cancel the debt as Ron Paul suggests the Fed should do now, and others in the UK suggest the Bank of England should now do with all the gilts bought with QE.

At worst, it would mean the yen would fall relative to the rest of the world: which is actually what the Japanese want to happen to their over-valued currency.

The fact is that Japan is still a productive power-house, and the wealth and income is still pretty widely spread, and for as long as that is the case, they'll be just fine.

If Japan is a failure you're using a pretty depressing definition of 'success'.

eddiebe's picture

Japans major policies are dictated by their occupiers.

The Big Ching-aso's picture



He wants more debt stimulus?   Is he Koo Koo?

Pool Shark's picture



Koo claims at the end of the video that due to fiscal stimulus, Japan was able to "climb out" of their crisis. What he apparently overlooks is that the only thing the stimulus accomplished was to transfer the debt from private corporations to the government. Their Debt/GDP ratio is 225% and climbing. All Japanese QE did was buy time and make the problem ultimately worse...

Zero Govt's picture

the debt spending did not get Japan out of recession... how can continuing to dig holes to climb out of the last one get you anywhere?

Govt cannot create anything productive, it cannot push on a piece of string and stimulate anything whatsoever, its entire existence has been destructive to both society and the economy.. that is why Japan is going nowhere but digging an ever deeper hole for the past tragic 20 years

Koo is a(nother) State-aid moron

eddiebe's picture

Seems like Japan is still in recession. Stimulus by the government is useless if it just stimulates the financial sector. There is plenty of money, it's just that the greedy bastards are also stupid and don't realize that keeping most everything for themselves and grabbing even more will eventually sink the whole ship. Assets need to be used for purposes that benefit everyone. That way everyone is willing to work for them and feel good about it. If the greedy bastards running any show arent playing 'fair' the masses of people they are profiting from and exploiting will start to do the same, religion and laws be damned.

 The masses of people know something is wrong, that's why we have all these uprisings everywhere. Greed and planned obsolescence without regard for others or the planet itself is playing havoc with the whole system and if the greedy bastards running the show don't ease up we'll all wind up trying to live on a ball of glass.

smb12321's picture

Japan's stimulus certainly has not helped the number one showfront of financials - the stock market.  It has dropped from 39,000 to 9,000 despite zero interest rates for years and much stimulus.  Japan became prosperous by NOT planningd obsolesence (which is why we drive only Hondas - they last forever).  

One example of how they stole the market is the thermostat. They were so perfectly manufactured that US firms thought their testing instruments were broken.  The going "fault" rate demanded by Ford was 1 flaw in 500.  Japan promised 1 in 15,000 and outperformed that estimate. Eventually, though, all knowledge flows outward and others caught up.      

josecokem's picture

It is called fear. Every investor know that feelings.

infiniti's picture

What Koo is trying to say is that debt = pulling demand forward. Genius!



Muppet Pimp's picture

+ 1  Brilliant!

So if people actually saved the money to buy things the demand would be current and they would be better off as they would not have to pay the interest.  Consumers do not have access to extremely low rates to borrow BTW (exception mortgages).  The lowest interest rate on my CC's is 7.9%.  Make that 3% and I will go ahead and buy the things that I would buy with saved money over the next few years.  But of course, then we will have stolen all of that demand, so what then?  At some point it seems you will have to have negative interest rates, i.e. pay people to borrow money, and then maybe they will buy the things that they would would buy the next decade.  But what then?  Just give out the damn money if only they will agree to spend it immediately. 

I know some folks that were in the position of having to decide what the big Obama fiscal stimulus money would be spent on.  They admittingly repaved roads that did not exactly need it yet among other things.  I spoke with them during the period when Obummer was debating another second round of stimulus (ala Paul Krugman) and they looked at me with a worried look (seriously) and said "we don't know what the hell we are going to spend it on".  I think the worried look stemmed from their role as custodians and allocators of taxpayer capital, but they were being told essentially to blow the money and think nothing of the fact that taxpayers would one day have to pay this money back.  If one is the type to actually embrace their duty to spend it on things that are worthy and they are force fed money, you get what you have in Vegas here awhile back.  People throw lavish parties on the taxpayer dime because there is no good use of the money.  This is why I realize PK has no freaking idea what he is talking about that if only the stimulus was bigger.  Yeah, if only it was bigger there would be even more of the taxpayer money that eventually must be repaid put toward boondoggles.

As I said before at the point where we decide we must go full retard, just mail out checks to the citizens.  The whole 'shovel ready' thing meant neccesarily that many worthy things could not be done as it would require engineers to evaluate and put plans together for it.  Therefore my industry (Engineering) continued to languish and got very little benefit as the push was to do jobs that plans were either already done for or that required minimal foresight to accomplish.  There are gobs of bridges that need repair for example, but that does not mean that plans are sitting on the shelf waiting to be funded.  Sure there was some of that, but big ambitious infrastructure projects take a bit to be thought through and designed.  Repaving BTW is a cost of materials and equipment gig, not a big rainmaker for jobs (a small crew can repave miles and miles of pavement).  This beuarocrats/technocrats don't understand any of this.  They are in a position of being captial misallocators with taxpayer funds, so in the end it is a joke.  In their haste to get the money moving they blew it in a big way.

unique_snowflake's picture

They couldn't do better than cash for clunkers?!  LNG export infrastructure would have been a better place to start...

donsluck's picture

Mup Pi, I am in the same business, engineering. I changed businesses, now I am a Commissioning Agent and no longer design mechanical systems. I started my own business and I am doing just fine.

The intent of the stimulus, unfortunatly, was short sighted and immediate. Personally, I think much of the money should have gone to engineering to pave the path to the second stimulus, even though I disagree with both.

Oh well, good luck.

Winston Churchill's picture

If you get into the details of the spending 'stimulus',most

went to shore up States spending on such vitals as bloated admin.

pensions and boondoggles.

The money was pissed away..

infiniti's picture

Spectacular helmet. I mean, really beautiful wig. Looks great!