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Richard Koo - Europe in a Balance Sheet Recession - Time for QE
Richard Koo's latest note points out that Europe has entered a Balance Sheet Recession (ZH primer).
As he has long argued, adding liqudity during a balance sheet recession is necessary and not inflationary;
When the private sector as a whole is trying to minimize debt
despite ultra-low interest rates, the money multiplier for the private
sector turns negative at the margin, which means the money supply will
not increase no matter how much quantitative easing the central bank engages in. And without growth in the money supply, there can be no inflation.
He goes on to suggest that a form of QE is necessary in Europe:
The ECB should embark on a quantitative easing program similar in
scale to those undertaken by Japan, the US, and the UK. Doubling the
current supply of liquidity would not trigger inflation and would enable
the ECB to buy that much more eurozone government debt.
The ECB has provided a total of €1.3trn in liquidity thus far. The experience of Japan, the US, and the UK suggests there is no reason why purchasing an additional €1.3trn in eurozone government bonds would lead to inflation.
If you haven't read his book - its probably worth your time. Balance Sheet Recession: Japan's Struggle with Uncharted Economics and its Global Implications
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Must be me being thick, but I don't get the graph. It suggests households have been in financial surplus since 2000! I can't square this with the creation of the largest private debt bubble in history!! There is no definition of 'financial surplus' so maybe it is the value of the asset in the financial fantasy world or something. The analogy for me (I have to keep things simple or I lose the plot) of the ECB rescue would be for me to create fake sales invoices for my business so that at the end of the year I have a large debtor figure in my balance sheet and therefore more 'assets'. My reported profitability is higher too!
Except of course it is all BOLLOX,,,,
K@
Although there do seem to be some intelligent articles posted here, ZH comments have really degenerated.
Why do so many of you post in such anger? With no actual insights?
You may disagree with Koo, but he's been right. Perhaps it's just random, that his reasons don't actually explain the results. But, show why his reasoning is flawed. This nutty ranting is bizarre.
It's just unassailable that accounts have to balance. See Martin Wolf's FT column today for a similar view
http://www.ft.com/intl/cms/s/0/448bb4e0-15f2-11e1-a691-00144feabdc0.html...
PH, you too confuse consumption of prior generation's capital with productivity and wealth creation. Even when fiat is created magically, the net effect of its introduction into a nation results in a lowering of standard of living for those who didn't get the magic money first. Japan borrowed from its citzens and simulated productivity when in fact it only facilitated consumption of that very capital. It created the illusion of prosperity but in fact it loaded the Japanese with tons of new debt and left them with the obligation to repay that debt, plus interest. How the Japanese will ever repay this massive debt remains to be seen. If their economy continues to languish, at some point they too will fail and will have to default on the promises they've made to their debt holders.
no QE free money for europe
.
if they dont like the situation in their home countries they should move to a wealthy communist country with jobs like china
.
like everyone else
Mr. Koo is wrong; it has not worked for Japan. Japan's government has been a systematic destroyer of wealth by borrowing trillions of dollars for Keynesian infrastructure "Stimulus" spending over twenty plus years. When Japan entered their crisis in 1989; they had little debt. They have become the most indebted country of the world trying to stimulate growth. It has been an abject failure. Their stock market is down 80% over 22 years and their real estate is off 70% over 21 years. Japan Post is the largest financial instituion in the world and owns mostly Japanese Government Bonds, Same for Social Security which now is liquidating $80 billion of JGB's per year and growing. The next phase is the collapse of their banking system as their largest holding is also JGB's. Their budget for this fiscal year proposed 50% borrowing and then they had the earthquake. Social Security is 55% of their spending. Interest costs at 1.4% absorb 23% of government revenues. An increase to 3% would absorb close to 50%. The problem is the largest buyers of JGB's are now net sellers as their depositors. insureds or pensioners retire or die and withdraw principal because earnings are so low. The financial institutions are full of JGB's and run a huge risk if Japan gets a couple of more credit downgrades. The real problem is their savings rate has declined from 16% to 2% and their young people do not make enough to get married and have a family or save. They are running out of JGB buyers. Basically the people have trusted the government and the government has wasted over half the massive amount of savings of the Japanese people. By the way they have twice the financial deposits of the United States. This is not a small problem.
"The International Monetary Fund warned in a new report that market concerns over fiscal sustainability could trigger a “sudden spike” in Japanese government bond yields that could quickly render the nation’s debt unsustainable as well as shake the global economy."
From The Trader today. Koo is confused. Stealing capital from generations of Japanese to give them paper debt certificates so they could spend and simulate prosperity hasn't really worked for the government. the simulation of prosperity looked good for a while but real productivity requires real investment, not just spending to simulate productivity. A nation cannot consume its way to prosperity. It has to be productive and create wealth, not just spend money to acquire other nation's products. One would think we'd have learned this by now.
there is only one way out of this and there has only ever been one path taken despite merkel's stubbornness up to this point. the is whole system needs to be reset. at first, it always seems the easiest and less painful way is to change the mathematics. fiat money makes it easy. if you are ten dollars in debt but only have 9 bucks to pay for it then you print 6 dollars to pay your debt and have some extra cash to buy more stuff. it is simply a mathematical calculation. the flaw in the math is the intrinsic value of everything foesn't change except when there is a shift in the demand curve up or down(in this case down). so the effect from printing the extra coupla bucks is eventual;ly absorbed and more printing is needed now that 15 nucks is owed. eventually this leads to the endgame which is extreme capacity, demand AND supply destruction better known as war. the key to making war work is that it has to be big enough to destroy enough capacity, demand and supply to effectively start the whole game over at a low enough level to insure it will continue for another coupla generations.
kinda puts the whole middle east springtime for hitler thingy in perspective. the quandry is how to get china, russia and india involved to make the exercise worthwhile. i tink we are seeing the fruits of the 1%ers labor unfold as we speak.
Not even going to read this. First rule of getting out of a hole...STOP DIGGING.
I actually agree with Koo. Just print more money. John law's creation of credit had one flaw and that was his bank notes were still backed by coinage. Now, paper currencies are backed by nothing but more paper. People come to the bank to withdraw paper currency not coinage. If shit hits the fan central banks can just print more paper.
The Zimbabwe strategy...... Priceless!
K@
What's the point of having balance sheets anyway? Just through it away, delete Excel off your computer and make something up. That's what we do in America, proof that it works!
I concur.
What is the true value of anything these days? We'll soon find out when food gets scarce!
The real market is determined by limited resources and limited production.
Yields can be perfected and maximized. There's a limit on all yields relating to food and feed (!) production. There are limits on how much a carbon based unit (person or animal) needs to live and to be productive.
Money can be created ad infinitum. The value of money is a fiction of some people's imagination. As long as we are told to accept the value of that money, we will.
Zero Heads, please remember that this is a guest post.
Thanks TD for providing insight on how many in the financial world still think.
This is going to take longer than I thought...
duplicate deleted
Japan implemented their "solution" in the early 1990s. They're still here.
Nomura's Richard Koo is a great, thoughtful economist, and does not deserve the scorn in some of these comments above.
Contrary to the popular meme, Japan has not been a 'failure', but a great and unique success in economic history, and its success over the past 20 years is largely due to the policies advocated by Richard Koo.
For two decades, Japan never had any significant amount of GDP loss, unlike the US depression in the 1930s, despite major similarities in their crashes.
Over 20 years ago Japan had a major collapse, full of bad debt ... and yet (contrary to Western myth) they indeed did all right, without 'austerity'.
Yes, their share market prices, and property and asset prices, dropped by 70% and more ... but basically life did not change too much for most Japanese, even though paper wealth diminished.
Yes, Japan's public sector levered up while the private sector slowly deleveraged. This is not 'debt curing a debt problem', but debt substituting for a credit deflation disaster.
AND, very importantly, for two decades, Japanese people largely kept their wages and earning power maintained. In other words, the government 'bailouts' were spent keeping common people in jobs with spending money in their pockets, not just routed for bankster profits.
It is common on ZeroHedge to sneer at these kind of thoughts, to think it's better just to default and liquidate, but Japan seems to show that the best way through this big mess, is really to keep WORKING people with spending money, while general deleverage is worked out in the least destructive way.
As Richard Koo points out, it's ok for gov't to lever up to the extent of the private pool of savings within a society, in the years of balance-sheet recession, when the private sector is DE-leveraging.
If here in Europe and the West we would do as well as Japan, we should be very happy. So it seems we should listen to the economist who best represents the policies of Japan's success story -
Here is a good short survey of Richard Koo's main ideas, video of him speaking at the April 2011 Bretton Woods Conference sponsored by the Institute for New Economic Thinking.
http://www.youtube.com/watch?v=5zCJy84Yvvo
General deleveraging! OMG becky!
So Japan, on it's demographic death spiral has somehow earned your respect? Respect for what? Respect for demonstrating political cowardice to the umpteenth degree? It really is sad because I have a tremendous amount of respect for the Japanese people. The time bomb that has been set for them by their craven and cowardly politicians will take down a very able populace.
Kicking the can further down the road than the Keynesian fools before them thought realistically possible is not in my book admireable.
A fucking 21 year long 'balance sheet recession' coupled with an aging population hardly seems likely to impress the youth of Japan in 2020.
More like a case study in 'new economic thinking' and the political/intellectual class failure.
Japan's government has been a systematic distroyer of wealth by borrowing trillions of dollars for Keynesian infrastructure "Stimulus" spending over twenty plus years. When Japan entered their crisis in 1989; they had little debt. They have become the most indebted country of the world trying to stimulate growth. It has been an abject failure. Their stock market is down 80% over 22 years and their real estate is off 70% over 21 years. Japan Post is the largest financial instituion in the world and owns mostly Japanese Government Bonds, Same for Social Security which now is liquidating $80 billion of JGB's per year and growing. The next phase is the collapse of their banking system as their largest holding is also JGB's. Their budget for this fiscal year proposed 50% borrowing and then they had the earthquake. Social Security is 55% of their spending. Interest costs at 1.4% absorb 23% of government revenues. An increase to 3% would absorb close to 50%. The problem is the largest buyers of JGB's are now net sellers as their depositors. insureds or pensioners retire or die and withdraw principal because earnings are so low. The financial institutions are full of JGB's and run a huge risk if Japan gets a couple of more credit downgrades. The real problem is their savings rate has declined from 16% to 2% and their young people do not make enough to get married and have a family or save. They are running out of buyers. Basically the people have trusted the government and the government has wasted the massive amount of savings of the Japanese people. By the way they have twice the financial deposits of the United States. This is not a small problem.
Your satire is halarious. Sounds like you need to give up your "bank job" and move there immediately. LOL!
Sadly, that wasn't satire...
Richard Koo is right, however in his own book he warns about helicopter money. Actually he said that the Japanese worst fear was to have the people in Japan lose faith in the Yen. He also said that the Japanese told the US that if they wanted to try QE they should do it over Nevada but not over Tokyo because the worst thing you can get is to have people lose faith in the currency. I guess the US just did that, that is a QE over Nevada and we see the result of Gold price and land !! Now in hte short run this is deflationary, but it DOES NOT MATTER FOR THE GOLD RATIO IF YOU DESTROY DEBT TRHOUGH INFLATION OR DEFLATION, ONE WAY OR ANOTHER WHEN DEBT IS DESTROYED IT TAKES A LOT LESS OUNCES OF GOLD TO BUY STOCKS. IT WAS TRUE IN 1932 IT WAS TRUE IN 1980. ONE WAS DEFLATION THE OTHER WAS INFLATION. SO IF GOLD STAYS FLAT BUT STOCKS PLUMMET I DON T CARE, I WILL CONVERT MY GOLD INTO COCA COLA WHEN IT REACHES 9 TIMES EARNINGS AND 6.6 TIMES DIVIDEND LIKE IN DID IN 1980!!!
BY THE WAY: GUESS WHY BUYING RAILROADS IS A MONETARY PLAY? THAT IS WHY BUFFET AND BILL ACKMAN ARE DOING IT? THEY ARE DOING THE SAME THING AS US WITH OIL AND GOLD. BUT THE ANSWER CONVOLUTED.
Guys: My own view is that with any shock like a war or something and oil goes crazy the thing implodes. And also given the bias of never letting the adjustment done by bankruptcies I think the odds favor a debt destruction through inflation. BUT FOLLOW MY ARGUMENT: IF YOU ARE IN 1932, YOU HIDE YOUR GOLD, THE GOV DEVALUE GOLD FROM 20 to 35 DOLLARS, AND THE STOCKS ARE IN THE FUNK. DEBT IS JUST DESTROYED WITH DEVALUATION, THE MULTIPLES ON PRIME STOCKS ARE LOW AND IF YOU CONCEILED YOUR GOLD AND YOU ARE ABLE TO REMONETIZE IT YOU HAVE MORE DOLLARS, YOU BUY A LOT OF GOOD STOCKS AND YOU HAVE MORE DOLLAR WHAT IS WRONG WITH THAT? GIVEN FIAT SYSTEM IF WE GO DEFLATION DESPITE THE EFFORTS OF THE CENTRAL BANK TO PRINT, THE ONLY WAY IT TO DO A PEG OF DOLLAR AT A VERY HIGH LEVEL OF GOLD PRICE TO MAKE IT CREDIBLE. UK DID A DEVLUATION AGAINST GOLD IN 1931 AND THE US FOLLOWED.
YOU CAN NOT LOSE IN A DEBT DESTRUCTION SCENARIO. THE ONLY PROBLEM IS IF WE FIND A MAGICAL SOURCE OF CHEAP ENERGY QUICKLY OR WE CREATE MASSIVE INCREASE IN PRODUCTIVITY. THEN YOU AND I ARE IN TROUBLE WITH OUR GOLD, BUT I WOULD LOVE CHEAP STOCKS ARE AND TONS OF DOLLARS TO BUY THOSE THROUGH A PEG OF DOLLAR AT VERY PRICE OF GOLD!!!
Makes sense to me.
But your issue will be getting that gold back into the system without the IRS sticking it in your ass Abner Louima style.
Better to use that gold to start up a business.
Still believe in that infinite growth model in a system with finite resources? Good luck with that. People have been losing faith for quite some time now and the second that the Eruopean "regulators" announced that Greece would not trigger a CDS event, faith is being lost faster and faster. If all CDS paper is bad, then what paper is safe? The answer is clear, NONE. The ONLY people who fear a complete collapse in paper are paper pushing fucknuts who know their labor is of NO real value. Got physical assets of real value and a network of like-minded individuals to defend it? You fucking better.
Why not just come out and tell everyone what propaganda outfit you are working for already? LOL!
Well there is THORIUM energy (Generation 4 nuclear reactor, about 160 times more efficient than first generation of light water nuclear energy, but it will not come in time to boost GDP through productivity, that boosting GDP at out sheer new technology by leaps and bounds. It will take at least 10 years to happen, that is my biggest fear for GOLD, but I think we are ok, when a confidence shock occurs it goes fast. But guys we have terrible patch right now, but in 15 years, this technology is just a fucking killer app, invented by an true American Genius which also invented the light water reactor but for political reason and because he made enemies saying that the US should not use his first invention. Thorium technology can not be used for weapons because gamma rays make the bombs detectable very easily, it emits so much gamma rays that it is NO good for weapons, so some AMIRAL killed is project for THORIUM in 1969 and now guess who is building those using publicly available information? CHINA!!! The politburo have 8 engineers out of 9 people, we just have lawyers in the US. Jian Zeming is an electrical engineer and his well connected son is building a THorium reactor. His son is a PHd in Electrical Engineering, useful PHd not fake economics PHD. Economics Phd is the clergy of teh Fiat system I completely agree.
worth repeating over and over to really get it
So how many of these reactors are safely providing energy for real customers in real cities now? I have a useful Ph.D. in engineering as well. I use mine to deliver real products, not hopium shit. By the way, as these governments collapse more of the academic fucks will be looking for work.
I have seen the data on these reactors, still need to mine the thorium (huge energy input), have access to lots of fresh water, and deal safely with the waste, which is unstable by the way. I have two good friends working at Los Alomos on related technology. I love how fucknuts like yourself, who don't understand these things, like to spin it to benefit your arguements.
The technology is a long way out dude. In the meantime we have 7 billion people to feed, but don't worry, those of us who actually use our degrees to deliver real products will keep the big boy pants on and keep doing so. Thanks for underscoring the panic by paper-pushers the world over. No one who's labor is of real value has any reason to fear a monetary collapse.
"I have seen the data on these reactors"
"I have two good friends working at Los Alomos on related technology."
CLEARLY NOT AS:
"still need to mine the thorium" WRONG
"access to lots of fresh water" WRONG
"deal with the waste, which ..." we already have infrastructure for, on a much more magnified scale, as our current Light Water Plutonium Factories produce 100x more waste than LFTRs whether measured in mass or years.
"I love fucknuts"
US military is funding a prototype thorium micro-reactor, so we may get lucky.
We have enough proven thorium reserves to power this country for 1000 years, and enough to convert our coal to clean synthetic fuel so cheaply Saudi Arabia will be buying it.
Good, unfortunately that technology is not on the market yet is it, but thanks for the hopium buzz, I can't wait to see the real details, after all, in the real world the details do matter.
My point is perhaps the military is actually DOING IT'S JOB, and looking out for we the people.
Bureau-rats will fiddle while the empire burns, I actually trust our military to be more forward looking and pro active. Let's just hope they don't fuck it up.
The "military" you are refering to are government workers and not the government lab rats who actually knew how to do math back in the 1940's. Care to rethink your statement regarding "Let's just hope they don't fuck it up."
Again, I read the technical literature and would obviously try to position my portfolio ahead of such a real technology, but we are not there yet. WWIII might get us there quicker.
dupe delete
Koo is just another Krugman-like Korrupt and Kriminal Keynesian Kleptomaniac Kook
I agree. Like Krugman, Koo stomps his feet like a spoiled child and insists that he is smarter than everyone else and his solution is the only one that will work (even though there are no examples of it working long-term in human history) if only people much stupider than he is would just listen to him.
1.3 trillion euros won't cover it. it is amazing isn't it how we throw around the term trillions now like it is no big deal. paying off debt with other debt is not solving the problem......
Have no fear! Print it!
There once was a man named Koo
Who sed, "I ain't no economics foo'
As I is actually a QE Wizard of Liquidity!"
But after taking a Greek haircut due to his own stupidity
He was caged with The Bernank & Trichet at the Zoo
Richard Koo is a "top economist" but most of all a monumental asshole. His only solution to all ills is print print print.
The really fun part is watching Nomura, which pays him (for being an asshole), sink deeper and deeper. When they go belly-up he will be dragged out of HQ, mumbling "they should have printed more"
"and without growth in the money supply there can be no inflation"
BULLSHIT. Limited availability of essential commodities/products can lead to inflation much faster than increases in the money supply. A fucking screwdriver becomes extremely valuable if it is desperately needed and you hold the only one for miles around. Another perfect example of why paper-pushing financial fucknuts are the ONLY people who fear collapse. They know their "profession" is not grounded in reality and hence their "labor" isn't worth their current compensation. fuck them, bring on the collapse, only then will compensation (in several forms) return to people who are actually worth a shit. More dribble like this should only make those of us adding real value to the system feel better.
You are referring to "price inflation." While the term inflation is generally used to denote an increase in the supply of money and credit. Unfortunately the nit picky wording does matter as the sheeple try to untangle the lies of the MSM, in this way we can all help one another.
lawsofphysics - think about supply chains and just in time inventories much?
I have to. At the end of the day, customers demand that our products (most of which are essential consumables) show up on time and in good shape. So yes, and by the way, deficits do fucking matter, as do what is happening on the margins.
Richard Koo is a puppet / idiot. Everything ZH regurgitates about Japan is wrong.
Kyle Bass.
No, this post is called, "lets post one of the more coherent MSM reasonings currently being digested as impetus to short/own U.S. paper"
W.T.F?
So Europe ought to mimic Japan and Bernake?
So at what point does 'money' become nothing more than an accurately recognized 'thing' that 'some' people use to swindle others out of wealth?
This fucking crap is so deep.
Hate to ramble (not really, I love it), but the present global situation reminds me vividly of a time as a young father raising pre middle school Son's.
My at the time oldest was about seven. His little brother was about five.
My five year old son was always lamenting "how unfair" it was and how his older brother was always 'making him' do things that he really didn't want to do. Most of these things involved relenquishing possesions coveted by his older brother.
I've raised my sons in a very laisse fair sort of way. I determined early on that it might be better for them to learn freedom early, take their lumps and hopefully bypass early many of the errors suffered by others later in life.
One day my at the time youngest son approached me, very upset, decrying that his brother had in effect 'ripped him off'. I asked him, 'why do you let him rip you off? You did give in and allow him to 'win'. Why?
He said; "because he told me if I don't do what he want's, I can't be in his CLUB anymore".
I said, "Elliott, Axel doesn't actually have a club". He only makes you think that he does. His club depends on you helping to support his imagination.
I then told him that if he refused to submit to his older brothers 'rules' that his brother would most likely give up on the club idea and decide to just be friends instead.
He did, and they are.
My point is power is mostly illusiary. We submit to false authority. If instead we respected ourselves and insisted on reasonable boundaries those who abuse us now would seek us out. Respect is earned and they will never respect us unless we respect ourselves first.
The sociopaths who run our governments need us more than we need them.
"So at what point does 'money' become nothing more than an accurately recognized 'thing' that 'some' people use to swindle others out of wealth?"
Been that way for quite a while.
totally agree with this post. There are hundreds of trillions of total money supply out there (existing as claims on future labor and energy). 2-4 trillion in QE is not gonna produce meaningful inflation. Can't - there will be no velocity. Now if euro collapses then those holding euros experience hyperinflation, but rest of world - huge deflation due to aggregate demand plunge.
Your statement would be true if i-crap were edible.
If the problem is a liquidity/funding problem, what is so irrational with supplying liquidity?
It would be nice to hear a bit of your approach to resolving this global mess... unless your solution actually is stacking metals and living in a trailer with friends close-by.