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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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If the problem is a liquidity/funding problem, what is so irrational with supplying liquidity?
jm, the problem is not one of liquidity and hasn't been about lack of liquidity for years. The problem is one of solvency, of structural deficits that can only be funded by larger and larger loans that cannot be repaid. There is plenty of fucking liquidity. The banks are sitting on trillions in reserves. But if someone (or a country like Greece) can't pay back their current loans, how is loaning them more money going to improve their ability to repay future loans?
I don't disagree for the most part. There is a core of insolvency that has to be purged. The problem is that such resolutions lead to illiquidity crises that can bankrupt truly viable enterprises because they can't roll their debt even though they are cash-flow positive.
However, there is not a lot of liquidity out there right now. I guarantee that.
My point is that the latter effects can be mitigated by policy tools.
> "My point is that the latter effects can be mitigated by policy tools."
Spoken like a central planner.
On paper, yes.
In reality, not a chance in hell.
You are arguing with over a decade of verified experience in Japan. Same thing happened in the civil war, WWI, and WWII. Nothing really that all that new despite the constant references to avoid "normalcy bias".
Seriously, why get your panties in a wad about it? If you think there is going to be more QE, buy risk. If not, then hold dollars/TSYs.
Short answer: Decreasing marginal return of new debt.
Let me guess. You just took Econ 101. You learned all about Keynes, and you read Krugman.
Your comment pretends that "liquidity" is something that you have. But you don't have it. It's a mirage. When liquidity is debt, the solution of "providing liquidity" is aggregate to the problem. You are simply buying time with layers of additional debt, and not solving anything. Your only hope rests in the very outlandish (and yet widely held) belief-system that additional rounds of debt will somehow bring forth magical "animal spirits" of economic health that will rise from the earth. These spirits of economic health will lead us to self-sustain in economic "perpetual-motion" and you won't need further stimulus. It's a baseless belief and ignores the massive global overhang of productive capacity and our peak levels of debt-saturation.
It's economic fallacy at it's finest. But it makes for very tempting policy because it not only provides the illusion of an answer, but it also seems to help for a time -- and therefore it exists. (Along with religion, and many other forms of tempting idiocy.)
To answer your question with a question: Why must there be a policy answer to mal-investment, that magically circumvents the losses mandated by mal-investment? The solution to our problems is a matter of taking one's lumps. The question we should be asking isn't: How can we magically avoid taking our lumps? It's: "Who should take the lumps?"
And therein lies the conflict before us.
Yes, and the venture capital guys that I have had to deal with (even the "honest ones") really believe they are doing "God's work". The whole thing with fiat is a fucking ponzi and they know it, but as living gods they don't talk about it. It really is like fight club. It is always about being an "owner", being on the other side of the debt, collecting money for nothing, tons of interest flowing into their coffers while they add no real value to the system.
The solution is to scrap the whole growth model and re-attach VALUE with a monetary and economic system that recognizes the finite resources with which humanity has acces to in order to sustain itself. This will happen whether this Harvard/Stanford/Yale paper pushing fucknuts want it to or not and they KNOW it. But why would they destroy the system now while sheeple still send them interest payments and they still have massive purchasing power to buy physical things of REAL VALUE.
It has been a while since I have dealt with these guys but I know two venture capital guys now. Recently (this summer), both purchased estates/ranches in remote island nations and have funded some trustworthy locals to maintain the property. They also employed veterans they know to serve as security. They know what's up and with a lear jet at their disposal they will continue to collect the interest because the know the governments are idiots (I mean they bought them after all anyway). They will keep collecting the interest, turning it into real wealth and be long gone when shit gets real. It has been this way for thousands of years dude. Wake up!
Enjoy the wait until it "gets real" in your cave or ranch.
The more rational of us realize that a vault of gold or clean title to land won't mean a thing in the apocalypse wet dreams embodied in some comments, and would prefer QE.
When did I say I have a cave or ranch? I am still delivering real products to my customers. I guess your degradation to insults and lack of an intelligent response sort of says it all.
QE all you want, you will only increase my purchasing power. I welcome your "solution." QE is the real "fear" trade by the way. Fear that if you don't do this, you might actually have to deliver something of real value in exchange for your labor.
Again, fucking bring on the QE, you only increase my purchasing power, especially in the corrupt black market world the will follow.
Well, your spew about what some venture capital ranchbuyers you idolize, plus your earlier reference about gold and "like minded" (groupthink bias) friends leads one to think you are a fringe goofball. Appologies if you are not a fringe goofball.
So what exactly are you complaining about? QE tells you to get out of a given currency. So get out of it. The world isn't going to end as a result of QE.
Your fear baiting is prolly a projection of your own insecurities about the future. I have a clear idea of what I think is going to happen and have positioned accordingly.
Maybe "jm" was referring to the folks that you mentioned and not you?
jm needs to get a job in the real world.
QE begs to differ about the idea of liquidity as impossible to achieve. The Fed demonstated that it is quite easy to turn a funding crisis around by taking extreme actions. Europe needs these extreme actions, otherwise the labor markets are going to price in the utter stupidity of the EU experiment, and you have far worse problems than some stress in equity or bond markets.
You speak of buying time as if it is nothing. Buying time is essential. What is needed is time to heal plus shared sacrifice between debtors and creditors. Monetization plays a role here. Look at Japanese labor markets. Things aren't flawless, but unemployment isn't a disaster like it is in Spain, Italy, and the rest.
Regarding production, the world needs to reconfigure from a developed world that absorbs capital account surplus from the emerging world through its debt markets, to an emerging world that runs current account deficits and absorbs the productive capacity through consumption. The decline of the euro and the dollar facilitated by QE encourages this.
> "The Fed demonstated that it is quite easy to turn a funding crisis around by taking extreme actions. "
I must have missed the QED. Where exactly did they "turn it around"? I see zero "demonstration" at all. The funding crisis has now been compounded. We are in significantly worse condition than we were.
The rest of your argument is inane. It's psycho-babble and religious belief. You are logically challenged. Please go back to Yahoo.
Well for starters, we saw positive GDP prints and PMI prints showing expension. No denying some economic expansion. More to the point, we saw massive liquidity provision reverse the deflationary spiral. I don't agree with your statement that we are significantly worse than we were before.
More to my narrow interest, we saw an epic rally in risk that was there for all to profit from.
As to the latter part of your post, whatever else it may be, it is a juvenile attempt at deflecting the need to challenge your worldview. I don't understand why people get so upset about getting their sacred cows challenged.
The Japanese "solution" is a chimera. They managed to ZIRP themselves into low-unemployment while the rest of the developed world was conveniently blowing the biggest credit bubble in history, importing at unprecedented rates and gleefully tearing down barriers to trade.
Let's see how well the Japanese "solution" works when the world's leading economies are deflating, re-erecting old tarriffs and trade quotas and competitively devaluing currencies.
I find it incredible how many "economists" point to the (then) 2nd largest economy in the world during the 90's and 00's -- and pretend it existed in a sealed bubble. The story of Japan's "managed deflation" should only be told in respect to the simultaneous (and unrepeatable) explosions in credit experienced by Japan's trading partners.
Which raises the obvious question: What if Japan had ZIRPed and exports had fallen 50% at the same time? How would that have worked out?
You are using metrics that are all cooked up in some ivory tower. Wake up! Look at the quality of life for the people/societies you are talking about. I have been doing business in Russia for almost 20 years. You have NO idea the very real pain supply chain disruptions will cause, the Russian people have suffered through this and that is why it takes many bribes to get our products into these markets. There are very real limits on consumption, especially when people along the supply chain required for your "consumption" start starving because their paper wages don't have any purchasing power. Let us know when you get to the real world dude, then we'll see what you think. In case you are wondering, arable land prices (not real estate) are up several hundred percent in many locations. People are not stupid, they are looking at the quality of life they had 10 or twenty years ago, they are looking at what their fiat bought them and going "what the fuck". Japan is the next shoe to drop, then America. Good luck.
QE is a way to mitigate the supply chain disruptions you are talking about. If you don't like the currency given QE, get out of it. It's what policy makers want of you anyway. The gold many posters place their faith in is a chief beneficiary of policy.
You speak of purchasing power. You think wide-scale sovereign default is going to preserve your purchasing power? Talk about short-sighted.
If you are so wise and cosmo, then you must be aware of the devaluations that informed the "Asian miracle" economies, including the way Asian economies resolved their debt crisis in 1998-2000. Devaluation came through actively managed currency devaluations against their trading partners. That, and countries pulling out little-known and long-unenforced laws that forbade compound interest to enforce haircuts.
"If you are so wise and cosmo, then you must be aware of the devaluations that informed the "Asian miracle" economies, "
Yes I am, so you are saying exactly what I have been saying, that the end game is to have the world working for these slave wages. Go ahead QE, you only increase my purchasing power. I do business in China and Russia, these markets are full of corruption, bribes, and kickbacks of all sorts. The devalutaion of human life in these societies is more than apparent. If this is your "vision" for the world, QE all you want. Clearly you are a troll and I have better things to do.
Look at Korean, Indonesian, Malaysian, Taiwanese, and several other countries' per capita income growth in Asia and get back to me about those "slave wages".
LOL! what is the average income there again? HA haha hahahaha hahaha ha.
Cheap whores in all those countries, so I'll give you that.
Yeah, let´s go full QEuro. I mean, look at the wonders QE has done for the US and Japan. Thriving economies, full of hopeful and prosperous people with a solid future....
Better to tear it all down and start over? I don't know about you...but I like my cushy life. I don't want to HAVE to farm to survive. I don't want to fend off looters. If you've got something else in mind...I'm all ears. Half the population depends on government money...what DO you do with them? Turn the old into fertilizer? Same with the poor? They DON'T add anything...why keep "leeches" around when times are tough? Being as I'm in the "old" category...it concerns me. 30 years ago I'd have said..."bring it on!" Now I say..."what's the rush?"
Love the meatballs you guys (my ancestors) make...got a great recipe?
So, you've got yours and you want to place any/all burdens on the future generations, keep it going?
All of tis can NOT continue, it's mathematically IMPOSSIBLE. Why do people insist on blaming those who merely point out this FACT? It's the fucking MESSAGE, quit lashing out at the messengers.
I'm not going to advocate for any "solution" (nothing is permanent); however, logic would suggest that the younger folk are NOT going to be able to carry the weight of dead-weight older folks, especially those who think that they should be "retired." Again, it's not that that is what is desired (or promoted), rather, it'll be out of necessity. I'm hedging by showing that I can do actual physical work, that I've attempted to help the future generations, hoping that mercy will be granted me.
So, it comes down to this... What will YOU have done to lessen the blow? Options:
1) Lobbying to do more of what will result in a bigger crash (because it makes it easier on YOU);
2) Do actual work in order to help set in place that which will help give comfort as/after the (guaranteed [by math] to occur) crash.
"I don't want to HAVE to farm to survive. I don't want to fend off looters."
LOL!!! So FEAR is going to guide your decision making? Got news for you, you are precisely the kind of sheeple the kleptocrats will hope keep allowing them to steal. As far as you comment above, if you were serious you would be damn sure that your currency was maintaining it's purchasing power. Got physical and like minded neighbors? you fucking better.
Funny how people think that folks like us are trying to force some way of life on others, a life that is "beneath" them.
Yeah, like I said to myself, "hey! I'm getting old now, I think that it would be great to break my back trying to farm, so MUCH better than sitting in some cushy cubicle where all your needs are pumped directly to you!" (looks suspiciously like the arrangement I have with my animals!)
Been in the cubicle, escaped when I realized that it only leads to slaughter (and the care and feeding by the "masters" was turning, and will continue to turn, to shit.
Richard Koo, flung poo, at you, at the Zoo!
here's an idea! why not pay off the debts first, (by confiscating the oldidorks, and paid off politicians wealth) then add all the QE you want! this guy must be paid by the oldidorks!
Richard Koo is a Foo'!
You got that right!
I've read Koo's book...he makes Krugman look like a Keynesian light weight.