Richard Koo On The Ineffectiveness Of Monetary Expansion

Tyler Durden's picture

Excerpted by George Dorgan of SNBCHF blog,

These are extraordinary times for central banks. Near zero interest rates and massive liquidity injections are still failing to bring life back to so many economies in the developed world.

About the inability of FX markets to judge the effects of monetary expansion

Koo: As more and more people began to realize that increases in monetary base via QE during balance sheet recessions do not mean equivalent increases in money supply, the hype over QEs in the FX market is likely to calm down. At the moment, however, that is not yet the case, as the sharp fall of the yen following the announcement of Abenomics with its commitment to monetary easing amply demonstrates...


The only way quantitative easing can have a positive impact on economic activity is if the authorities’ purchase of assets from the private sector boosts asset prices, making people feel wealthier and thereby encouraging them to consume more. This is the wealth effect, often referred to by the Fed chairman Bernanke as the portfolio rebalancing effect, but even he has acknowledged that it has a very limited impact...


In a sense, quantitative easing is meant to benefit the wealthy. After all, it can contribute to GDP only by making those with assets feel wealthier and encouraging them to consume more.

Home prices of countries with trade deficits increased due to unnaturally low interest rates

The following graph suggests that differences in the development of home prices among major nations will need to re-adjust to the mean of 1991, i.e. German prices must rise and/or the ones with current account deficits and a tradition of high rates must fall.

Money supply versus monetary base

Koo: For example, the US monetary base grew from 100 at the time of Lehman Shock to 347 today as mentioned earlier, but the money supply grew only from 100 to 135 during the same period. In the UK where the monetary base now stands at 433, the money supply is stuck at a pitiful 110. In the Eurozone, the monetary base is at 157 while the money supply is at 107. In Japan, the monetary base is at 150 while the money supply is at 113.

Similarly the monetary base compared to credit to private sector:

FX traders do not understand link between monetary base and money supply

Koo: Instead, foreign exchange dealers and traders, who probably do not have time to think about the complicated link between monetary base and money supply during balance sheet recessions, simply assumed the textbook case where monetary base and money supply are expected to move in tandem (which was indeed true before the bursting of the bubble).

Koo affirms that fiscal spending and not monetary policy saved the US from the Great Depression:

Koo: Unfortunately there was a period in economics profession, from late 1980s to early 2000s, where many noted academics tried to re-write the history by arguing that it was monetary and not fiscal policy that allowed the US economy to recover from the Great Depression. They made this argument based on the fact that the US money supply increased significantly from 1933 to 1936. However, none of these academics bothered to look at what was on the asset side of banks’ balance sheets.


The asset side of banks’ balance sheet clearly indicates that it was lending to the government that grew during this period (chart below). The lending to the private sector did not grow at all during this period because the sector was still repairing its balance sheets. And the government was borrowing because the Roosevelt Administration needed to finance its New Deal fiscal stimulus. In other words, it was Roosevelt’s fiscal stimulus that increased both the GDP and money supply after 1933...


Although deficit spending is frequently associated with crowding out and misallocation of resources, during balance sheet recessions, the opposite is true.

Koo delivers an explanation for falling bond yields.

Koo: In most countries, they are not supposed to take too much foreign exchange risk, and they are also not supposed to take too much principle risk, meaning that not all funds can be invested in equities, that a large portion must be invested in fixed income assets, i.e., bonds.


When investors with these restrictions are faced with a private sector that is not borrowing money at all, the only asset these investors can invest in would be their own government bonds. This is because the government is the only borrower left in the country. As a result, a large portion of the saved and deleveraged funds end up in government bond market, resulting in ridiculously low bond yield during this type of recessions.


Low bond yield, in turn, is a natural corrective mechanism that helps governments put in necessary fiscal stimulus to support their economies during balance sheet recessions.

About the Euro zone:

Koo: As a result, there has been a huge capital flight out of peripheral countries to Germany, resulting in a ridiculously low Bund yield of 1.5 percent or less at ten years for a country with the lowest unemployment rate in 20 years and the largest-ever industrial production...


If the different risk weights manage to keep sufficient domestic savings at home, bond yields [in the periphery] will come down...


The OMT by the ECB announced last year may be viewed as an effort to return the savings back to the countries that generated them. However, the conditions attached to the OMT, that receiving countries engage in fiscal consolidation, are totally counter-productive when the countries are facing balance sheet recessions...


In other words, they are apparently aware that Europe is in a balance sheet recession. And yet Mr. Draghi is still insisting that these countries continue with their fiscal austerity which not only does not follow from his own diagnosis that these economies are in balance sheet recessions, but is also making recessions in these countries much worse...


The booming economies of the periphery also allowed the Germans to export their way out of balance sheet recessions by 2007-8...


Spain is already in a deflationary spiral and others are not too far behind. This crazy cycle of bubbles and balance sheet recessions in the Eurozone could have been avoided if the German government implemented necessary fiscal stimulus starting in 2000...


The 3 percent deficit rule is appropriate when the economy is not in balance sheet recession, but is highly disruptive if the economy is suffering from this disease.

About Japan’s Abeconomics:

Koo: In Japan, the new governor of Bank of Japan Mr. Kuroda, who has no prior experience with monetary policy, is still clinging to the obsolete idea that additional bond purchases will somehow get the economic activity and inflation rates to pick up.

About the withdrawal of liquidity by central banks:

Koo: But once the private sector finishes repairing balance sheets and regains its appetite for borrowings, the central bank will be forced to remove the massive reserves in the banking system before both money supply and inflation go through the roof. The benefit of implementation QE and the cost of its removal are not symmetrical because the two take place at different phases of the economy. At this juncture, a QE of $200 billion or $2 trillion really does not make much difference because the money multiplier is dead in the water...


This time, however, the US and UK central banks are in the long end of the market. This means the removal of QE will have much larger effect at the long end of the yield curve, with equally larger impact on the economy just when the economy is regaining its health and willingness to borrow

Full PDF below:

Koo Ineffectiveness Monetary Expansion

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maskone909's picture

Speaking of QE
Japan is revising their constitution in attempt to take away more freedoms and give more power to the military. They were chanting "BANZAI!" Getting a little crazy,world.

SafelyGraze's picture

in the news today, they said the economy is showing signs of improvement

sign 1: so many people are now unemployed that fewer employees are available to be fired or laid off

sign 2: libor and the fed's purchase of treasurys are making mortgage rates drop


notbot's picture

Koo is the grand poobah of Keynesian econ. He makes Krugman look like a light-weight.


If only we had more cash-for-clunkers and plowing-under-crops fiscal policy, we'd all be rich.  Nevermind if the market is trying to clear out previous mal-investment. 

SleepingBear's picture

Yea I wanted to point out the same. I'm sure ZH appreciates Koo's indictment of the efficacy of monetary expansion, but do they realize his solution is massive fiscal expansion? If you guys like Koo, than Paul Krugman does some really great work on the liquidity trap you should check out


Pool Shark's picture



Koo has essentially said the reason QE hasn't worked is because central banks have been half-hearted about it.

As far as I'm concerned, Koo can rot with Keynes...


matrix2012's picture


JAPAN steps up and defies the new world order with a Banzai

This is great news against the NEW world order flow, we have seen in the last 30 years, Japan and is saying NO to globalism as the USA has been full steam ahead on since Clinton and NAFTA.

Sunday's proceedings (4/28) were filled with nationalistic rituals considered symbols of the imperial warship that drove Japan to its 20th century aggression in Asia. The ceremony started with the singing of the controversial national anthem "Kimigayo" ("His Majesty's Reign"), and ended with "Banzai!" cheers for Emperor Akihito.


PRETENDING things before and during World War II did not happen is indeed NOTHING NEW in Japan.


Watch here the BANZAI CHARGE

"Banzai charge" (or "banzai attack") (????) Banzai totsugeki was a name applied during World War II by the Allied forces to human wave-style attacks mounted by infantry forces of the Imperial Japanese Army. The name Gyokusai (Japanese: ??, honourable suicide; literally "broken jade" or "broken jewel") was however used by the Naikaku Joh?kyoku (Cabinet Information Bureau) and the media of the Imperial Japanese regime. These attacks were usually launched as a suicide attack to avoid surrender and perceived dishonor or as a final attempt at maximizing the odds of success in the face of usually numerically superior Allied forces.



"You will not hear much about Sunday in the mainstream media or on financial news but it is bigger than money printing. During the ceremonies the national anthem "Kimigayo" was sang, ending with cheers of "Banzai" for Emperor Akihito. The anthem for Japan from 1868 to 1945 revered the imperial family and lauded Japanese pride. For the most part it had been forbidden since the end of WWII. There is no doubt Japan will move to remove the pacifist nature of its current constitution and begin to build its military.

It's not great news for its neighbors but I suspect will be great for the Japanese economy and more importantly rekindle a warrior spirit that's faded away over the last few decades. If the Japanese economy and stock market continue to rebound the simplistic answer will be money printing, but make no mistake there will be an answer more critical and one we need to observe very closely."


"Tenno Heika Banzai!"

There was only one unscripted moment, dutifully ignored by all the major broadcasters except the center-left TBS network. One of the attendees started shouting, "Tenno heika banzai!" ("May the Emperor live 10,000 years!"). Much of the rest of the audience soon joined in, causing the Imperial Couple, who had been leaving, to freeze like two deer caught in the headlights. (Link – J video


This guy seems to grasp the underlying causes of WW2 (posted in jp, use SRWare Iron browser to have it auto-translated) -



ihedgemyhedges's picture

It's quite effective for "us".

Sincerely, The Top 0.1%

Antifederalist's picture

Yes, it is for now. But karma is a bitch.

Dumb fucks like Blankfein buying $43 mm houses in Hamptons

Good luck enjoying that property pal.

You are going to need a small army for security when the dollar is confetti.

In Weimar they called the paper mark Jew confetti

dow2000's picture

Honestly this whole empire of fucking lies sucks...when will you fucking sheep get up grab ypur fucking gun and rid the world of a few corrupt bankers? 


nobodyimportant's picture

And what is your body count to date?

ShrNfr's picture

Of course, when the wealthy sell those assets to somebody, somebody has to buy them. The buyers are known as the "sucker class". When the buyer is the government, the ultimate buyers are known as "the sucker class of raped and pillaged taxpayers".

Seer's picture
"Koo: But once the private sector finishes repairing balance sheets and regains its appetite for borrowings, the central bank will be forced to remove the massive reserves in the banking system before both money supply and inflation go through the roof." Ha ha!  This guy is funny! "private sector finishes repairing balance sheets" and starts to borrow again, hysterical! Hey Koo, wake the fuck up!  PEOPLE are broke.  How are THEIR "balance sheets" to be "repaired?" This is a perpetual decline.  Economies of scale are going to unwind: no buyers, no production.
css1971's picture

With our current monetary system debt can only be moved around. Paying it off causes massive deflation/depression. So if the private sector are to "repair their balance sheets" someone else has to take on all that debt.

So far the public sector debt is barely keeping up with private deleveraging.

i.e. we all have to go Japanese. Expect another 20 years of this... Or at least 11+ years at the current rate.

W T F II's picture

Koo is WRONG....None of it matters, because the whole system is about to be re-vamped (no pun intended on the "vamp" part)

socalbeach's picture

Where is Koo getting his money supply growth figures from?  Even M1, the narrowest measure of non-monetary base money supply, has increased from about 1.4t to 2.5t, which is way more than the 30% increase he states.

M1 adjusted for retail sweeps hasn't gone up as much, only about 52% since 2008, but that's still more than the 30% he states.

Richard Koo: "For example, the US monetary base grew from 100 at the time of Lehman Shock to 347 today as mentioned earlier, but the money supply grew only from 100 to 135 during the same period."

edit: He's using M2 which has gone up 36% since Sept, 1, 2008.  But in absolute terms during that period, M2 is up almost $3t, more than the increase in the monetary base. 

dootyfree's picture

that's why he's the best.  No BS, just the facts.

polo007's picture

Here is a downloadable PDF version:

Central Banks in Balance Sheet Recessions: A Search for Correct Response


q99x2's picture

Invest in government. The guys a moron.

Hobbleknee's picture

In Germany, housing bubbles come and go during the time it takes you to file all the paperwork required to buy a house.

dunce's picture

He may be right that QE only benefits people with assets but those same people feel anxiety instead of feeling wealthier because they know it is phony asset pricing. The stagnation in expansion investing is a massive no confidence vote on current policy. Huge operations are being mothballed all over the world. Vale gave up on a huge potash mine in Argentina after putting in 2 billion, large operations in Australia are being shelved.  Those are just two off the top of my head, i think Shell made a big reduction in one of their projects also. None of these movers and shakers can do anything until the politicians and bankers get out of the way. the solution can be said to be political in as much as we need a new set of politicians.

Setarcos's picture

You are not wrong.

Huge projects here in Australia are being shelved ... and we are the biggest "hole in the ground", having done nothing value-added for decades, e.g. exporting raw iron ore, coal and our remaining forests.

Australia is a disaster waiting to happen ... including the ridiculous housing bubble.

Andy Lewis's picture

Of course it's ineffective.   Feed the money to the banks and watch them dump it into commodities thereby spiking food prices.  It's not supposed to work for us.

Real Keynesianism - feeding money to the needy - works for all of us, and everybody goddamn well knows it.

Setarcos's picture

Well at least you get REAL Keynesianism, but you are likely to get slaughtered in ZH, because of the very popular - but erroneous - belief that idiots like Krugman are Keynesians.

Those who push this line - and the never tested Austrian School - fail to accept the fact that post-WW2 prosperity was largely due to Keynes' ideas, as the late J K Galbraith amply explained in such books as, "The Affluent Society".


Real Keynesianism - feeding money to the needy - works for all of us, and everybody goddamn well knows it.

Trouble is they do not, or not since the rise and rise of monetarism since the 1980s (the Chicago School and Reagan/Thatcherism).

Interestingly Thatcher was a disciple of Ayn Rand, along with Alan Greenspan and Ron Paul ... a very interesting mix, with Thatcher being the greatest advocate of destroying society and promoting individual greed - she deregulated the City of London banksters, thus causing what many ZHers complain about today, whilst also still arguing the monetarist/Libertarian line launched by the likes of Milton Freidman, Reagan, Greenspan and Ron Paul of course, who made a lot of noise about the Fed and Big Government, but never achieved anything and has lived off the teat of the State for decades, with his son following suit ... and it's more than notable that the idolized Ayn Rand also never did a day of honest work in her life, unless you count writing a fictional novel, "Atlas Shrugged".

If this thread stays up, then I expect down arrows, but I gave you an up.



Urban Redneck's picture

Real Keynesianism isn't feeding money to the needy - which doesn't work.

The feeding money to the wanting crowd never accepts that times are good are now, and therefore the time to be building counter-cyclical buffers is now, because there is always some needy or worthy Piece of Shit that can fed others' money.  

So now the economy is bouncing along a bottom, with a high debt load, no savings, and no mechanism to kick start economic growth.  

There is no such thing as real Keynesianism (outside the imaginary world of literature).  The Keynesians have had over forty years to speak up about savings since the Monetarist putsch.  Decades later, after a triumvirate of Monetarists finally delivered "savings" - albeit through an accounting gimmick as opposed to real savings, the real Keynesians had yet another glaring opportunity to speak up, but there was silence, because it was spending time, and some needy or worthy Pieces of Shit wanted money...  

Setarcos's picture

In FACT it was Keynes who advocated "building counter-cyclical buffers" with fiscal/tax policies during good times, whereas the monetarists - represented by such as Reagan and Bush - used the good times to cut taxes, at least for the very rich.

Contrary to your assertions, real Keynesians DID speak up, but we got rolled by the "greed is good brigade" and the ignoranti like you URBAN REDNECK ... fancy you being apparently proud of being that!

Urban Redneck's picture

Perhaps you are illerate, or suffering from some Pavlovian bigotry.  But if you just want to toss names around- I would be more careful about tossing around words like ignoranti when addressing your intellectual superiors.


Setarcos's picture

Oh dear, are you arrogant or what!?

I was having an oblique dig, but you come out with all guns blazing.

BTW it is 'illiterate', regardless of how you like to spell the word for not being able to read, nor write well ... but we all can do typos, I grant you that.

Urban Redneck's picture

I was returning the favor.  

You write about Keynesianism as if Keynes gave a shit about about social justice.  Once can debate whether Keynes was a statist or a royalist, but in practice he was all for fucking over the serfs and savers alike to serve the interests of the Empire.  

Those very interests of empire, and comparative advantages in infrastructure, certainly helped fuel the economic prosperity of the US following WW2-- far more so than any stimulation of aggregate demand by the gross misdirection of scarce resources by the State, which has in effect transitioned the economy from manufacturing, to service, to information, to finance, to utter bullshit-- all in the pursuit of stimulating demand by the non-productive as opposed to developing productive capacities.

I fart in the general direction Keynesians, neo-Keynesians, and Austrians alike, if for no other than economic ideology should not be elevated to dogma, since economics does not exist in a social science vacuum and the precise applicability of models predicated on certeris paribus to a actual economy will vary from cycle to cycle based on externalities.

MagicMoney's picture

Actually Bush cut taxes for the middle class too. Keynesianism doesn't work. It's witchcraft, and how did cutting taxes before the 2007-2008 crisis prevent the bailouts, stimulus exactly? It didn't. So your argument for "building counter-cyclical buffers" during good times makes no sense at all.

MagicMoney's picture

Richard Koo is absolutely wrong about the Great Depression. Spending money did not improve the economy. That's why the Depression lasted 15 years. He is very ignorant of basic economics, even history, and believes in mythology. Richard Koo even makes a false premise that the wealth effect only works for the rich. Wealth effect (tricking people into thinking they have assets, or savings) also works on lower income as well. False premise totally, and Richard Koo is a religious nut who doesn't even make a convincing argument.