Richard Koo Explains It's Not The Fed, Stupid; It's The Fiscal Cliff!

Tyler Durden's picture

While Koo-nesianism is only one ideological branch removed from Keynesianism, Nomura's Richard Koo's diagnosis of the crisis the advanced economies of the world faces has been spot on. We have discussed the concept of the balance sheet recession many times and this three-and-a-half minute clip from Bloomberg TV provides the most succinct explanation of not just how we got here but why the Fed is now impotent (which may come as a surprise to those buying stocks) and why it is the fiscal cliff that everyone should be worried about. As Koo notes, the US "is beginning to look more like Japan... going through the same process that Japan went through 15 years earlier." The Japanese experience made it clear that when the private sector is minimizing debt (or deleveraging) with very low interest rates, there is little that monetary policy can do.The government cannot tell the private sector don't repay your balance sheets
because private sector must repair its balance sheets. In Koo's words: "the only thing the
government can do is to spend the money that the private sector has saved and put that
back into the income stream" - which (rightly or wrongly) places the US economy in the hands of the US Congress (and makes the Fed irrelevant).

 

DEIRDRE BOLTON, BLOOMBERG NEWS ANCHOR:  Based on the data points, the economic data points we've got in the past month, how likely is it that the U.S. is heading towards a lost decade? Is it more or less likely than what you told us about four to six months ago?

RICHARD KOO, CHIEF ECONOMIST, NOMURA RESEARCH INSTITUTE: Well, it is beginning to look more like Japan. The amount of house price declines, the commercial real estate price declines there, all following the Japanese pattern very precisely and very slow GDP growth, even with all this monetary easing, QE2, possibly QE3.

So yes, to me, the United States is going through the same process of what I call balance sheet recession, that Japan went through 15 years earlier.

BOLTON: You mentioned the possibility of QE3. What should Ben Bernanke do today in his speech and then what should he do as a follow-up action?

KOO: Well, actually, the Japanese experience told us that when private sector is minimizing debt or deleveraging with very low interest rates, there's very little monetary policy can do.

In fact, Chairman Bernanke has been saying, since the middle of last year that this is no time to cut budget deficit. The fiscal stimulus should be in place because I think he also understands that under the circumstances, there's so little that monetary policy can do.

But there's a lot the fiscal policy can do to keep the U.S. economy from losing its bottom.

BOLTON: Richard, how.

KOO: And so I think he should continue to push that line. Yes?

BOLTON: Continue to push that line and maybe try to subtly encourage Washington to take a little bit more control. Sounds like you think that Congress should do something.

KOO: Yes, because when people are deleveraging even with zero interest rates, that means they are very sick. The private sector is very sick and in need of help because their balance sheets are under water.

And then that's the case, even if Federal Reserve lowers interest rates, puts liquidity into the market, the private sector cannot really respond because they have balance sheet problems.

And the government cannot tell the private sector don't repay your balance sheets because private sector must repair its balance sheets. So the only thing the government can do is to spend the money that private sector has saved and put that back into the income stream.

And that, I think is what the U.S. has to do. And that means this is no time to cut budget deficit. You have to maintain the fiscal stimulus until private sector is healthy enough to start borrowing and spending money again.

And at that point, Federal Reserve will become all very irrelevant. But at the moment, I think the control of the U.S. economy is really in the hands of Congress.

 

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SGS's picture

Be aware Mr O'leary is now buying phyzz.  The volcano of institutional buying will be full retard. 

Precious's picture

-> There will be more QE

-> There will be less QE

Precious's picture

-> There will be war with Iran

-> There will be peace with Iran

Precious's picture

-> Fiscal cliff will further damage the economy

-> Fiscal cliff will not affect the economy

Precious's picture

-> There will be future inflation

-> There will be future deflation

Precious's picture

-> Equities will be higher in one year

-> Equities will be lower in one year

Precious's picture

-> Gold will be higher in one year

-> Gold will be lower in one year

Precious's picture

-> The EU will have fewer members in one year

-> The EU will have the same members in one year

Precious's picture

-> Bernanke will not be Fed Chairman next year

-> Bernanke will be Fed Chairman next year

Precious's picture

-> Oil will be over $100 per barrel in one year

-> Oil will be under $100 per barrel in one year

old naughty's picture

"QE Infinity pretty much guarantees that..."

Ben does not feel like Japan; does not live like Japan; does not look like Japan.

As he and his friends puts it: "The US is not Japan."

GetZeeGold's picture

 

 

Do you really think so?

http://www.youtube.com/watch?v=IWWwM2wwMww

 

Paging Cindy Lauper......she bops.....ain't no law against it yet.

 

Precious's picture

-> Housing prices will be lower in one year

-> Housing prices will be higher in one year

Precious's picture

-> Unemployment will be higher than 8% in one year

-> Unemployment will be lower then 8% in one year

akak's picture

-> Enough up-arrow/down-arrow posts!

-> We need more up-arrow/down-arrow posts.

JLee2027's picture

What fiscal cliff? Congress will just pass a bill and change the rules again. Extend and pray - forever!

boogerbently's picture

Interest at ZERO has NOT inspired borrowing?

Interest at ZERO has NOT inspired lending.

The logic is that more gasoline will eventually extinguish the fire.

Hulk's picture

-> you will be one year older in one year

-> you will be one year younger in one year

francis_sawyer's picture

<=== Itz da jooze

<=== Itz da goyim

blunderdog's picture

 -> There will be boatloads of SPAM

 -> There may someday be relief from SPAM

Michael's picture

Richard Koo Koo.

 

All we have to do is eliminate those thousand individual points of light George Bush Sr spoke of.

 

I just dont think anybody gets what I am talking about with that bold statement.

Note the date of this GWB SR speech.

George Bush Sr. New World Order Live Speech Sept 11 1991

http://www.youtube.com/watch?v=byxeOG_pZ1o&feature=related

Bush Sr. New World Order Speech Rare

http://www.youtube.com/watch?v=K37x7oWfm_U&feature=related

 

Those 1,000 points of light are the 1,000 people who own us.

 

I get that Wendell Goler confused look at the end of this video a lot on some of my comments;

Mike Huckabee Challenges Ron Paul on Iraq

http://www.youtube.com/watch?v=3-xN4BSDNNM

Michael's picture

Dr. Judy Wood - Where Did the Towers Go?

https://www.youtube.com/watch?feature=player_embedded&v=ZWjktDuIhR8

Organic matter reacts differently then in-organic matter when subject to a directed specific type of energy wave. Sort of like that which comes from a Star Trek Phaser. Think Tesla influence.

There were TWO types of demolition techniques used on the World Trade Center Towers on 9/11.

When I release specific info like this, I spread it far and wide to where they would have to shut down the entire Internet to get rid of it.

Twenty-five years after Reagan's Star Wars speech

http://www.thebulletin.org/web-edition/op-eds/twenty-five-years-after-reagans-star-wars-speech

Reagan launches SDI

http://www.youtube.com/watch?v=oyJjngsudW4

(Star Wars-Ronald Reagan ) Strategic Defense Initiative - SDI

http://www.youtube.com/watch?v=dq6ZsF6bzOA&feature=related

Element's picture

Dr. Judy Wood?

Michael ... wtf?... she's the most full of crap 9-11 nut-job around. Take a critical analytical look at what she's saying, and her alleged 'evidence', she's pure snake-oil.  And the Tesla effect bollocks, that may be the lamest crock I've ever seen.  Up to you, but if you're going to read people like that make sure you have your bullshit detector pinned on '11'.

max2205's picture

Why are we wasting salary on 535 people including POTUS when Ben is the only one running the show

boogerbently's picture

How about we reduce the pensions of all the "ex" 535, currently recieving 100% retirement?!?!

Ben COULD say trillion$$$ should go directly to taxpayers.

q99x2's picture

And its off to QE infinity with gold up another $3.80 and silver up $0.12; wheat, sugar, coffee, the markets green across the board. Fuck WWIII we have a rally going on.

Is it any wonder they couldn't pull the traders from their terminals as the world trade centers collapsed.

Time for psychopathic mass hysteria, hookers and another round of coke.

boogerbently's picture

I didn't lose my job, and, until 2008, never participated in the stock market.

I entered just before the bottom (Mar. 2009).

Recession been "belly belly good to me."

If a novice, like me,  could make $$$ in this market, anyone could.

People with their $$$ in "safe" treasuries have only themselves to blame.

Fitting, that in the Wall St. casino, my best "bet" was LVS. (and gold)

Yen Cross's picture

KOO KOO? I respect the fact that this "Harvard Edukated" "post Doc. can evaluate the obvious.  Grants and "global warming"aside, let's ( lay some pipe, and flow some "nat gas"!   Flush those arab assholes down the drain, and focus on the "United States of America

bank guy in Brussels's picture

In contrast to a meme among ZH readers - somewhat egged on by Tyler's omissions - Japan is a great success story, thanks to following the policies of Richard Koo. The so-called 'lost decades' were actually quite all right for the Japanese.

For 22 years, despite a huge market crash and asset price collapses of 70% in both stock shares and real estate - life has remained quite all right for most Japanese.

A key element of Richard Koo's thought - which he himself does not emphasise enough - is that in Japan, like Iceland - but unlike the US or the EU in southern Europe - in Japan there was no 'austerity' against common working people. (Austerity in the sense of cutting worker jobs, incomes, pensions and benefits).

In Japan they floated the banks, yes ... but they also kept common people in jobs and incomes and with money to spend ... so life stayed quite okay, and the avoided the depression and trauma that is afflicting life in the USA now, and life in Greece etc. under the brutally unfair 'Troika'.

Richard Koo is a great, compassionate, intelligent guy ... who has been trying to tell both the US and the EU what actually WORKS to preserve the life of common people in our once-in-a-lifetime balance sheet recession.

Yes, Japan has a lot of gov't debt, basically owed to itself (and which it can thus write off to itself as well) ... but they have had 22 years of maintaining good quality of life for most Japanese citizens, Fukushima aside.

When the banks crashed in Iceland, they did not do brutal 'sink or swim' austerity ... they actually increased social support for working and common people.

In the US and EU we should all be lucky to have the same economic success as in Richard Koo's Japan.

Yen Cross's picture

[Bank guy],in "Brussels" , would you mind answering a question for me.? If you agree I'll ask, as I appreciate " Banking Privacy"

geno-econ's picture

But Japan does not have a Defense budget to worry about. Ours is $700 billion with other costs off budget and inefficient investment policies that promote bubbles that create huge income disparity.  Unfortunatly Koo's compassion is not the American way. 

grid-b-gone's picture

Which explains why China is not talking about taking any U.S. islands.

suteibu's picture

Japan is a great success story, thanks to following the policies of Richard Koo.

There is so much wrong with your comment but I will start here.  That debt which has given Japan a generation of respite from the damage done by their own asset bubble is about to fuck the next 3 increasingly smaller generations of Japanese through higher taxes, falling incomes, and dwindling discretionary funds and savings. 

Nearly 50% of Japan's workforce is currently either working part time or drawing unemployment.  That figure will rise as the central planners in Japan convert the economy from manufacturing/export to (I kid you not) a service economy - because hotel and tourism jobs are good replacements for manufacturing jobs, I suppose.

Poverty is at such high levels in Japan that the government, rather than dealing with the problem, have merely changed the criteria so that the rate would be more politically digestable.

Divorce, single parent households, suicides, crime, acts of aggression, and homeless rates are rising while the birthrate and incomes are falling.

The pension system is underwater.  And so are private pension systems which will soon be rolled into the government system which will only make matters worse.

The consumption tax was just doubled yet, before it is even implemented, they are looking to doubling it again because the government is spending the money on more Koo-esque type stimulus programs instead of reducing the yearly deficit which is 50% of the "official" yearly budget but much higher when one adds all of the money the government spends. 

I could go on....

Following Koo's advice has kept Japan treading water at best but the nation is on the event horizon of a massive whirlpool.  It will be small consolation for all of those Japanese debt holders to know that foreigners will not be affected when the whole thing gets sucked under.  The cost of modern economic "science," whether it comes from Keynes, Bernanke, or Koo carries a heavy price for people who have little say in the matter.

EvlTheCat's picture

please don't quote so we can vote

++++++ to you!

Bank Guy's idea of compassion is stealing from responsible savers and wasting the money on compulsive gamblers who don't have to attend gamblers anonymous meetings because their psychopathic behavior is considered normal in their own circle.  But what do you expect from a "bank guy"?

@bank guy in Brussels

Now I know why you hate the death penalty.  You can't tax the dead in order to socialize your losses.

suteibu's picture

Thanks.  I was unaware of the quote/vote issue.

boogerbently's picture

Sut,

" That debt which has given Japan a generation of respite from the damage done by their own asset bubble is about to fuck the next 3 increasingly smaller generations of Japanese through higher taxes, falling incomes, and dwindling discretionary funds and savings.

Nearly 50% of Japan's workforce is currently either working part time or drawing unemployment. That figure will rise as the central planners in Japan convert the economy from manufacturing/export to (I kid you not) a service economy - because hotel and tourism jobs are good replacements for manufacturing jobs, I suppose.

Poverty is at such high levels in Japan that the government, rather than dealing with the problem, have merely changed the criteria so that the rate would be more politically digestable.

Divorce, single parent households, suicides, crime, acts of aggression, and homeless rates are rising while the birthrate and incomes are falling.

The pension system is underwater. And so are private pension systems which will soon be rolled into the government system which will only make matters worse.

The consumption tax was just doubled yet, before it is even implemented, they are looking to doubling it again because the government is spending the money on more Koo-esque type stimulus programs instead of reducing the yearly deficit which is 50% of the "official" yearly budget but much higher when one adds all of the money the government spends. "

In your statement, remove the word Japan, and insert USA, or France, or Greece.

suteibu's picture

Indeed.  The entire developed world is turning Japanese, but nobody does it better.  It is a rather nasty side effect of central planning, central banks and welfare states, although some seem to think these are features rather than bugs.

JamesBond's picture

when the big flush occurs, japan will turn inward once again.  they will 'take care' of their own and all the other

international investors will lose their shirts.  always remember that you're nothing but a gaijin   

 

jb

GernB's picture

You have a strange definition of "quite all right." Had they gone through with the deleveraging needed it would have been short and painful and then Japan would have once again prospered. As it is, they have made the pain last 10x as long, though some what less painful, with an economic disaster looming whe the end finally comes. The Japanese people deserve to prosper, but the central planners have taken thst away from them and left them with perpetual struggle.

FreedomGuy's picture

Japan had an export based economy which the U.S. and others kept afloat. If we did not keep buying their cars and electronics there would not have been jobs for the nice Japanese to keep their nice people in. The USA and Europe have not been in simultaneous recession with Japan.

Their bill will come due, as well as ours and Europe's.

Where I disagree with Koo's fundamental philosophy is the government spending can somehow replace private spending. As he said in his video, the government must spend the saved money as the people deleverage. What happens is you deleverage because it is the right or even necessary thing to do and the government releverages you with public debt. The difference is the government lets you put if off which appears as the annual deficit. The other difference is the government will spend money very differently than you and I would. They will not replace my spending at REI, Amazon, Kohl's or Walmart. They will repave a road, buy more paper clips, add another neutron bomb, lend money to another Solyndra, subsidize corn even more or pass the money to their political donors. It will not have the same effect on the economy.

In essence, there is no winning this game, because as you deleverage yourself, your government releverages you and moves the money to completely different places. My guess is economic stagnation and fragility. Does that not seem to be about the case right now?

brettd's picture

USA and Japan are vastly different cultures.

Japan and Iceland similar in homogeniaity.

USA not so much.

StychoKiller's picture

The declining birthrate in Japan sez:  You are delusional!

EvlTheCat's picture

Do you just go around arbitrarily making meaningless comments to well documented information?

Population density is not birth rate.  You might want to look those two ideas up so you can distinguish between them.

Freegolder's picture

The governments of the world have no money, so they mostly have to borrow to spend. To stop rates from rising they use QE to monetise the debt. There is only one end to this (certainly for Japan and the US), and that is currency collapse.

It is now just a matter of time, a few more years perhaps.

And then the world can renew itself a fairer place under a freegold monetary system (and no America throwing its weight around either).

Happy days lie ahead (although I am biased given my gold stocks).

NewWorldOrange's picture

Gold STOCKS? As in PAPER STOCKS, not a "stock" of physical gold?

HAHAHAHA hohohoho HEHEHEHEHE!!!!!!!!!!

Good luck with that, and good luck to your...cough...bankrupt....cough....counterparty.

boogerbently's picture

When they "confiscate" gold, what will happen to yours when you try to sell or trade it ?

HAHAHAHA hohohoho HEHEHEHEHE!!!!!!!!!!

Good luck with that, and good luck to your...cough...bankrupt....cough....thought process.

 

Overfed's picture

Happy days lie ahead? 'Fraid not.

I think this is what we have ahead of us. http://youtu.be/Gy7FVXERKFE