Richard C. Koo is Chief Economist, Nomura Research Institute, Tokyo
Your book respectively your “Balance Sheet Recession” concept has been the talk of the town in 2009, as the global economy was in the middle of a severe contraction. Stimulus packages around the world however prevented the global economy to slip into a depression. Some economist and politicians are now asking to scale down the stimulus, as if a recovery may have started. Do you agree?
Not until private sector deleveraging is over. At present, private sectors in the US, UK, Spain, Portugal, and Italy are still deleveraging. This means these countries should not try to reduce fiscal stimulus. Any attempt to cut deficit in these countries is likely to result in a weaker economy and a larger deficit as seen in Japan in 1997.
The other source of stimulus is “quantitative easing”. What is your take on this?
Useless until private sector deleveraging is over. When private sector is deleveraging, money multiplier is negative at margin. No monetary stimulus will work in such an environment where people are trying to reduce debt, even with zero interest rates, in order to repair their damaged balance sheets.
Japanese Banking Crisis and US Subprime Crisis, Graph: Richard C. Koo, Nomura Research Institute, Tokyo
Recently you have attended to the conference of “Institute for New Economic Thinking” in King’s College, Cambridge. What was your impression regarding the causes of the ongoing crisis and its possible remedies?
Until people realize that they have contracted a completely different disease called balance sheet recession where the private sector is minimizing debt instead of maximizing profits, a constructive policy dialogue is not likely to be possible. Once the exact nature of the disease is understood, the remedy (sufficient and sustained fiscal stimulus until private sector balance sheets are repaired) will become obvious to everyone.
Thank you very much.
Contrast Between Yin and Yang, Graph: Richard C. Koo, Nomura Research Institute, Tokyo
Richard C. Koo is the Chief Economist of Nomura Research Institute, the research arm of Nomura Securities, the leading securities house in Japan. He is the best-selling author of “Holy Grail of Macro Economics. Lessons from Japan’s Great Recession”.