Nomura Research / Balance Sheet Recessions
Richard Koo, Chief Economist of Nomura Research Institute, the research arm of Nomura Securities, Tokyo, is the author of The Holy Grail of Macroeconomics, Revised Edition: Lessons from Japans Great Recession and Balance Sheet Recession: Japan’s Struggle with Uncharted Economics and its Global Implications. In these two books Koo outlines the Japanese experience of boom and bust and how other countries might learn from the country’s experience.
Below is an illuminating slide from a recent presentation by Koo that outlines how economies expand too quickly, based partly on the extension of too much credit, and end up with a balance sheet recession. This cycle would typically play out over a period of decades. For example, in the United States one could argue that point 5 began during the early to mid 1980s when credit began expanding, the “bubble” was reached during the middle part of this decade when household financial obligations as a percent of disposable income peaked and currently the U.S. is facing point 2. The next stage for the U.S. according to Koo would for monetary policy to stop working leaving fiscal policy as the only effective way to manage the balance sheet recession. With a zero percent interest rate policy traditional monetary policy has already hit a wall. It will take strong fiscal discipline to guide the economy going forward. Japan’s bubble peaked at the end of 1989 and according to Koo has only reached the end of point 4 in 2008.
