Credit Writedowns » balance sheet recession

Big in Japan

Michael Pettis — Mon, 12 Sep 2011 13:30:00 +0000

As I see it, Japan’s problem was that during the 1980s it was so addicted to investment-led growth and artificially cheap financing that it misallocated capital on a massive scale and failed to include the resulting implicit losses in its GDP calculations. If you look at real per capita household income and household consumption growth during the period of Japan’s stagnation, you will find that both of them rose fairly rapidly. This isn’t what typically happens during a US-style financial crisis, when household income suffers

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Market volatility and double dip mean re-test of March 2009 low

Comstock Partners — Tue, 06 Sep 2011 22:48:47 +0000

This extra $4.5 trillion of household mortgage debt is a terrible burden on the economy since consumers make up over 70% of our economy. This is why consumer spending has been so tepid over the past few years. U.S. consumers spent well beyond their means for decades and now that they are so overleveraged their PCE will stay constrained for years. The consumer spending didn't seem too onerous over the past few years until the Commerce Department lowered their earlier estimates significantly. Also, consumer confidence by any measure you chose is signaling another recession, and any cuts in federal or state government spending could only exacerbate that. U.S. consumers spent well beyond their means for decades and now that they are so overleveraged their PCE will stay constrained for years. The consumer spending didn't seem too onerous over the past few years until the Commerce Department lowered their earlier estimates significantly. Also, consumer confidence by any measure you chose is signaling another recession, and any cuts in federal or state government spending could only exacerbate that

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The Jackson Hole Spaghetti Toss

Guest Author — Wed, 24 Aug 2011 11:00:00 +0000

If the Chairman has to do something, then the real question is what policy response is adequate to a) reviving asset prices and b) returning the US to trend real GDP growth (since the portfolio balance channel appears to be the only one left for monetary policy transmission to work). Many institutional investors may be realizing that is a null set given current political configurations, and so whatever the Chairman delivers - even if he goes boldly where no Fed governor has ever gone before - may have a very short half life, as we saw with the last move of pegging the 2 year US Treasury yield at the fed funds rate

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The impotence of monetary policy

Edward Harrison — Fri, 24 Jun 2011 00:30:51 +0000

For my part, I am with Richard Koo. Monetary policy reflation will not work in a balance sheet recession when fiscal policy is contractionary. But at some point, the Fed will be compelled to act anyway

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Roach: Return of the Living Dead

Edward Harrison — Thu, 16 Jun 2011 13:47:35 +0000

Rather than adding stimulus with the aim of goosing demand to help the economy reach escape velocity, I would say that the central objective of economic policy is to help the economy reach full employment. Doing so will increase demand, increase output, and cut budget deficits tremendously. Policy makers should do this while aiding the economy in reallocating scarce resources to areas that will sustain longer-term productivity growth. In America, that means less resources in finance and housing and perhaps more in technology and infrastructure

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INET Video: Richard Koo on Balance Sheet Recessions

Edward Harrison — Mon, 11 Apr 2011 19:00:43 +0000

Below is a video of Richard Koo from this past weekend's INET conference in Bretton Woods giving us his latest thoughts on policy responses to a balance sheet recession. He believes that Europe, the U.S. and China have much to learn from Japan 's post-1990 balance sheet recession.

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Flow of Funds indicates businesses have stopped deleveraging

Edward Harrison — Thu, 10 Mar 2011 19:53:14 +0000

The Federal Reserve released the quarterly flow of funds report which allows one to see the debt levels outstanding in the U.S. economy. From the looks of it, deleveraging has not continued apace. UBS’ Andy Lees writes: The Fed Z1 flow of funds report for Q4 just released. Total nonfinancial sector debt grew by 5.1%

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Richard Koo on QE2, China and Balance Sheet Recessions

Edward Harrison — Thu, 10 Mar 2011 14:00:00 +0000

Below, INET’s Rob Johnson interviews Richard Koo, Chief Economist at Nomura and author of the 2009 book "The Holy Grail of Macroeconomics, Revised Edition: Lessons from Japans Great Recession" on how his theory on the Japanese balance sheet recession applies today. Koo gave a speech at the 2010 INET conference in Oxford last year with

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Davos leaves Nouriel Roubini downbeat about policy coordination and Egypt contagion risks

Edward Harrison — Mon, 31 Jan 2011 15:15:51 +0000

Piggybacking off of my last post highlighting Nouriel Roubini’s talk with Simon Constable, I wanted to present three videos from Roubini’s appearance on NBC Europe this morning. In the earlier pre-Davos Wall Street Journal interview, Roubini was pointing out that great risks still remain in the global economy. He highlighted the need for policy coordination

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Housing Double Dip in Progress

Edward Harrison — Tue, 28 Dec 2010 22:00:49 +0000

The Case/Shiller Housing Index numbers were below expectations and confirmed that housing is dipping again after a brief respite. In the video below, Robert Shiller explains what this means for the economy.

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Koo Calls For Stimulus as Private Sector Deleverages

Edward Harrison — Wed, 19 May 2010 12:41:19 +0000

Richard Koo was on Bloomberg yesterday making a lot of good points about what public sector retrenchment will mean, namely a decrease in private sector savings. With households already highly indebted in many countries, this cannot be a good thing. Nevertheless, from my perspective, he has the politics of this all wrong. Koo says: I

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What is a double dip recession?

Edward Harrison — Mon, 17 May 2010 18:50:05 +0000

You hear the term "double dip recession" bandied about in the media a lot these days. But there is no strict definition for what a double dip recession is or what it actually means to an economy. Have no fear; At the weekend, Robert Shiller of Irrational Exuberance fame came up with a working definition

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Why The World Is Headed For A Balance Sheet Recession

Edward Harrison — Thu, 15 Apr 2010 01:35:45 +0000

In my post Koo, White, Soros and Akerloff videos from inaugural INET conference I highlighted four speeches from the recent George Soros-sponsored pow-wow. I have already written up a post based on the one by William White in "The origins of the next crisis." This post serves to give you some colour on another of

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The Retirement Lottery

Niels Jensen — Tue, 02 Mar 2010 18:23:38 +0000

Most of us have about 20 years to secure our retirement - from our mid 40s to our mid 60s. That has been an absolute disaster for my generation, with inflation-adjusted returns on a global equity portfolio being down about 23% over the past decade. The problem confronting us is that we continue to be stuck in a structural bear market which we define as a market where returns are low because valuations (P/E levels) are under pressure.

Unfortunately, this is likely to continue for several years more. Following the liquidity crisis of 2008, we have entered a so-called balance sheet recession. When that happens, the first priority becomes to minimise debts at the cost of pretty much everything else. As both households and corporates change their mindsets about debt, governments may be forced to pick up the slack; otherwise we would enter a very deep recession. Therefore we'd better get used to many more years of large government deficits

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Lessons from Japan on sovereign default and balance sheet recessions

Marshall Auerback — Mon, 22 Feb 2010 19:29:15 +0000

Edward wrote a piece about Japan’s government net asset value falling below zero. He thought it would make sense if I gave you an alternative view using Richard Koo’s latest thinking about the Japanese experience, especially given the parallels to the U.S. regarding balance sheet recessions. Before I get to Koo, I should add that,

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The Age of Deleveraging

Edward Harrison — Sat, 19 Dec 2009 15:38:12 +0000

John Mauldin’s latest is about deleveraging and how this secular trend will drive the macro picture in 2010. The question is why? Read and find out. Also see A conversation with Bridgewater Associates’ Ray Dalio for another good commentary on this topic. John Mauldin, Best-Selling author and recognized financial expert, is also editor of the

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John Mauldin: Thoughts on the Statistical Recovery

Edward Harrison — Sat, 12 Dec 2009 13:52:55 +0000

Below is the latest from John Mauldin via his weekly newsletter. John expects a double dip recession as I do. Here he talks about what I call structurally high private sector unemployment i.e. unemployment in the private sector that cannot be diminished in the medium-term without some serious government action. As usual, I stress the

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The new Japan, domestic consumption, and the neo-liberal thought machine

Marshall Auerback — Wed, 04 Nov 2009 14:26:12 +0000

Several notable economists prognosticated on what Japan should do to get out of their malaise in the 1990s but none of them understood the problem or the options available to the sovereign government. They all gave poor advice. The way Japan recovered after that decade of poor economic outcomes was through fiscal policy. Monetary policy

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Japan does not demonstrate the failure of stimulus

Marshall Auerback — Wed, 04 Nov 2009 02:15:20 +0000

When I read Ed’s recent piece “Japan: stimulus without reform leads to a policy cul de sac,” I couldn’t help but think he is wrong about Japan. Supporting aggregate demand The problem is taxes. In Japan, taxes are too high relative to the desire for spending and savings. Policy makers need to stop taking so

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The next crisis is already under way

Edward Harrison — Mon, 19 Oct 2009 21:52:06 +0000

Wolfgang Munchau of the Financial Times wrote a very important comment piece in today’s Financial Times. In it he said that central banks are targeting asset prices to avoid the brunt of cyclical downturns. This policy is inducing asset bubbles and creating a more volatile real economy with unpredictable negative consequences. I want to expand

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The recession is over but the depression has just begun

Edward Harrison — Thu, 01 Oct 2009 17:49:18 +0000

For the last few months I have been casting around looking for bullish data points as counterfactuals to my more bearish long-term outlook. I have found some, but not enough. If you recall, early this year, I stated that we are in depression, making the case for the ongoing downturn as a depression with a

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Weak consumer spending will last for years

Edward Harrison — Sun, 16 Aug 2009 23:56:08 +0000

It has been my thesis for some time that we are seeing a secular change in consumption patterns in the United States. This will have grave implications for a world economy used to seeing the American consumer as an economic growth engine and consumer of first choice. Retail sales in the United States have fallen

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Revisiting employment indicators for signs of recovery

Edward Harrison — Mon, 10 Aug 2009 19:11:54 +0000

If you recall, at the end of May, I wrote a post “Both initial claims and continuing claims now pointing to recovery” that said jobless claims data were pointing to an imminent recovery. The general gist of my argument was recovery would come by year’s end or early in 2010. But we needed to focus

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US Bancorp CEO makes his case on TARP repayment

Edward Harrison — Thu, 18 Jun 2009 13:56:13 +0000

This video of US Bancorp CEO Richard Davis on CNBC is good in getting to the motivations and thinking of bank CEOs now repaying TARP monies. Davis sounds articulate, well-prepped and diplomatic and makes a lot of sense. You couldn’t ask for a better spokesperson to make the case. The bottom line: Big banks exiting

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The Mega Jeremy Grantham Interview

Edward Harrison — Mon, 08 Jun 2009 03:34:31 +0000

This is an interview in five parts via Morningstar on May 28th with the one-time reputed perma-bear Jeremy Grantham who has been sounding much more bullish of late (in a bear-market rally kind of way). Definitely worth a look. The five parts run just over 20 minutes. Part 1: On dipping a toe back into

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Why the personal consumption data is important to the stock market

Edward Harrison — Tue, 02 Jun 2009 19:41:34 +0000

The data for personal consumption came out yesterday. However, I have not had a chance to look at the data and write a post until now. What I see right now is not good for a sustainable recovery. Let me tell you why and how this could impact the chances for getting a longer cyclical

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Central banks will face a Scylla and Charybdis flation challenge for years

Edward Harrison — Tue, 02 Jun 2009 14:00:40 +0000

Nearly a month ago, back on May 5th, I highlighted some testimony by Federal Reserve Chairman Ben Bernanke before congress in a post labelled, “Bernanke expects recovery later this year". In his testimony, Bernanke used the phrase ‘Scylla and Charybdis’ to describe the Federal Reserve’s policy challenge regarding deflationary and inflationary forces. I would like

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Links: 2009-06-01

Edward Harrison — Mon, 01 Jun 2009 13:18:52 +0000

Welcome to June. Here are today’s links. Susan Boyle, U.K. Talent Show Loser, Rushed to Clinic, Sun Says A break from the finance news for a little celebrity culture trivia: “Susan Boyle, who was runner-up in a U.K. television talent show on May 30, was rushed to a health clinic because of exhaustion, the Sun

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Links: 2009-03-18 18 Mar 2009
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More thoughts on the fake recovery

Edward Harrison — Sat, 23 May 2009 09:21:17 +0000

A recent post I published on both Credit Writedowns and Naked Capitalism, “Both initial claims and continuing claims now pointing to recovery,” has left the impression that I am a wild-eyed bull – for which I have been duly smacked about the head. This is far from the case. A recent post by Nouriel Roubini

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Links: 2009-04-04

Edward Harrison — Sat, 04 Apr 2009 14:40:09 +0000

I have a ton of links today, so I have broken then out into sections. See the news feed for other stories. Finance Inside Obama’s bank CEOs meeting – Eamon Javers – POLITICO.com “My administration,” the president added, “is the only thing between you and the pitchforks.” Lehman Brothers’ Dick Fuld Has a New Gig

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It’s the writedowns, stupid

Edward Harrison — Thu, 19 Mar 2009 18:11:33 +0000

Today, I want to make the case for seeing writedowns as central to this global downturn. To do so, we need to rewind and compare what is going on today with what we have experienced in the past. Drawing on this comparison, I can demonstrate that traditional policy tools are likely to be ineffective today. Moreover, the present course of action will also prove inadequate. Other more aggressive means must be applied in order to ensure a more stable banking system and a path to recovery. Likely remedies will include a reorganization of large swathes of the U.S. banking system.

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Links: 2009-03-18

Edward Harrison — Wed, 18 Mar 2009 11:46:18 +0000

Here are the main links. Others can be found in the news feed (also available via RSS). Enjoy. IMF poised to print billions of dollars in ‘global quantitative easing’ – Telegraph (hat tip Artur. Gold, anyone?) China blocks Coca-Cola bid for Huiyuan – FT.com is this a protectionist move? A (Mostly) Private Capital Assistance Programme

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Links: 2009-01-13 13 Jan 2009
Links: 2009-02-15 15 Feb 2009
Links: 2009-03-08 8 Mar 2009

We are in depression

Edward Harrison — Tue, 17 Feb 2009 20:47:51 +0000

The results of my poll are back and according to readers we are clearly in Depression. A plurality of you voted for depression with a small ‘d,’ edging out those who see Depression with a Big ’D.’ [poll id="2"] I agree with this assessment as I also voted for a depression with a small ‘d.’ Let

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IMF Head Strauss-Kahn uses the D-word Depression 9 Feb 2009
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A conversation with Bridgewater Associates’ Ray Dalio

Edward Harrison — Tue, 10 Feb 2009 14:26:54 +0000

Update: 18 Mar 2008. I am reposting this entry from Feb 10th because it is relevant to the need to liquidate insolvent institutions like AIG that are now getting bailouts

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$1.6 trillion: new estimate on writedowns

Edward Harrison — Mon, 07 Jul 2008 01:59:00 +0000

$1.6 trillion! This is the figure that a Bridgewater Associates study has come up with. I caught this article when I was looking for the original German-language version of a story that MarketWatch exposed regarding the Swiss banks' need for more capital. (see MarketWatch here and my analysis here).

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$5 trillion to go on balance sheets again? 4 Jun 2008
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