Economics in the Age of Deleveraging

Clearly, economic policy is now far more complex than it appeared to be before the GFC. As we enter this Age of Deleveraging, the worst thing we can do is apply policies that appeared to work during the preceding Age of Leverage—but were in fact predicated on ever-rising private sector indebtedness. Politicians should be sceptical of conventional economic advice at this time; it would be much wiser to study the history of the 1930s instead

The impotence of monetary policy

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

Roach: Return of the Living Dead

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

Koo says QE2 drove speculation, but what about the real economy?

So, the Fed has basically just announced it will stop QE2. It will then start selling Treasuries. And remember, this is at the same time the Treasury is selling $10 billion a month in mortgage securities. Only after this will rates be hiked. That doesn’t sound like a bullish scenario for risk assets. Bond yields could fall even though the Fed is selling if the economy swoons as a consequence

INET Video: Richard Koo on Balance Sheet Recessions

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.

Richard Koo on QE2, China and Balance Sheet Recessions

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

Koo Calls For Stimulus as Private Sector Deleverages

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

Why The World Is Headed For A Balance Sheet Recession

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

Koo, White, Soros and Akerloff videos from inaugural INET conference

These videos are from the Inaugural Institute of New Economic Thinking (INET) conference in Cambridge. Hat Tip Mark Thoma

The Retirement Lottery

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

Lessons from Japan on sovereign default and balance sheet recessions

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,

Japanese government has negative net asset value

Bloomberg reports: The Japanese government’s net assets in 2009 may have fallen below zero for the first time, the Nikkei newspaper reported, citing an unidentified government official. The result, which includes the central and regional governments, may add to pressure for the government to reduce bond sales, the paper said. Net assets of the central