Interesting commentary from Richard Koo’s latest research piece:
“US authorities understand risks of balance sheet recessions…
A Fed official told me that, with inflation now at acceptable levels, the Fed feels no need for additional easing measures.
However, he also added that the Fed would not hesitate to act if inflation resumed falling.
Fed officials are now fully aware of the risks posed by a balance sheet recession and actually used the term on several occasions during our talks.
This stands in sharp contrast to the situation in the eurozone where the officials are unaware of the concept and the risk of balance sheet recession. And to that extent I think the US economy is at less risk of a downturn than the eurozone.
For the past year and a half Fed Chairman Ben Bernanke has been arguing that now is not the time to engage in fiscal
consolidation. That suggests he understands that taking away fiscal support at a time like this would have destructive consequences.
The White House officials I spoke with on this trip were also fully cognizant of the risks posed by balance sheet recessions and understood the need for fiscal stimulus at times like these.”
I guess it’s moderately reassuring that Fed officials are at least acknowledging the problem of the balance sheet recession. Unfortunately, their hands are tied here. The political environment in the USA will absolutely not allow further fiscal stimulus as Richard Koo likely told them they need. So they’re left attempting various forms of monetary easing and QE. In other words, don’t expect the Fed to be able to do much to help the economy. We’re like the dying patient whose doctors understand what’s killing us, but their hospital overlords (politicians) won’t do what’s necessary to cure the patient.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.