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I’ve previously argued that the balance sheet recession in the USA is unlikely to last as long as the balance sheet recession in Japan. ย I won’t repeat those arguments here, but I thought I’d offer the other side of the argument from Richard Koo himself who says that it doesn’t matter that the US response has been faster:

“Meaningless for West to boast about speed of monetary response

This is important because there are still people in the West who believe that Japanโ€™s recession lasted as long as it did onlybecause the Bank of Japan was slow to ease monetary policy, and that the recession in Western economies will be over soonenough because central banks have eased quickly.Investors in the US and Europe always ask about this issue. The expectations of a quick recovery based on quick central bankactions are shared not only by private investors but also by many senior government officials and economists.

That is why they want to believe that QE2 and other forms of monetary accommodation by Western central banks have rescuedtheir economies from deflation. But it makes no sense to compare the rate of inflation in Japan more than a decade after thebubble burst with that in Western economies just three and a half years after the bubble collapsed, and use that as evidencethat Western government policies have successfully avoided deflation. Japan, after all, had no deflation at the same point intime.

In my view, it is far more significant that housing prices continue to fall, money supply growth remains stagnant, and the labormarket is still anemic in spite of all the easing carried out by Western central banks. This indicates that US and Europeaneconomies are experiencing the same kind of balance sheet recession as Japan did, and that monetary policy is powerlessunder such conditions. Only fiscal policy can help.”

Source: Nomura

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