Richard Koo was on Bloomberg last night to discuss the balance sheet recession and how the USA is repeating the “exact” same mistakes Japan made. Koo discusses the rating downgrades in Japan in the 90’s that now sound like the EXACT same thing occurring in the USA. Koo argues that the ratings agencies have no idea what the USA is suffering from.
Amazingly, Koo’s balance sheet recession idea hasn’t really caught on even though it has been, in my opinion, the single most accurate description of our current problems (unfortunately, I’ve been writing this same message for 3 years and even sent multiple letters to the Fed in 2008 describing how we could avoid this Japanese style balance sheet recession). Like Koo, I’ve been largely ignored. When Koo was asked if we’re going the way of Japan he said:
“Excactly the same way. Exactly the same problems. And exactly the same confusion.”
Ironically, I actually think Koo is misinterpreting an important piece of the puzzle as well. As I’ve previously argued, I think Koo is missing the point that the USA never needs to “fund” itself. For instance, he points to bond yields as evidence that the bond market isn’t worried about solvency. But as I’ve covered thoroughly, the bond market is merely the Fed’s whipping boy. So Koo reaches the exact right conclusion but for reasons that are different than my own.
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.