Just wanted to pass along a late night read from Edward Harrison over at Credit Writedowns. Like myself, Edward believes we are mired in a long-term balance sheet recession that will hold down global growth for years to come. The Fed’s attempt to reflate assets will ultimately fail as the deleveraging process maintains a death grip on the economy. This is a must read in my opinion as Edward beautifully summarizes much of our own macro thinking:
“Nomura’s Chief Economist Richard Koo wrote a book last year called “The Holy Grail of Macroeconomics” which introduced the concept of a balance sheet recession, which explains economic behaviour in the United States during the Great Depression and Japan during its Lost Decade. He explains the factor connecting those two episodes was a consistent desire of economic agents (in this case, businesses) to reduce debt even in the face of massive monetary accommodation.
When debt levels are enormous, as they are right now in the United States, an economic downturn becomes existential for a great many forcing people to reduce debt. Recession lowers asset prices (think houses and shares) while the debt used to buy those assets remains. Because the debt levels are so high, suddenly everyone is over-indebted. Many are technically insolvent, their assets now worth less than their debts. And the three D’s come into play: a downturn leads to debt deflation, deleveraging, and ultimately depression. The D-Process is what truly separates depression from recession and why I have said we are living through a depression with a small ‘d’ right now.”
Read the full piece here.