jeffturley

I have said before that I believe we are on parallel economic journeys with Japan. After completing Balance Sheet Recession: Japan's Struggle with Uncharted Economics and its Global Implications (written in 2003), here are 5 Significant Perspectives from Richard Koo’s Balance Sheet and his most recent article. I believe if you take a little time to read the article it will give you a greater depth of insight than most commentators on our current economic subject.

5 Significant Perspectives from Resolve Lending, Inc

1. Although many Americans may scoff at the idea that the United States has something to learn from Japan, the truth is that the magnitude of the housing price bubble in the United States from 1999 to 2006 (a 138 percent increase) was virtually identical to the one Japan experienced between 1984 and 1991 (a 142 percent increase). Furthermore, according to the housing price futures listed in the Chicago Mercantile Exchange, the magnitude of the decline in housing prices (33 percent decline from the peak in four years) is nearly the same as that of the earlier Japanese experience (37 percent decline from the peak in four years).

2. Many businesses and households may find themselves with negative net worth. When these businesses and households start paying down debt or increasing savings in order to regain their financial health and credit ratings, the economy enters what may be called "balance sheet recession" where monetary easing by the central bank fails to stimulate the economy or asset prices. -- Think about how many people have told you over the past six months “we are tightening the reins and looking for places to save.” For every latte you don’t buy think about how many other people have to cut back.

3. With nobody borrowing money and everybody paying down debt or increasing savings, even at zero interest rates, the deflationary spiral becomes a real possibility in this type of recession. – **This is the classic definition of “balance sheet recession.” Think of it as everyone deciding to payoff debt rather than borrow; deflation becomes inevitable. Here’s a prime example, house prices go up when everyone is buying and banks give out easy money. On the flip side, house values go down when everyone is selling. The same economic principal applies across every sector from lattes, cars, and dry cleaning.

4. “When the private sector is obsessed with their balance sheet woes and the danger of falling into a deflationary spiral is real, increasing government spending is far more efficient than a tax cut in boosting domestic demand.” **Why is this a true statement? Because if someone handed you a check today you most likely would either payoff debt or save. You would not go out and buy another house. What is true in the Micro (your home) is true in the Macro (Corp America and currently banks). Large corporations are doing what you are doing.

5. Critics will also argue that limiting government help to banks is not fair. But this is akin to the kidney and liver complaining when heart gets the special treatment. If the heart stops, everybody dies. Moreover, the U.S. and Japanese capital injections in 1933 and 1999 respectively ended up costing taxpayers nothing, as banks paid back the money in due course. ** If you had a heart attack you wouldn’t want your doctor to say, “that is a bad heart, forget the heart, let’s save those nice arms.” Sorry, President Bush was not an idiot and neither is President Obama. Step one “save the heart” step two, keep the blood/money flowing,” then work out the other issues.

As I prepared this post I found others wiser then myself to have found Richard Koo interesting. (Krugman/ Noble Winner /08) If you want to read more of Koo I have a seven page paper he wrote late 2008 I will email you, just send me an email.

http://krugman.blogs.nytimes.com/

http://www.ft.com/cms/s/0/774c0920-fd1d-11dd-a103-000077b07658.html

Rates are still great, email or call when you need me.

Thanks,
Jeff Turley