Few people have a better grasp on the current economic predicament than Richard Koo. Koo is growing increasingly concerned about the state of the global economy and now believes the slowdown is becoming more pronounced:
“Signs of a slowdown in the global economy have become more prominent over the last two weeks. The deceleration in economic activity was reflected in the US jobs report and new unemployment claims, European industrial output, and Japanese consumer confidence. It was also reported on Monday that Japan's inflation-adjusted GDP grew only 0.4% y-y in the Apr"“Jun quarter, confirming that the recent slowdown actually began this spring.
This string of weak data led to a further correction in equities and pushed bond prices higher (and yields lower). Strong demand for government debt was underlined by yields ofsubstantially less than 3% for the 10-year Treasury note and less than 1% for the 10-year Japanese government bond.
In Ireland and some other countries in the eurozone, meanwhile, marked economic weakness fanned concerns about the future, leading investors to sell bonds and send interest rates higher.
In the currency markets, the narrowing yield differential between Japan and other nations prompted further buying of the yen, which set a new post-Lehman high of 84.72 against the US dollar.”
Koo is quick to note that the recovery we’ve seen since the Lehman collapse was primarily a mean reverting recovery that took us back to where we should have been in the first place had there been no Lehman related panic:
“That means that the rally that started about six months after the Lehman-inspired financial crisis was actually just a recovery from the Lehman crisis and not from the global housing bubble collapse in 2007.
The recovery from the financial crisis of 2008"“09 was destined to run out of gas once economic activity rebounded to the (depressed) level where it would have been as a result of the balance sheet problems. I think that is what we are now observing in the US and Europe (Exhibit 1).”
“In other words, the level of economic activity has returned to where it would have been if Lehman Brothers had not been allowed to fail.”
Koo is increasingly concerned that governments have already begun down the wrong path of austerity:
“But governments in the UK, Ireland and Spain have already changed course and are pursuing austerity policies. Even in the US, it remains to be seen whether the Bush tax cuts and the Obama economic stimulus can be extended.
The recovery from the 2008"“09 financial crisis has now run its course, clearing the fog surrounding the balance sheet recession. But I suspect that more time and even weaker economic data will be necessary before people understand this and accept the need for further fiscal stimulus.”
In particular he is very worried about Europe and the actions taken by Trichet:
“Against this backdrop, I am particularly concerned by an opinion piece contributed to the 23 July Financial Times by ECB President Jean-Claude Trichet and titled, "Stimulate no more"”it is now time for all to tighten." In the article, Mr. Trichet argues that the economic recovery is already under way and that the fiscal stimulus administered by national governments over the past two years should be quickly withdrawn.
Mr. Trichet also argues that the series of fiscal stimulus packages unveiled by the G20 two years ago was actually a mistake and says it was unfortunate that some countries had administered stimulus without any need for it. Now, he says, it is time for all countries to pursue medium-term fiscal consolidation strategies.”
Koo believes Trichet is wrong because, like Bernanke, he has misunderstood the balance sheet recession. He believes Trichet is becoming “more German than the Germans” and is directly contributing to the recovery in that single nation while the periphery burns. Ultimately, he says Trichet is making the same mistakes as Bernanke – believing that austerity and monetary policy should rule the day. Richard Koo, who has been right thus far, says they still fail to understand the balance sheet recession. It looks to me like he’ll continue to be right.
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The Theorists like Koo always see things only as science experiment from a wealthy perch in life. We get it, Mr. Koo. The people who disagree with you aren’t idiots. They just happen to be able to see beyond your shallow vision and figure out what sociey needs to sustain itself over the long haul, not the next two fiscal quarters of economic statistical rubbish.
We all get the theory: Government spends, spends, and then spends some more until things get better. Of course the theory sounds great, they always do on paper. But, your missing something massive, Mr. Koo. The American people don’t like, or agree with how the ungodly amounts of money are being spent. They see where its going! Its going to Public Employee Unions that are economically unviable, and borderline criminal. Its going to massive and unpopular entitlements like Obamacare which will break the nations finances completely inside of a decade. Its going to pay 99 weeks of unemployment benefits! Soon to be 119 weeks! It goes to fund a byzantine empire of a welfare system that is corrput and unjust beyond belief, paying for free housing, welfare checks, and food stamps for people who aren’t citizens of the country.
The people see that all the Government spending is going to society’s takers purely on the backs of the few remaining people in this country who pay taxes. Excuse us for wanting a little Government austerity when presented with the disgusting facts, which get worse by the day.
Not being an economist, I’m constantly amazed and equally skeptical about most of what these folks say. However, we do need to give Koo his due: he’s not “merely” a theorist. He’s spent decades on the front lines in Japan. Not too many folks in this world, I suspect, have as much actual experience with a delevering spiral.
Here’s a simple equation:
Violent deleveraging in private sector + substantial deleveraging in public sector = BAD TIMES AHEAD, VERY BAD TIMES.
Let the private sector heal, pump it with stimulus, and then fix the long term entitlement issues. That’s the big issue we need to deal with.
I don’t follow the implication that is made by the characterization that Trichet is “more German than the Germans” . After all Germany has 90% debt/gdp, so I don’t think implying that they are an austerian model is even a serious debate. What would be relevant is that Germany’s strong surplus status has allowed it to benefit via the ability to sell it’s debt cheaply. Same cannot be said for Spain, Ireland, and UK so austerity is the only alternative for them b/c in the context of the “New Normal” the market realizes that these countries are operating negative cash flow with a weak export culture. In order to maintain any chance at being able to participate in the debt markets they have to use the austerity posture whereas Germany actually has pro-forma debt service. Clearly a discussion of US and it’s chronic deficit could be had here, but let’s just say ‘reserve currency’ (for now) and push that to the side for the time being.
To Frederick’s point, it’s not necessarily that fiscal spending is theoretically bad, it’s just that government is fundamentally bad at spending it. With no faith in govt. ability to effectively allocate spending and no sales growth, then only choice is to cut spending and begin the process of balance sheet repair. It’s called deleveraging and the resulting depression is inevitable, but also necessary. Maybe Trichet understands this.
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Few people have a better grasp on the current economic predicament than Richard Koo. Koo is growing increasingly concerned about the state of the global economy and now believes the slowdown is becoming more pronounced:
“Signs of a slowdown in the global economy have become more prominent over the last two weeks. The deceleration in economic activity was reflected in the US jobs report and new unemployment claims, European industrial output, and Japanese consumer confidence. It was also reported on Monday that Japan's inflation-adjusted GDP grew only 0.4% y-y in the Apr"“Jun quarter, confirming that the recent slowdown actually began this spring.
This string of weak data led to a further correction in equities and pushed bond prices higher (and yields lower). Strong demand for government debt was underlined by yields ofsubstantially less than 3% for the 10-year Treasury note and less than 1% for the 10-year Japanese government bond.
In Ireland and some other countries in the eurozone, meanwhile, marked economic weakness fanned concerns about the future, leading investors to sell bonds and send interest rates higher.
In the currency markets, the narrowing yield differential between Japan and other nations prompted further buying of the yen, which set a new post-Lehman high of 84.72 against the US dollar.”
Koo is quick to note that the recovery we’ve seen since the Lehman collapse was primarily a mean reverting recovery that took us back to where we should have been in the first place had there been no Lehman related panic:
“That means that the rally that started about six months after the Lehman-inspired financial crisis was actually just a recovery from the Lehman crisis and not from the global housing bubble collapse in 2007.
The recovery from the financial crisis of 2008"“09 was destined to run out of gas once economic activity rebounded to the (depressed) level where it would have been as a result of the balance sheet problems. I think that is what we are now observing in the US and Europe (Exhibit 1).”
“In other words, the level of economic activity has returned to where it would have been if Lehman Brothers had not been allowed to fail.”
Koo is increasingly concerned that governments have already begun down the wrong path of austerity:
“But governments in the UK, Ireland and Spain have already changed course and are pursuing austerity policies. Even in the US, it remains to be seen whether the Bush tax cuts and the Obama economic stimulus can be extended.
The recovery from the 2008"“09 financial crisis has now run its course, clearing the fog surrounding the balance sheet recession. But I suspect that more time and even weaker economic data will be necessary before people understand this and accept the need for further fiscal stimulus.”
In particular he is very worried about Europe and the actions taken by Trichet:
“Against this backdrop, I am particularly concerned by an opinion piece contributed to the 23 July Financial Times by ECB President Jean-Claude Trichet and titled, "Stimulate no more"”it is now time for all to tighten." In the article, Mr. Trichet argues that the economic recovery is already under way and that the fiscal stimulus administered by national governments over the past two years should be quickly withdrawn.
Mr. Trichet also argues that the series of fiscal stimulus packages unveiled by the G20 two years ago was actually a mistake and says it was unfortunate that some countries had administered stimulus without any need for it. Now, he says, it is time for all countries to pursue medium-term fiscal consolidation strategies.”
Koo believes Trichet is wrong because, like Bernanke, he has misunderstood the balance sheet recession. He believes Trichet is becoming “more German than the Germans” and is directly contributing to the recovery in that single nation while the periphery burns. Ultimately, he says Trichet is making the same mistakes as Bernanke – believing that austerity and monetary policy should rule the day. Richard Koo, who has been right thus far, says they still fail to understand the balance sheet recession. It looks to me like he’ll continue to be right.
The content on this site is provided as general information only and should not be taken as investment advice. All site content shall not be construed as a recommendation to buy or sell any security or financial product, or to participate in any particular trading or investment strategy. The ideas expressed on this site are solely the opinions of the author(s) and do not necessarily represent the opinions of firms affiliated with the author(s). The author(s) may or may not have a position in any security referenced herein and may or may not seek to do business with one another or companies mentioned via this website. Any action that you take as a result of information or analysis on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
A NOTE ON COMMENTS – DUE TO THE INCREASING POPULARITY OF THE SITE WE HAVE HAD A GROWING NUMBER OF PROBLEMS WITH USERS. ANYONE WHO USES RACIAL EPITHETS OR DECIDES THAT THIS IS THE PLACE WHERE THEY WILL DISPLACE THEIR ANGER (VIA THE FORM OF INSULTS OR GENERALLY CHILDISH COMMENTS) WILL BE IMMEDIATELY BANNED. THE COMMENT SECTION IS OPEN TO READERS WHO ARE INTERESTED IN ASKING PERTINENT QUESTIONS AND/OR ENGAGING IN THOUGHTFUL, INTELLIGENT AND PRODUCTIVE DEBATE. IN SHORT, JUST BE NICE….
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