Odd Lots Why Governments Haven't Learned The Lessons Of Japan
Oct 14, 2019
Richard Koo, Chief Economist at Nomura Research Institute, dives into Japan's economic struggles and the elusive lessons learned by global policymakers. He introduces his concept of 'balance sheet recession,' explaining why excessive debt leads to stagnation and why traditional stimulus efforts fail. Koo highlights the missteps in handling fiscal policy during downturns, drawing parallels to current economic challenges in Europe and the U.S. His insights connect individual behaviors to broader economic issues, emphasizing the importance of adapting past lessons for future stability.
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Balance Sheet Recession Definition
- A balance sheet recession occurs when over-leveraged entities prioritize debt repayment over investment.
- This collective behavior, while individually rational, shrinks the economy.
Why are balance sheet recessions rare?
- Balance sheet recessions are rare because bubbles, which precede them, are infrequent.
- The collective debt repayment following a bubble creates a unique macroeconomic problem.
Japan's 20-Year Recession
- Japan's balance sheet recession lasted nearly 20 years, partly due to inconsistent fiscal stimulus.
- Prematurely cutting stimulus led to a double-dip recession and prolonged pessimism.
