Forward Guidance Richard Koo: China’s “Balance Sheet Recession” Has Already Started | (Jack’s Final Episode)
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Sep 13, 2024 Richard Koo, a senior advisor at CSIS and chief economist at Nomura Research Institute, is a pioneer of the balance sheet recession concept. He discusses China's current economic turmoil, asserting that its balance sheet recession has already begun. Koo explains the shift from profit maximization to debt repayment, highlighting the implications for corporate behavior. He contrasts China's trade surplus challenges with historical insights from Japan and Korea, emphasizing the importance of effective fiscal policy to navigate these turbulent economic times.
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Balance Sheet Recession
- In a balance sheet recession, companies prioritize minimizing debt over maximizing profits.
- This happens after a bubble bursts, leaving them with high liabilities and devalued assets.
Balance Sheet Recession Post-2008
- The 2008 financial crisis triggered a balance sheet recession as households drastically reduced borrowing and increased saving.
- This rapid shift in financial behavior significantly impacted GDP and led to high unemployment, especially in Spain.
US vs. Europe Post-2008
- The US recovered faster from the 2008 recession than Europe due to different fiscal approaches.
- Ben Bernanke advised against austerity, while Europe's Growth and Stability Pact limited borrowing, hindering recovery.
