Odd Lots Richard Koo Explains Why The Recovery Will Be So Difficult
May 11, 2020
Richard Koo, Chief Economist at Nomura Research Institute, delves into the complexities of global economic recovery amid simultaneous crises. He draws parallels with Japan's balance sheet recession, highlighting the psychological shifts towards savings that hinder growth. Koo discusses the varied fiscal responses across nations, particularly the challenges Europe faces compared to the U.S. and Japan. He emphasizes the difficulties policymakers will encounter in reviving economies and the long-lasting impacts of past recessions on current financial behaviors.
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Psychological Impact of Debt Crises
- Richard Koo's balance sheet recession framework emphasizes the psychological impact of debt crises.
- This can lead to increased savings for years, impacting economic recovery.
Balance Sheet Recession Characteristics
- During a balance sheet recession, the financial market gets flooded with cash while everyone else is paying down debt.
- This leads to lower government bond yields despite large deficits, as seen in Japan and the US after 2008.
Corporate Scarring
- The current crisis will likely scar corporate behavior, impacting buybacks, CAPEX, and hiring for years.
- This is similar to the impact of the 1991-1992 credit crunch.
