Transcript The World in Balance Sheet Recession

The World in Balance Sheet Recession:
What Post-2008 West Can Learn from Japan
1990-2005
Richard C. Koo
Chief Economist
Nomura Research Institute
Tokyo
April 2012
Exhibit 1. US Housing Prices Are Moving along the Japanese Experience
Futures
(US: Jan. 2000=100, Japan: Dec. 1985=100)
260
US: 10 Cities Composite Home Price Index
240
Composite
Index
Futures
Japan: Tokyo Area Condo Price1
220
200
180
160
140
120
100
80
Japan: Osaka Area Condo Price1
60
40
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
13
14
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
US
Japan
Note: per m 2, 5-month moving average
Sources: Bloomberg, Real Estate Economic Institute, Japan, S&P, S&P/Case-Shiller® Home Price Indices, as of Mar. 23, 2012
1
Exhibit 2. US Commercial Real Estate Prices Also Falling to Japanese Levels
(peak = 100)
110
100
US: Commercial Property Price Index
90
80
Down
42.0%
from Peak
70
60
50
"Pretend &
Extend"
40
Japan: Commercial Land Price Index
in Six Major Cities
30
20
01
02
03
04
05
06
07
08
09
10
11
84
85
86
87
88
89
90
91
92
93
94
US
Japan
Note: Peak of US Prices: Oct. 2007, Peak of Japanese Prices: Sep. 1990.
Source: Nomura Research Institute, based on Moody's/Real Estate Analytics and Japan Real Estate Institute
2
Exhibit 3. Drastic Rate Cuts Have Done Little to Revive Employment or House Prices
(%)
8
Australia
7
UK
6
5
4
EU
3
US
2
Japan
1
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Sources: BOJ, FRB, ECB, BOE and RMB Australia. As of Mar. 23, 2012.
3
Exhibit 4. US Economy Is still a Long Way from Previous Peak
(2007=100, Seasonally adjusted)
(%, Seasonally adjusted, inverted)
103
3.5
4.0
Unemployment Rate
(right scale)
101
4.5
99
5.0
5.5
Industrial Production
(left scale)
97
Last seen
in 2005
95
6.0
6.5
7.0
93
7.5
91
8.0
Unemployment rate:
Last seen in 1983
89
8.5
9.0
87
9.5
10.0
85
10.5
Industrial Production:Last seen in 1997
83
11.0
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
Sources: US Department of Labor, FRB
4
Exhibit 5. Euro-Zone Economy Is still a Long Way from Previous Peak
(Seasonally adjusted, 2005=100)
(%, Seasonally adjusted, inverted)
115
7.0
7.5
Unemployment Rate
(right scale)
110
8.0
105
8.5
Last seen
in 2005
100
9.0
9.5
95
10.0
90
85
1998
Industrial Production
(left scale)
1999
2000
2001
2002
2003
10.5
Last seen in 1997
2004
2005
2006
2007
2008
2009
2010
2011
11.0
2012
Sources: Eurostat
5
Exhibit 6. Except in Germany, Industrial Production in Europe Is still Weak
(2005 = 100, Seasonally Adjusted)
Level last
seen in
120
Spain
115
France
110
2007: Germany
Italy
105
Germany
100
95
1997: France
90
1987-88: Italy
85
1996: Spain
80
75
70
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
12
Source: Eurostat
6
Exhibit 7. Drastic Liquidity Injection Failed to Increase Money Supply (I): US
340
320
300
280
260
240
220
200
180
160
140
120
100
80
3.0
2.5
(Aug. 2008 =100, Seasonally Adjusted)
Monetary Base
Money Supply (M2)
Loans and Leases in Bank Credit
Down
25%
(%, yoy)
Consumer Spending
Deflator (core)
2.0
1.5
1.0
0.5
08/1 08/4 08/7 08/10 09/1 09/4 09/7 09/10 10/1 10/4 10/7 10/10 11/1 11/4 11/7 11/10 12/1
Sources: Board of Governors of the Federal Reserve System, US Department of Commerce
Note: Commercial bank loans and leases, adjustments for discontinuities made by Nomura Research Institute.
7
Exhibit 8. Drastic Liquidity Injection Failed to Increase Money Supply (II): EU
180
(Aug. 2008 =100, Seasonally Adjusted)
170
Base Money
Money Supply (M3)
160
Credit to Euro Area Residents
150
140
130
120
110
100
90
2.2
2.0
1.8
1.6
1.4
1.2
1.0
0.8
0.6
(%, yoy)
CPI core
08/1
08/4
08/7
08/10
09/1
09/4
09/7
09/10
10/1
10/4
10/7
10/10
11/1
11/4
11/7
11/10
12/1
Sources: ECB, Eurostat
Note: Base money's figures are seasonally adjusted by Nomura Research Institute.
8
Exhibit 9. Drastic Liquidity Injection Failed to Increase Money Supply (III): UK
340
(Aug. 2008 =100, Seasonally Adjusted)
1
Reserve Balances + Notes & Coin
Money Supply (M4)
Bank Lending (M4)
310
280
250
220
Aug. 08'
190
160
Down
16%
130
100
70
6
5
4
3
2
1
0
(%, yoy)
07/1
CPI (ex. Indirect Taxes)
07/7
08/1
08/7
09/1
09/7
10/1
10/7
11/1
11/7
12/1
Sources: Bank of England, Office for National Statisics, UK
Notes: 1. Reserve Balances data are seasonally unadjusted. 2. Money supply and bank lending data exclude intermmediate
financial institutions.
9
Exhibit 10. Drastic Liquidity Injection Failed to Produce
Drastic Increase in Money Supply (IV): Japan
350
(1990/1Q = 100, Seasonally Adjusted)
Monetary Base
300
Quantitative
Easing
Earthquake
Money Supply (M2)
Bank Lending
250
1990/1Q
200
150
Textbook
Economics
Balance Sheet
Recession
(Monetary Policy
Ef f ective)
(Monetary Policy
NOT Ef f ective)
Down
41%
100
50
4
3
2
1
0
-1
-2
-3
(y/y, %)
CPI Core
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Note: Bank lending are seasonally adjusted by Nomura Research Institute.
Source: Bank of Japan
10
Exhibit 11. Japan’s De-leveraging with Zero Interest Rates Lasted for 10 Years
Funds Raised by Non-Financial Corporate Sector
(% Nominal GDP, 4Q Moving Average)
(%)
25
10
CD 3M rate
(right scale)
20
8
Borrowings from Financial Institutions (left scale)
15
6
Funds raised in Securities Markets (left scale)
10
4
5
2
0
0
-5
Debt-financed
bubble
(4 years)
Balance sheet
recession
(16 years)
-10
-2
-4
-15
-6
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Sources: Bank of Japan, Cabinet Of f ice, Japan
11
Exhibit 12. Japan’s GDP Grew in spite of Massive Loss of Wealth
and Private Sector De-leveraging
(Sep. 1990=100)
(Sep.1990=100, Seasonally Adjusted)
140
130
Nominal GDP (Right Scale)
120
Real GDP
(Right Scale)
115
100
Cumulative
90-05 GDP
Supported by
Government
Action:
~ ¥2000 trillion
100
Likely GDP Path
w/o Government Action
80
85
60
70
40
55
Last seen in 1973
20
40
Land Price Index in Six Major Cities
(Commercial, Left Scale)
0
25
down
87%
Cumulative
Loss of
Wealth on
Shares and
Real Estate
~ ¥1500 trillion
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Sources: Cabinet Of f ice, Japan Real Estate Institute
12
Exhibit 13. Japanese Government Borrowed and Spent
the Unborrowed Savings of the Private Sector to Sustain GDP
(Tril. yen)
110
Government spending
100
90
cumulative
cyclical
deficit
90-05
¥315 trillion
80
70
60
overall
deficit
¥460
trillion
50
40
Bubble Collapse
30
Tax revenue
20
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Source: Ministry of Finance, Japan
Note: FY 2011 includes 4th supplementary budget and FY2012 is initial budget.
13
Exhibit 14. Premature Fiscal Reforms in 1997 and 2001 Weakened Economy, Reduced
Tax Revenue and Increased Deficit
(Yen tril.)
(Yen tril.)
80
70
60
80
Tax Revenue
Budget Deficit
Hashimoto
fiscal
Obuchi-Mori
reform
fiscal
stimulus
Earthquake
Koizumi
fiscal
reform
70
Global
Financial
Crisis
60
50
50
*
40
unnecessary
increase in
deficit:
40
¥103.3 tril.
30
30
20
20
10
10
0
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
(FY)
Source: Ministry of Finance, Japan
Notes: Latest f igures(*) are estimated by MOF. From FY2011, f igures includes reconstruction taxes and bonds.
14
Exhibit 15. US in Balance Sheet Recession: US Private Sector Increased Savings Massively
after the Bubble
Financial Surplus or Deficit by Sector
(as a ratio to nominal GDP, %, quarterly)
8
Households
6
(Financial Surplus)
Shift from
4Q 2006 in
private sector:
9.00% of GDP
Rest of the World
4
Corporate: 2.15%
Households:
6.86%
2
0
-2
-4
Shift from
4Q 2006 in
public sector:
7.28% of GDP
-6
-8
-10
General
Government
Corporate Sector
(Non-Financial Sector +
Financial Sector)
IT Bubble
(Financial Deficit)
Housing
Bubble
-12
85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Note: For the latest f igures, 4 quarter averages ending with 4Q/11' are used.
Sources: FRB, US Department of Commerce
15
Exhibit 16. UK in Balance Sheet Recession: UK Private Sector Increased Savings
Massively after the Bubble
Financial Surplus or Deficit by Sector
(as a ratio to nominal GDP, %)
9
Households
6
(Financial Surplus)
Rest of the World
Shift from
1Q 2007 in
private sector:
6.77% of GDP
3
Corporate: 0.88%
Households: 5.90%
0
-3
-6
-9
General
Government
Corporate Sector
Shift from
1Q 2007 in
public sector:
6.45% of GDP
(Non-Financial Sector +
Financial Sector)
(Financial Deficit)
-12
88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Note: For the latest f igures, 4 quarter averages ending with 3Q/11' are used.
Source: Of f ice f or National Statistics, UK
16
Exhibit 17. Global Bond Yields* Nearing Japanese Levels
(%)
6
UK
US
Sweden
Switzerland
Japan
5
Japanese
Bond Yield
in 1997
4
3
3%
2
1.3%
1
0
2007
2008
2009
2010
2011
2012
*Note: Excluding Eurozone. As of Mar. 22, 2012.
Source: Bloomberg
17
Exhibit 18. Euro-Zone Bond Yields Are Diverging Sharply
(%)
40
35
Greece
Ireland
30
Portugal
Spain
25
Italy
France
20
Germany
15
10
5
0
2007
2008
2009
2010
2011
2012
Note: As of Mar. 22, 2012.
Source: Bloomberg
18
Exhibit 19. Euro-zone in Balance Sheet Recession: Euro-zone Private Sector Increased
Savings Massively after the Bubble
Financial Surplus or Deficit by Sector
(as a ratio to nominal GDP, %)
6
(Financial Surplus)
Households
Shift from
3Q 2008 in
private sector:
3.66% of GDP
4
Corporate: 3.12%
Households: 0.54%
Rest of the World
2
0
-2
Shift from
3Q 2008 in
public sector:
3.12% of GDP
-4
General
Government
Corporate Sector
-6
(Non-Financial Sector + Financial Sector)
(Financial Deficit)
-8
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Note: For the latest f igures, 4 quarter averages ending with 3Q/11' are used.
Source: ECB
19
Exhibit 20. Spain in Balance Sheet Recession: Spanish Private Sector Increased
Savings Massively after the Bubble
Financial Surplus or Deficit by Sector
(as a ratio to nominal GDP, %)
12
(Financial Surplus)
Households
9
Shift from
3Q 2007 in
private sector:
17.65% of GDP
Rest of the World
6
Corporate: 12.24%
Households: 5.41%
3
0
-3
Shift from
3Q 2007 in
public sector:
11.62% of GDP
-6
Corporate Sector
-9
(Non-Financial Sector + Financial Sector)
General
Government
(Financial Deficit)
-12
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
Note: For the latest f igures, 4 quarter averages ending with 3Q/11' are used.
Source: Banco de España
20
Exhibit 21. Ireland in Balance Sheet Recession: Irish Private Sector
Increased Savings Massively after the Bubble
Financial Surplus or Deficit by Sector
(as a ratio to nominal GDP, %)
20
15
Corporate Sector
(Financial Surplus)
(Non-Financial Sector + Financial Sector)
Rest of the World
5
Shift from 2007
in private sector:
29.60% of GDP
0
Corporate: 14.99%
Households: 14.61%
10
-5
-10
-15
General
Government
Households
Shift from 2007
in public sector:
31.20% of GDP
-20
-25
-30
(Financial Deficit)
-35
2002
2003
2004
2005
2006
2007
2008
2009
2010
Sources: Eurostat, Central Statistics Of f ice, Ireland
21
Exhibit 22. Portugal in Balance Sheet Recession: Portuguese Private Sector Increased
Savings Massively after the Bubble
Financial Surplus or Deficit by Sector
(as a ratio to nominal GDP, %)
12
(Financial Surplus)
Rest of the World
9
Shift from
2Q 2008 in
private sector:
8.65% of GDP
Households
6
Corporate: 5.20%
Households: 3.34%
3
0
General Government
-3
Shift from
2Q 2008 in
public sector:
5.40% of GDP
-6
Corporate Sector
-9
(Non-Financial Sector + Financial Sector)
(Financial Deficit)
-12
99
00
01
02
03
04
05
06
07
08
09
10
11
Note: For the latest f igures, 4 quarter averages ending with 3Q/11' are used.
Source: Banco de Portugal
22
Exhibit 23. Sustaining Fiscal Stimulus in Democracy
during Peacetime Is Difficult
Authoritarian
Democracies
No opposition
"Bond market might rebel"
(if any, quickly suppressed)
"Big Government is BAD Government"
"Monetary Policy should work better"
"Aging Population"
"Should not use grand-children's credit card"
"Structual Reform is what is needed"
"Maastricht Treaty and Fiscal Compact"
"Must Avoid Greece's Fate"
...
23
Exhibit 24. Balance Sheet Correction in France Was Minimal
Financial Surplus or Deficit by Sector
10
(as a ratio to nominal GDP, %)
(Financial Surplus)
8
Households
Rest of the World
Shift from 2006
private sector:
3.43% of GDP
6
4
Corporate: 2.85%
Households: 0.57%
2
0
-2
Shift from 2006
public sector:
4.71% of GDP
-4
-6
General
Government
Corporate Sector
(Non-Financial Sector + Financial Sector)
(Financial Deficit)
-8
99
00
01
02
03
04
05
06
07
08
09
10
Sources: ECB, Eurostat
24
Exhibit 25. Balance Sheet Correction in Italy Was Minimal
Financial Surplus or Deficit by Sector
(as a ratio to nominal GDP, %, quarterly)
12
(Financial Surplus)
10
Households
8
Shift from
3Q 2008 in
private sector:
2.53% of GDP
6
4
Corporate: 1.47%
Households: 1.06%
Rest of the World
2
0
-2
Shift from
3Q 2008 in
public sector:
1.81% of GDP
-4
-6
-8
Corporate Sector
(Non-Financial Sector +
Financial Sector)
General
Government
-10
(Financial Deficit)
-12
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
Note: For the latest f igures, 4 quarter averages ending with 3Q/11' are used.
Sources: Banca d'Italia, Eurostat
25
Exhibit 26. Italian Corporates Are Back to Normal After 2 Difficult Years
(as a percentage of nominal GDP)
(as a percentage of nominal GDP, inverted)
15
-15
left scale
Financial Assets
10
-10
5
-5
0
0
-5
5
-10
10
Financial Liabilities right scale
-15
15
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
Note: For the latest f igures, 4 quarter averages ending with 3Q/11' are used.
Sources: Banca d'Italia, Eurostat
26
Exhibit 27. Italian Households Are Not Affected by Crisis
(as a percentage of nominal GDP, inverted)
(as a percentage of nominal GDP)
16
-16
left scale
Financial Assets
12
-12
8
-8
4
-4
0
0
-4
4
Financial Liabilities
right scale
-8
8
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
Note: For the latest f igures, 4 quarter averages ending with 3Q/11' are used.
Sources: Banca d'Italia, Eurostat
27
Exhibit 28. Greek Private Sector Is Drawing Down Savings to Survive
Financial Surplus or Deficit by Sector
25
(as a ratio to nominal GDP, %, quarterly)
(Financial Surplus)
20
Rest of the World
Households
Shift from
2Q 2008 in
private sector:
1.18% of GDP
15
10
Corporate: 4.27%
Households: -3.09%
5
0
-5
Shift from
3Q 2008 in
public sector:
1.82% of GDP
-10
Corporate Sector
-15
(Non-Financial Sector +
Financial Sector)
(Financial Deficit)
General
Government
05
08
-20
01
02
03
04
06
07
09
10
11
Note: For the latest f igures, 4 quarter averages ending with 2Q/11' are used.
Sources: Bank of Greece, Eurostat
28
Exhibit 29. Greek Corporates Are Both Drawing Down Savings and Reducing Debt
(as a percentage of nominal GDP)
(as a percentage of nominal GDP, inverted)
15
-15
left scale
Financial Assets
10
-10
5
-5
0
0
-5
5
-10
10
Financial Liabilities
right scale
-15
15
00
01
02
03
04
05
06
07
08
09
10
11
Note: For the latest f igures, 4 quarter averages ending with 3Q/11' are used.
Sources: Bank of Greece, Eurostat
29
Exhibit 30. Greek Households Are Both Drawing Down Savings and Reducing Debt
(as a percentage of nominal GDP)
(as a percentage of nominal GDP, inverted)
20
-20
left scale
Financial Assets
15
-15
10
-10
5
-5
0
0
-5
5
-10
10
Financial Liabilities
right scale
-15
15
00
01
02
03
04
05
06
07
08
09
10
11
Note: For the latest f igures, 4 quarter averages ending with 3Q/11' are used.
Sources: Bank of Greece, Eurostat
30
Exhibit 31. ECB Facing Balance Sheet Recession Can Supply Large Amounts of Liquidity
without Igniting Inflation
(Aug. 2008 = 100, seasonally adjusted)
350
Eurozone
325
Monetary Base
(=Liquidity)
300
US
US-like
monetary
easing would
allow ECB to
supply €
945.5 bil.
worth of
additional
liquidity.
UK
275
Eurozone
Money Supply
250
US
UK
225
200
Aug. 2008
175
150
estimates
125
100
75
2007
2008
2009
2010
2011
2012
Notes: 1. UK's reserve balances data are seasonally unadjusted.
2. UK's money supply and bank lending data exclude intermmediate f inancial institutions.
3. Base money's f igures of Eurozone are seasonally adjusted by Nomura Research Institute.
Source: Nomura Research Institute, based on FRB, ECB and Bank of England data.
31
Exhibit 32. Exit Problem (I): Japanese Corporates Increased Savings Again
After Lehman
Financial Surplus or Deficit by Sector
(as a ratio to nominal GDP, %)
15
(Financial Surplus)
12
Households
Shift from
4Q 2008 in
private sector:
5.76% of GDP
9
6
Rest of
the World
Corporate: 3.29%
Households: 2.47%
3
0
-3
-6
-9
Corporate Sector
-12
-15
(Non-Financial Sector +
Financial Sector)
General Government
Balance Sheet Recession
(Financial Deficit)
-18
Shift from
4Q 2008 in
public sector:
6.86% of GDP
Global
Financial
Crisis
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Note: For the latest f igures, 4 quarter averages ending with 4Q/11' are used.
Sources: Bank of Japan, Flow of Funds Accounts, and Government of Japan, Cabinet Of f ice, National
Accounts
32
Exhibit 33. Japanese Corporates Are Increasing Savings
(as a percentage of nominal GDP)
(as a percentage of nominal GDP, inverted)
25
20
-25
left scale
Financial
Assets
-20
15
-15
10
-10
5
-5
0
0
-5
5
-10
10
-15
15
-20
Financial Liabilities
right scale
-25
20
25
-30
30
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
(FY)
Note: For the latest f igures, 4 quarter averages ending with 4Q/11' are used.
Sources: Bank of Japan, Flow of Funds Accounts, and Government of Japan, Cabinet Of f ice, National Accounts
33
Exhibit 34. Japanese Households Are Both Increasing Savings and Reducing Debt
(as a percentage of nominal GDP)
(as a percentage of nominal GDP, inverted)
21
18
-21
left scale
Financial Assets
-18
15
-15
12
-12
9
-9
6
-6
3
-3
0
0
-3
3
-6
6
Financial Liabilities right scale
-9
-12
9
12
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
(FY)
Note: For the latest f igures, 4 quarter averages ending with 4Q/11' are used.
Sources: Bank of Japan, Flow of Funds Accounts, and Government of Japan, Cabinet Of f ice, National Accounts
34
Exhibit 35. Exit Problem (II): German Private Sector Refused to Borrow Money after
1999-2000 Telecom Bubble
Financial Surplus or Deficit by Sector
15
(as a ratio to nominal GDP, %, quarterly)
(Financial Surplus)
10
Households
Shift from
3Q 2000
to 1Q 2005
in private sector:
12.59% of GDP
Telecom Bubble
5
Corporate: 9.98%
Households: 2.60%
0
-5
General
Government
-10
Corporate Sector
-15
Shift from
3Q 2000
to 1Q 2005
in public sector:
4.91% of GDP
Balance
Sheet
Recession
(Non-Financial Sector +
Financial Sector)
Rest of the World
(Financial Deficit)
-20
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
Notes: The assumption of Treuhand agency's debt by the Redemption Fund f or Inherited Liabilities in 1995 is
adjusted. For the latest f igures, 4 quarter averages ending with 3Q/11' are used.
Source: Deutche Bundesbank
35
Exhibit 36. German Corporates Are Saving More than Borrowing
(as a percentage of nominal GDP)
(as a percentage of nominal GDP, inverted)
20
-20
left scale
Financial Assets
15
-15
10
-10
5
-5
0
0
-5
5
-10
10
Financial Liabilities
right scale
02
06
-15
15
91
92
93
94
95
96
97
98
99
00
01
03
04
05
07
08
09
10
11
Notes: The assumption of Treuhand agency's debt by the Redemption Fund f or Inherited Liabilities in 1995 is adjusted. For the
latest f igures, 4 quarter averages ending with 3Q/11' are used.
Source: Deutche Bundesbank
36
Exhibit 37. German Households Are Refusing to Borrow
(as a percentage of nominal GDP, inverted)
(as a percentage of nominal GDP)
12
-12
left scale
Financial Assets
8
-8
4
-4
0
0
-4
4
reason for weak German
house prices despite record
low interest rate
Financial Liabilities right scale
-8
8
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
Notes: The assumption of Treuhand agency's debt by the Redemption Fund f or Inherited Liabilities in 1995 is adjusted. For the
latest f igures, 4 quarter averages ending with 3Q/11' are used.
Source: Deutche Bundesbank
37
Exhibit 38. Exit Problem (III): U.S. Took 30 Years to Normalize Interest Rate after 1929
Because of Private Sector Aversion to Debt
(%)
9
8
US government bond yields
Prime BA, 90days
US government bond yields 1920-29 average (4.09%, June 1959)
Prime BA, 90days 1920-29 average (4.13%, September 1959)
7
6
5
Oct '29 NY Stock
Market Crash
Dec '41 Pearl
Harbor Attack
Jun '50 Korean
War
'33～
New Deal
4
3
2
1
0
19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
Source: FRB, Banking and Monetary Statistics 1914-1970 Vol.1, pp.450-451 and 468-471, Vol.2, pp.674-676 and 720-727
38
Exhibit 39. Japanese
Money
Supply
up by
Government
Borrowings
Money Supply
Is Kept
Up byKept
Government
Borrowings
(II)
Balance Sheets of Banks in Japan
December 2007
December 1998
Assets
Assets
Credit
Extended to
the Private
Sector
Credit
Extended to
the Private
Sector
Money Supply
(M2+CD)
¥501.8 tril.
(-99.8)
¥621.5 tril.
Credit
Extended to the
Public Sector
Credit Extended
to the Public
Sector
Foreign Assets
(net)
Money Supply
(M2+CD)
¥744.4 tril.
(+122.9)
¥601.6 tril.
¥140.4 tril.
Liabilities
Liabilities
Other Liabilities
(net)
¥153.2 tril.
¥247.2 tril.
(+106.8)
Foreign assets
(net)
Other Liabilities
(net)
¥74.1 tril.
(+41.4)
¥32.7 tril.
Total Assets ¥774.7 tril.
Total Assets ¥823.1 tril. (+48.4)
¥78.7 tril.
(-74.5)
Source: Bank of Japan "Monetary Survey"
39
Exhibit 40. US Money Supply Increased after 1933
because of Government Borrowings
Balance Sheets of All Member Banks
June 1936
June 1929
Assets
Credit
Extended to
the Private
Sector
$29.63 bil.
Assets
Liabilities
Deposits
$32.18 bil.
June 1933
Assets
Credit
Extended to
the Private
Sector
$15.80 bil.
(-13.83)
Credit
Extended
to the
Public
Sector
Other
$8.63 bil.
Liabilities
(+3.18)
$6.93 bil.
Other
Assets
$6.37 bil.
(-1.65)
Capital Reserves
$6.35 bil. $2.24 bil.
Credit
Extended to
the Public
Sector
$5.45 bil.
Other Assets
$8.02 bil.
Reserves
$2.36 bil.
Credit
Extended
to the
Private
Sector
$15.71 bil.
(-0.09)
Liabilities
Deposits
$23.36 bil.
(-8.82)
Credit
Extended
to the
Public
Sector
$16.30 bil.
(+7.67)
Liabilities
Deposits
$34.10 bil.
(+10.74)
(= Money Supply)
Other
Other
Assets
Liabilities
$8.91 bil.
$4.84 bil.
(+2.54)
(-2.09)
Other
Liabilities
$7.19 bil.
(+2.35)
Reserves
Capital
$5.61 bil.
$4.84 bil.
(+3.37)
(-1.51)
$5.24 bil.
(+0.40)
Capital
(-0.12)
Total Assets $45.46 bil.
Total Assets $33.04 bil. (-12.42)
Total Assets $46.53 bil. (+13.49)
Source: Board of Governors of the Federal Reserve System (1976) Banking and Monetary Statistics 1914-1941 pp.72-79
40
Exhibit 41. Recovery from Lehman Shock Is NOT Recovery from Balance Sheet Recession
Bubble
Burst
Lehman Shock
Likely GDP Path
without Lehman Shock
Weaker Demand
from Private Sector
De-leveraging
Economic weakness
from private-sector (A)
de-leveraging
Economic weakness
from policy mistake (B)
on Lehman
?
Actual GDP
Path
Current Location
Stronger Demand
from Government's
Fiscal Stimulus
Source: Nomura Research Institute
41
Exhibit 42. Yin Yang Cycle of Bubbles and Balance Sheet Recessions
Yin (=Shadow)
(1) Monetary policy is tightened, leading the bubble to collapse.
US
Spain
UK
Germany
Japan
Yang (=Light)
Bubble
(9) Overconfident private sector triggers a bubble.
(2) Collapse in asset prices leaves private sector
with excess liabilities,
forcing it into debt minimization mode.
The economy falls into a balance sheet recession.
(8) With the economy healthy,
the private sector regains its vigour,
and confidence returns.
(3) With everybody paying down debt,
monetary policy stops working.
Fiscal policy becomes the main economic tool
to maintain demand.
(7) Monetary policy becomes the main
economic tool, while deficit reduction
becomes the top fiscal priority.
(4) Eventually private sector finishes its debt repayments,
ending the balance sheet recession.
But it still has a phobia about borrowing which keeps
interest rates low, and the economy less than fully vibrant.
Economy prone to mini-bubbles.
(6) Private sector fund demand recovers,
and monetary policy starts working again.
Fiscal policy begins to crowd out private investment.
(5) Private sector phobia towards borrowing gradually disappears,
and it takes a more bullish stance towards fund raising.
Source: Richard Koo, The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession , John Wiley & Sons, Singapore, April 2008 p.160.
42
Exhibit 43. Contrast Between Yin and Yang Phases of Cycle
Yang
Yin
1) Phenomenon
Textbook economy
Balance sheet recession
2) Fundamental driver
Adam Smith's "invisible hand"
Fallacy of composition
3) Corporate financial condition
Assets > Liabilities
Assets < Liabilities
4) Behavioral principle
Profit maximization
Debt minimization
5) Outcome
Greatest good for greatest number
Depression if left unattended
6) Monetary policy
Effective
Ineffective (liquidity trap)
7) Fiscal policy
Counterproductive (crowding-out)
Effective
8) Prices
Inflationary
Deflationary
9) Interest rates
Normal
Very low
10) Savings
Virtue
Vice (paradox of thrift)
a) Localized
Quick NPL disposal
Pursue accountability
Normal NPL disposal
Pursue accountability
b) Systemic
Slow NPL disposal
Fat spread
Slow NPL disposal
Capital injection
11) Remedy for
Banking Crisis
Source: Richard Koo, The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession ,
John Wiley & Sons, Singapore, 2008
43