Sunday, September 16, 2012

Zero Hedge — Richard Koo Explains It's Not The Fed, Stupid; It's The Fiscal Cliff!

While Koo-nesianism is only one ideological branch removed from Keynesianism, Nomura's Richard Koo's diagnosis of the crisis the advanced economies of the world faces has been spot on. We have discussed the concept of the balance sheet recession many times and this three-and-a-half minute clip from Bloomberg TV provides the most succinct explanation of not just how we got here but why the Fed is now impotent (which may come as a surprise to those buying stocks) and why it is the fiscal cliff that everyone should be worried about. As Koo notes, the US "is beginning to look more like Japan... going through the same process that Japan went through 15 years earlier." The Japanese experience made it clear that when the private sector is minimizing debt (or deleveraging) with very low interest rates, there is little that monetary policy can do.The government cannot tell the private sector don't repay your balance sheets because private sector must repair its balance sheets. In Koo's words: "the only thing the government can do is to spend the money that the private sector has saved and put that back into the income stream" - which (rightly or wrongly) places the US economy in the hands of the US Congress (and makes the Fed irrelevant).
Zero Hedge
Richard Koo Explains It's Not The Fed, Stupid; It's The Fiscal Cliff!
Submitted by Tyler Durden

6 comments:

Dan Kervick said...

It's not just about moving the money that the private sector has saved - although redistributing surplus savings directly to consumers could be a big help.

The government can pass legislation that spends new money directly into the economy.

Tom Hickey said...

The point is not to tax the saving but rather to discourage the rent-seeking behavior with negative incentives.

googleheim said...

Taxation is the way that jobs will be created.

It will force the spending of savings which are basically hoardings of the corporations and 1%.

These hoardings are not healthy.

We are different than Japan since we have hoarders on the list including Japan of our U$D

So let's stick it to Richard Koo Klux Klan and symbolically rip the white hoods off those who never apologized for World War II actions and make them spend their treasuries.

China
BRICs
UK
Japan
OPEC

push them to spend their dollar.

We'll even let them set up factories here in the USA so the goods will be sent their homelands.

Tax the hoards.

Anonymous said...

"the only thing the government can do is to spend the money that the private sector has saved and put that back into the income stream"

... Dan, I took that comment to mean 'replacing' the money taken out of the system (via an increased private sector surplus), as opposed to mobilising savings made by choice.

ie. activist fiscal policy, or deficit spending.

Of course he's absolutely right, and in saying:

"the private sector cannot really respond because they have balance sheet problems.",

... he describes the situation succintly - a rubber band that has lost its elasticity.

Funny how such a simple concept appears too difficult to model for most.

apj

Matt Franko said...

goog,

I think in these foreign countries what the people in charge of these USD balances do is somehow "skim" large amounts of balances out of these accounts for their own personal gain or for the gain of a small group of insiders...

Perhaps by trading them back and forth and taking "commissions" on the trades, etc... huge 'control fraud'... and the larger the amounts they ultimately control, the less their 'skim' looks in perspective... so I dont see them giving them up anytime soon..

rsp,

paul said...

Anon:

I agree with your assessment and would add that running an economy on ever-expanding credit is not amenable to either real growth in the aggregate or to the underlying system relationship whereby feedback (ever-increasing liabilities coupled with hoarding) undermines the desire for growth.

In simpler terms it should be and probably is intuitive to most that another description of credit is spending income from the future that hasn't been earned yet.

It should be obvious that this can't end well without net spending through the Treasury.

Matt: Very astute observation.