The World in Balance Sheet Recession:
What Post-2008 U.S., Europe and China
Can Learn from Japan 1990-2005
Richard C. Koo
Chief Economist
Nomura Research Institute
Tokyo
November 2011
Exhibit 1. Before the Earthquake, Japan Was Running Increasingly
Larger Trade Surpluses even with Strong Yen
Japan’s Trade Balances with Korea, Taiwan and China
(¥ bil. Seasonally adjusted, 3 months moving average)
500
(Surplus)
Korea
Taiwan
400
China (including Hong Kong)
China (excluding Hong Kong)
300
200
100
0
-100
-200
Earthquake
-300
(Deficit)
-400
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
Source: Nomura Research Institute, based on Ministry of Finance, Japan, Trade Statistics
Note: Seasonal adjustments by Nomura Research Institute.
1
Exhibit 2. Industrial Production Fell to the Level of 1987
after the Earthquake
(Seasonally adjusted)
(Seasonally adjusted, 2005=100)
1.2
115
forecast
Industrial production (right scale)
110
1.1
105
1.0
100
0.9
95
Last seen in 2002
0.8
0.7
Job offers to applicants ratio
(left scale)
90
Last seen
in 1987
Last seen
in 2003
85
80
0.6
75
Last seen in 1983
0.5
70
Lowest on record
0.4
2000
65
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Note: Forecasts are calculated f rom METI's survey on planned production.
Sources: Ministry of Economy, Trade and Industry (METI), and Ministry of Health, Labour and Welf are
2
Exhibit 3. 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
Japan: Tokyo Area Condo Price1
220
Composite
Index Futures
200
180
160
140
Japan: Osaka Area Condo Price1
120
100
80
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 Oct. 28, 2011
3
Exhibit 4. US Commercial Real Estate Prices Also Falling to
Japanese Levels
(peak = 100)
110
100
US: Commercial Property Price
Index
90
80
Down
41.1%
from Peak
70
60
50
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
4
Exhibit 5. 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
Sources: BOJ, FRB, ECB, BOE and RMB Australia. As of Oct. 28, 2011.
5
Exhibit 6. 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
6.0
95
6.5
Last seen
in 2005
93
7.0
7.5
91
8.0
8.5
89
Unemployment rate:
Last seen in 1983
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
Sources: US Department of Labor, FRB
6
Exhibit 7. Euro-Zone Economy Is still a Long Way from Previous Peak
(Seasonally adjusted, 2005=100)
(%, Seasonally adjusted, inverted)
115
7.0
Unemployment Rate
(right scale)
110
7.5
8.0
105
Last seen
in 2006
8.5
100
9.0
95
9.5
90
85
1998
Last seen in 1998
Industrial Production
(left scale)
10.0
10.5
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Sources: Eurostat
7
Exhibit 8. Except in Germany, Industrial Production in Europe
Is still Weak
(2005 = 100, Seasonally Adjusted)
Level last
seen in
120
Spain
115
2008: Germany
France
110
Italy
105
Germany
100
1999: France
95
1994: Italy
90
85
1997: 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
Source: Eurostat
8
Exhibit 9. Drastic Liquidity Injection
Failed to Increase Money Supply (I): US
320
(Aug. 2008 =100, Seasonally Adjusted)
300
Monetary Base
Money Supply (M2)
Loans and Leases in Bank Credit
280
260
240
220
200
180
160
Down
25%
140
120
100
80
3.0
Consumer Spending
Deflator (core)
(%, yoy)
2.5
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
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.
9
Exhibit 10. Drastic Liquidity Injection
Failed to Increase Money Supply (II): EU
150
(Aug. 2008 =100, Seasonally Adjusted)
Base Money
140
Money Supply (M3)
Credit to Euro Area Residents
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
Sources: ECB, Eurostat
Note: Base money's figures are seasonally adjusted by Nomura Research Institute.
10
Exhibit 11. Drastic Liquidity Injection
Failed to Increase Money Supply (III): UK
280
265
250
235
220
205
190
175
160
145
130
115
100
85
70
6
5
4
3
2
1
0
(Aug. 2008 =100, Seasonally Adjusted)
1
Reserve Balances + Notes & Coin
Money Supply (M4)
Bank Lending (M4)
Aug. 08'
Down
17%
(%, yoy)
CPI (ex. Indirect Taxes)
07/1 07/4 07/7 07/10 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
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.
11
Exhibit 12. Drastic Liquidity Injection Failed to
Produce Drastic Increase in Money Supply (IV): Japan
260
(Oct. 97 = 100, Seasonally Adjusted)
220
Monetary Base
200
Money Supply (M2)
180
Bank Lending
Earthquake
Quantitative
Easing
240
160
140
Oct. 97
Down
37%
120
100
80
60
3.0
(y/y, %)
CPI Core
2.0
1.0
0.0
-1.0
-2.0
-3.0
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
Note: Bank lending are seasonally adjusted by Nomura Research Institute.
Source: Bank of Japan
12
Exhibit 13. 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
Sources: Bank of Japan, Cabinet Of f ice, Japan
13
Exhibit 14. Japan’s GDP Grew in spite of Massive Loss of Wealth
and Private Sector De-leveraging
(Tril.yen, Seasonally Adjusted)
(Mar. 2000=100)
600
800
Nominal GDP
(Left Scale)
550
Real GDP
(Left Scale)
700
500
Cumulative
90-05 GDP
Supported by
Government
Action:
~ ¥2000 trillion
600
450
500
Likely GDP Path
w/o Government Action
400
350
400
300
300
200
Last seen in 1973
250
Land Price Index in Six Major Cities
(Commercial, Right Scale)
200
100
0
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
14
Exhibit 15. 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
Source: Ministry of Finance, Japan
Note: FY 2011 includes 2nd supplementary budget.
15
Exhibit 16. Premature Fiscal Reforms in 1997 and 2001 Weakened
Economy, Reduced Tax Revenue and Increased Deficit
(Yen tril.)
(Yen tril.)
70
70
Tax Revenue
Budget Deficit
60
Hashimoto
Obuchi-Mori
fiscal
fiscal
reform
stimulus
Koizumi
fiscal
reform
Global
Financial
Crisis
60
50
50
*
unnecessary
increase in
deficit:
¥103.3 tril.
40
40
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
(FY)
Source: Ministry of Finance, Japan
*: estimated by MOF
16
Exhibit 17. 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
(Financial Surplus)
Shift from
4Q 2006 in
private sector:
9.30% of GDP
6
Rest of the World
4
Corporate: 1.40%
Households:
8.22%
2
0
-2
-4
Shift from
4Q 2006 in
public sector:
5.80% 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 2Q/11' are used.
Sources: FRB, US Department of Commerce
17
Exhibit 18. 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:
8.23% of GDP
3
Corporate: 2.19%
Households: 6.04%
0
-3
-6
-9
General
Government
Corporate Sector
Shift from
1Q 2007 in
public sector:
7.11% 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 2Q/11' are used.
Source: Of f ice f or National Statistics, UK
18
Exhibit 19. Global Bond Yields* Nearing Japanese Levels
(%)
6
England
US
Sweden
Switzerland
Japan
5
Japanese
Bond Yield
in 1997
4
3
3%
2
1.3%
1
0
2007
2008
2009
2010
2011
*Note: Excluding Eurozone. As of Oct. 28, 2011.
Source: Bloomberg
19
Exhibit 20. Euro-Zone Bond Yields Are Diverging Sharply
(%)
26
24
22
Greece
Ireland
20
Portugal
18
Spain
16
Italy
14
France
12
Germany
10
8
6
4
2
0
2007
2008
2009
2010
2011
Note: As of Oct. 28, 2011.
Source: Bloomberg
20
Exhibit 21. 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:
4.09% of GDP
4
Corporate: 2.62%
Households: 1.47%
Rest of the World
2
0
-2
Shift from
3Q 2008 in
public sector:
4.03% 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 1Q/11' are used.
Source: ECB
21
Exhibit 22. 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:
17.95% of GDP
Rest of the World
6
Corporate: 12.54%
Households: 5.41%
3
0
-3
Shift from
3Q 2007 in
public sector:
11.93% 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 2Q/11' are used.
Source: Banco de España
22
Exhibit 23. 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, %)
15
Corporate Sector
(Financial Surplus)
(Non-Financial Sector + Financial Sector)
Shift from 2006
in private sector:
21.55% of GDP
10
Rest of the World
Corporate: 7.29%
Households: 14.26%
5
0
General
Government
-5
-10
Shift from 2006
in public sector:
16.78% of GDP
Households
(Financial Deficit)
-15
2002
2003
2004
2005
2006
2007
2008
2009
Sources: Eurostat, Central Statistics Of f ice, Ireland
23
Exhibit 24. 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: 4.70%
Households: 3.95%
3
0
General Government
-3
Shift from
2Q 2008 in
public sector:
6.21% 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 2Q/11' are used.
Source: Banco de Portugal
24
Exhibit 25. 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
25
Exhibit 26. 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:
3.49% of GDP
6
4
Corporate: 4.53%
Households: -1.04%
Rest of the World
2
0
-2
Shift from
3Q 2008 in
public sector:
1.90% of GDP
-4
-6
-8
Corporate Sector
General
Government
-10
(Non-Financial Sector +
Financial Sector)
(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 1Q/11' are used.
Sources: Banca d'Italia, Eurostat
26
Exhibit 27. Balance Sheet Correction in Greece Was Minimal
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
27
Exhibit 28. European Banks Are Already on Credit-Crunch Mode
Lending Attitudes of Euro-zone Banks
(D.I.)
50
more banks tightning credit standards
compared to 3 months ago
large sized firms
40
0
more banks easing credit standards
compared to 3 months ago
30
?
20
10
0
small and medium-sized firms
-10
-20
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Source: Nomura Research Institute, based on ECB, The Euro Area Bank Lending Survey.
Note: D.I. are calculated f rom the answers to the question, "Over the past three months, how have your bank's credit standards as
applied to the approval of loans or credit lines to enterprises changed?"
D.I. = ("Tightened considerably" + "Tightened somewhat"×0.5) - ("Eased somewhat"×0.5 + "Eased considerably")
28
Exhibit 29. 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"
"Wasteful spending"
"Monetary Policy should work better"
"Aging Population"
"Should not use grand-children's credit card"
"Structual Reform is what is needed"
"Republicans, Tea Party types
and Blue Dog Democrats (U.S.)"
"Need to beg Chinese to buy more Treasuries (U.S.)"
...
29
Exhibit 30. Pre-Mature Withdraw of New Deal Policies in 1937
Worsened Unemployment
($ mn, June)
(%)
14000
28
New Deal policies
12000
24
Unemployment rate
(right scale)
10000
Expenditures (left scale)
20
8000
16
6000
12
4000
8
Revenue (left scale)
2000
4
0
0
Budget deficit as % of
GNP (right scale)
-2000
-4
-4000
-8
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
* As a percentage of GDP
Source: Board of Governors of the Federal Reserve System (1976), Vol. 1, p. 513; US Bureau of the Census (1975), p.
229.
30
Exhibit 31. German Fiscal Stimulus Reduced Unemployment Dramatically
（%）
(DM bn)
35
35
Nazis come to
power
30
Government
expenditure
(left scale)
30
25
25
20
20
Unemployment rate
(right scale)
15
10
15
Government
revenue
(left scale)
Fiscal deficit as %
of GDP
(right scale)
10
5
5
0
0
N.A.
N.A.
-5
-5
-10
-10
1930
1931
1932
1933
1934
1935
1936
1937
1938
Source: Mitchell (1975), p. 170; Flora et al. (1987), p. 350; Deutsche Bundesbank (1976).
31
Exhibit 32. Monetary Easing No Substitute for Fiscal Stimulus (I):
Japan’s Money Supply Has Been Kept Up by Government Borrowings
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"
32
Exhibit 33. Monetary Easing No Substitute for Fiscal Stimulus (II): Post-1933 US
Money Supply Growth Made Possible by 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
33
Exhibit 34. 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
1Q 2009 in
private sector:
6.92% of GDP
9
6
Rest of
the World
Corporate: 5.09%
Households: 1.82%
3
0
-3
-6
-9
Corporate Sector
-12
-15
(Non-Financial Sector +
Financial Sector)
General Government
Balance Sheet Recession
(Financial Deficit)
-18
Shift from
1Q 2009 in
public sector:
5.54% 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 f igures since 1999, 4 quarter averages ending with 2Q/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
(as a ratio to nominal GDP, %)
8
Households
6
(Financial Surplus)
Shift from 2000
to 2005
in private sector:
12.06% of GDP
Telecom Bubble
4
Corporate: 9.26%
Households: 2.80%
2
0
Rest of the World
-2
-4
-6
-8
Corporate Sector
(Non-Financial Sector +
Financial Sector)
Shift from 2000
to 2005
in public sector:
4.62% of GDP
General
Government
(Financial Deficit)
-10
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
Sources: Deutsche Bundesbank, Federal Statistical Of f ice Germany
Note: The assumption of Treuhand agency's debt by the Redemption Fund f or Inherited Liabilities in 1995 is adjusted.
35
Exhibit 36. 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
36
Exhibit 37. Recovery from Lehman Shock Is NOT Recovery from
Balance Sheet Recession
Bubble
Burst
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
Likely GDP Path
without Lehman Shock
?
Actual GDP
Path
Stronger Demand
from Government's
Fiscal Stimulus
Current Location
Source: Nomura Research Institute
37
Exhibit 38. US House Prices Are Returning to Traditional DFC Values
(1990/1Q = 100, seasonally adjusted)
280
260
FHFA House Price Index: Purchase Only
240
FHFA House Price Index: All-Transactions
220
S&P/Case-Shiller: U.S. National Index
200
CPI: Rent of primary residence
180
160
140
120
100
80
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: DFC = Discounted Future Cashf low
Sources: US Department of Labor, FHFA and S&P
38
Exhibit 39. Stock Adjustment Problem in US Housing Is Still Considerable
(%)
12
10
8
Default rate
6
4
Foreclosure rate
2
0
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
06
07
08
09
10
11
Sources: MBA, Bloomberg
39
Exhibit 40. Multi-Decade Cycle of Bubbles and Balance Sheet Recessions
Yin (=Balance Sheet Recession)
(1) Monetary policy is tightened, leading the bubble to collapse.
US
Entrance
Problem
Spain
UK
Exit
Problem
Japan
Yang (=Textbook Economy)
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.
Germany
(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.
40
Exhibit 41. Euro-Zone Banks Need Low-Cost Unconditional Capital
Injection to Avoid Credit Crunch
Contrast Between Yin and Yang Phases of Cycle
Behavioral principle
Yang
= Profit maximization
Yin
= Debt minimization
1) Phenomenon
Textbook economy
Balance sheet recession
2) Private sector financial condition
Assets > Liabilities
Assets < Liabilities
3) Outcome
Greatest good for greatest number
Depression if left unattended
4) Monetary policy
Effective
Ineffective (liquidity trap)
5) Fiscal policy
Counterproductive (crowding-out)
Effective
6) Prices
Inflationary
Deflationary
7) Interest rates
Normal
Very low
8) 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 by government
9) Remedy for
Banking Crisis
Source: Richard Koo, The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession ,
John Wiley & Sons, Singapore, 2008
41