Monday, April 06, 2009

Richard Koo on Balance Sheet Recessions

Richard Koo on Balance Sheet Recessions (from Paul Kedrosky) gives an interesting perspective on global crisis and how possibly Japanese way could actually be a best case scenario. At the fag end he goes into really interesting implications for politics, differences between current crisis and Japan that is critical.
Japanese crisis was essentially corporate balance-sheet crisis. Current crisis is US and European household balance sheets and financial institution balance sheet crisis. Japan has strong household and financial balance-sheets. So fiscal stimulus kept Japanese consumption going. In addition, export demand did not actually fall off a cliff. These two issues will make current slowdown actually more horrible.
US households bear weight of global production. US financial bear weight of global capital supply. Both are in a mess. The stimulus required to pull-off a Japan-style escape will be of global proportion - and definitely out of league of Fed. Even by Japanese experience - global deficit would be roughly 8% of GDP. Disproportionate amount of it will come from US which implies ~ 18-20% of current US GDP. This weakens the dollar (that is good) and probably kindle some hope for US economy.
Implications
  • Despite everything US and European GDP will have to fall structurally.
  • We are looking at structural global GDP contraction - but unevenly spread.
  • Solve household balance sheet problem - solve the crisis.
  • Global realignment of production and consumption center is evident.
  • Unstable political storms are coming - watching Af-Pak closely.
  • Increasingly worried about China - hoping sense prevails.
  • Increasingly confident of two-engine approach to economy. Wealth creation engine (entrepreneurship) and wealth distribution engine ( domestic consumption & resulting jobs)
  • India looks strangely best positioned - thanks to the fact that its government's hands are tied!