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!