The World in Balance Sheet Recession:What Post-2008 West Can Learn from Japan1990-2005                               Richa...
Exhibit 1. US Housing Prices Are Moving along the Japanese Experience             (US: Jan. 2000=100, Japan: Dec. 1985=100...
Exhibit 2. US Commercial Real Estate Prices Also Falling to Japanese Levels                      (peak = 100)           11...
Exhibit 3. Drastic Rate Cuts Have Done Little to Revive Employment or House Prices                (%)            8        ...
Exhibit 4. US Economy Is still a Long Way from Previous Peak         (2007=100, Seasonally adjusted)                      ...
Exhibit 5. Euro-Zone Economy Is still a Long Way from Previous Peak          (Seasonally adjusted, 2005=100)              ...
Exhibit 6. Except in Germany, Industrial Production in Europe Is still Weak            (2005 = 100, Seasonally Adjusted)  ...
Exhibit 7. Drastic Liquidity Injection Failed to Increase Money Supply (I): US         340     (Aug. 2008 =100, Seasonally...
Exhibit 8. Drastic Liquidity Injection Failed to Increase Money Supply (II): EU            180     (Aug. 2008 =100, Season...
Exhibit 9. Drastic Liquidity Injection Failed to Increase Money Supply (III): UK        340       (Aug. 2008 =100, Seasona...
Exhibit 10. Drastic Liquidity Injection Failed to Produce     Drastic Increase in Money Supply (IV): Japan350             ...
Exhibit 11. Japan’s De-leveraging with Zero Interest Rates Lasted for 10 Years                                      Funds ...
Exhibit 12. Japan’s GDP Grew in spite of Massive Loss of Wealth                and Private Sector De-leveraging       (Sep...
Exhibit 13. Japanese Government Borrowed and Spent  the Unborrowed Savings of the Private Sector to Sustain GDP       (Tri...
Exhibit 14. Premature Fiscal Reforms in 1997 and 2001 Weakened Economy, Reduced                         Tax Revenue and In...
Exhibit 15. US in Balance Sheet Recession: US Private Sector Increased Savings Massively                                  ...
Exhibit 16. UK in Balance Sheet Recession: UK Private Sector Increased Savings                          Massively after th...
Exhibit 17. Global Bond Yields* Nearing Japanese Levels    (%)6                                                           ...
Exhibit 18. Euro-Zone Bond Yields Are Diverging Sharply      (%)4035                                  Greece              ...
Exhibit 19. Euro-zone in Balance Sheet Recession: Euro-zone Private Sector Increased                         Savings Massi...
Exhibit 20. Spain in Balance Sheet Recession: Spanish Private Sector Increased                      Savings Massively afte...
Exhibit 21. Ireland in Balance Sheet Recession: Irish Private Sector            Increased Savings Massively after the Bubb...
Exhibit 22. Portugal in Balance Sheet Recession: Portuguese Private Sector Increased                         Savings Massi...
Exhibit 23. Sustaining Fiscal Stimulus in Democracy                   during Peacetime Is Difficult    Authoritarian      ...
Exhibit 24. Balance Sheet Correction in France Was Minimal                                          Financial Surplus or D...
Exhibit 25. Balance Sheet Correction in Italy Was Minimal                                        Financial Surplus or Defi...
Exhibit 26. Italian Corporates Are Back to Normal After 2 Difficult Years             (as a percentage of nominal GDP)    ...
Exhibit 27. Italian Households Are Not Affected by Crisis       (as a percentage of nominal GDP)                          ...
Exhibit 28. Greek Private Sector Is Drawing Down Savings to Survive                                                  Finan...
Exhibit 29. Greek Corporates Are Both Drawing Down Savings and Reducing Debt                  (as a percentage of nominal ...
Exhibit 30. Greek Households Are Both Drawing Down Savings and Reducing Debt                 (as a percentage of nominal G...
Exhibit 31. ECB Facing Balance Sheet Recession Can Supply Large Amounts of Liquidity                             without I...
Exhibit 32. Exit Problem (I): Japanese Corporates Increased Savings Again                               After Lehman      ...
Exhibit 33. Japanese Corporates Are Increasing Savings       (as a percentage of nominal GDP)                             ...
Exhibit 34. Japanese Households Are Both Increasing Savings and Reducing Debt               (as a percentage of nominal GD...
Exhibit 35. Exit Problem (II): German Private Sector Refused to Borrow Money after                              1999-2000 ...
Exhibit 36. German Corporates Are Saving More than Borrowing          (as a percentage of nominal GDP)                    ...
Exhibit 37. German Households Are Refusing to Borrow       (as a percentage of nominal GDP)                               ...
Exhibit 38. Exit Problem (III): U.S. Took 30 Years to Normalize Interest Rate after 1929                (%)               ...
Exhibit 39. Japanese Money Kept Up byKept up by Government Borrowings                Money Supply Is Supply Government Bor...
Exhibit 40. US Money Supply Increased after 1933               because of Government Borrowings                           ...
Exhibit 41. Recovery from Lehman Shock Is NOT Recovery from Balance Sheet Recession                        Bubble         ...
Exhibit 42. Yin Yang Cycle of Bubbles and Balance Sheet Recessions                             Yin (=Shadow)              ...
Exhibit 43. Contrast Between Yin and Yang Phases of Cycle                                                    Yang         ...
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R. Koo. The World in Balance Sheet Recession.

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"Nomura" vyriausiojo ekonomisto Richardo Koo prezentacija apie balanso recesiją.

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R. Koo. The World in Balance Sheet Recession.

  1. 1. The World in Balance Sheet Recession:What Post-2008 West Can Learn from Japan1990-2005 Richard C. Koo Chief Economist Nomura Research Institute Tokyo April 2012
  2. 2. Exhibit 1. US Housing Prices Are Moving along the Japanese Experience (US: Jan. 2000=100, Japan: Dec. 1985=100) Futures 260 240 US: 10 Cities Composite Home Price Index Japan: Tokyo Area Condo Price1 Composite 220 Index Futures 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 US 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 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 2
  3. 3. 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% 70 from Peak 60 50 40 "Pretend & Extend" 30 Japan: Commercial Land Price Index in Six Major Cities 20 01 02 03 04 05 06 07 08 09 10 11 US 84 85 86 87 88 89 90 91 92 93 94 Japan Note: Peak of US Prices: Oct. 2007, Peak of Japanese Prices: Sep. 1990. Source: Nomura Research Institute, based on Moodys/Real Estate Analytics and Japan Real Estate Institute 3
  4. 4. 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. 4
  5. 5. Exhibit 4. US Economy Is still a Long Way from Previous Peak (2007=100, Seasonally adjusted) (%, Seasonally adjusted, inverted) 103 3.5 4.0 101 Unemployment Rate (right scale) 4.5 99 5.0 Industrial Production 5.5 97 (left scale) Last seen 6.0 in 2005 95 6.5 7.0 93 7.5 91 8.0 Unemployment rate: Last seen in 1983 8.5 89 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 5
  6. 6. 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 110 (right scale) 8.0 105 8.5 100 Last seen 9.0 in 2005 9.5 95 10.0 90 Industrial Production 10.5 (left scale) Last seen in 1997 85 11.0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Sources: Eurostat 6
  7. 7. Exhibit 6. Except in Germany, Industrial Production in Europe Is still Weak (2005 = 100, Seasonally Adjusted) 120 Level last seen in 115 Spain 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 7
  8. 8. Exhibit 7. Drastic Liquidity Injection Failed to Increase Money Supply (I): US 340 (Aug. 2008 =100, Seasonally Adjusted) 320 Monetary Base 300 Money Supply (M2) 280 Loans and Leases in Bank Credit 260 240 220 200 180 160 Down 140 25% 120 100 80 3.0 (%, yoy) Consumer Spending 2.5 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. 8
  9. 9. 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 (%, yoy) 2.0 CPI core 1.8 1.6 1.4 1.2 1.0 0.8 0.6 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 moneys figures are seasonally adjusted by Nomura Research Institute. 9
  10. 10. Exhibit 9. Drastic Liquidity Injection Failed to Increase Money Supply (III): UK 340 (Aug. 2008 =100, Seasonally Adjusted) 1 310 Reserve Balances + Notes & Coin Money Supply (M4) 280 Bank Lending (M4) 250 220 190 Aug. 08 160 Down 130 16% 100 70 6 (%, yoy) 5 CPI (ex. Indirect Taxes) 4 3 2 1 0 07/1 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. 10
  11. 11. Exhibit 10. Drastic Liquidity Injection Failed to Produce Drastic Increase in Money Supply (IV): Japan350 Earthquake (1990/1Q = 100, Seasonally Adjusted) Quantitative Easing Monetary Base300 Money Supply (M2) Bank Lending250 1990/1Q200 Textbook Balance Sheet Economics Recession150 (Monetary Policy (Monetary Policy Ef f ective) NOT Ef f ective) Down 41%100 50 4 (y/y, %) CPI Core 3 2 1 0 -1 -2 -3 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 11
  12. 12. 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 20 (right scale) 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 Balance sheet -2 bubble recession (4 years) (16 years) -10 -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 12
  13. 13. 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) Real GDP 120 (Right Scale) 115 Cumulative 100 100 90-05 GDP Likely GDP Path Supported by w/o Government Action Government 80 85 Action: ~ ¥2000 trillion 60 70 40 55 Last seen in 1973 down Cumulative 87% Loss of 20 40 Wealth on Land Price Index in Six Major Cities Shares and (Commercial, Left Scale) Real Estate 0 25 ~ ¥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 13
  14. 14. Exhibit 13. Japanese Government Borrowed and Spent the Unborrowed Savings of the Private Sector to Sustain GDP (Tril. yen)110 Government spending100 90 80 cumulative cyclical deficit 70 90-05 ¥315 trillion 60 overall 50 deficit ¥460 trillion 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 12Source: Ministry of Finance, JapanNote: FY 2011 includes 4th supplementary budget and FY2012 is initial budget. 14
  15. 15. Exhibit 14. Premature Fiscal Reforms in 1997 and 2001 Weakened Economy, Reduced Tax Revenue and Increased Deficit (Yen tril.) (Yen tril.) 80 80 Earthquake Tax Revenue Hashimoto 70 fiscal Obuchi-Mori Koizumi 70 Budget Deficit reform Global fiscal fiscal stimulus Financial reform 60 Crisis 60 50 50 unnecessary * increase in 40 40 deficit: ¥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. 15
  16. 16. 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 (Financial Surplus) 6 Shift from Rest of the World 4Q 2006 in 4 private sector: 9.00% of GDP Corporate: 2.15% 2 Households: 6.86% 0 -2 -4 Shift from -6 4Q 2006 in General public sector: -8 Government 7.28% of GDP Corporate Sector (Non-Financial Sector + -10 Financial Sector) IT Bubble Housing Bubble (Financial Deficit) -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 16
  17. 17. 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 (Financial Surplus) 6 Rest of the World Shift from 1Q 2007 in private sector: 3 6.77% of GDP Corporate: 0.88% Households: 5.90% 0 -3 Shift from -6 1Q 2007 in public sector: General Corporate Sector 6.45% of GDP (Non-Financial Sector + -9 Government 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 17
  18. 18. Exhibit 17. Global Bond Yields* Nearing Japanese Levels (%)6 UK US5 Sweden Switzerland Japan4 Japanese Bond Yield in 19973 3%2 1.3%10 2007 2008 2009 2010 2011 2012*Note: Excluding Eurozone. As of Mar. 22, 2012.Source: Bloomberg 18
  19. 19. Exhibit 18. Euro-Zone Bond Yields Are Diverging Sharply (%)4035 Greece Ireland30 Portugal Spain25 Italy France20 Germany1510 5 0 2007 2008 2009 2010 2011 2012Note: As of Mar. 22, 2012.Source: Bloomberg 19
  20. 20. 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 4 3Q 2008 in private sector: 3.66% of GDP Rest of the World Corporate: 3.12% 2 Households: 0.54% 0 -2 Shift from 3Q 2008 in public sector: -4 3.12% of GDP General Government Corporate Sector -6 (Non-Financial Sector + Financial Sector) (Financial Deficit) -8 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 201 0 201 1 Note: For the latest figures, 4 quarter averages ending with 3Q/11 are used. Source: ECB 20
  21. 21. 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 Rest of the World Shift from 3Q 2007 in private sector: 6 17.65% of GDP Corporate: 12.24% Households: 5.41% 3 0 -3 Shift from 3Q 2007 in public sector: -6 11.62% of GDP 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 figures, 4 quarter averages ending with 3Q/11 are used. Source: Banco de España 21
  22. 22. 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 Corporate Sector (Financial Surplus) 15 (Non-Financial Sector + Financial Sector) Rest of the World Shift from 2007 10 in private sector: 5 29.60% of GDP Corporate: 14.99% 0 Households: 14.61% -5-10 General Shift from 2007-15 Households Government in public sector:-20 31.20% of GDP-25-30 (Financial Deficit)-35 2002 2003 2004 2005 2006 2007 2008 2009 2010Sources: Eurostat, Central Statistics Of fice, Ireland 22
  23. 23. 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) 9 Rest of the World Shift from 2Q 2008 in 6 Households private sector: 8.65% of GDP Corporate: 5.20% 3 Households: 3.34% 0 General Government -3 Shift from 2Q 2008 in -6 public sector: 5.40% of GDP -9 Corporate Sector (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 figures, 4 quarter averages ending with 3Q/11 are used. Source: Banco de Portugal 23
  24. 24. 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-childrens credit card" "Structual Reform is what is needed" "Maastricht Treaty and Fiscal Compact" "Must Avoid Greeces Fate" . . . 24
  25. 25. Exhibit 24. Balance Sheet Correction in France Was Minimal Financial Surplus or Deficit by Sector (as a ratio to nominal GDP, %) 10 (Financial Surplus) 8 Households Rest of the World 6 Shift from 2006 private sector: 4 3.43% of GDP Corporate: 2.85% Households: 0.57% 2 0 -2 -4 Shift from 2006 public sector: General Corporate Sector 4.71% of GDP -6 Government (Non-Financial Sector + Financial Sector) (Financial Deficit) -8 99 00 01 02 03 04 05 06 07 08 09 10Sources: ECB, Eurostat 25
  26. 26. 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 6 private sector: 2.53% of GDP 4 Rest of the World Corporate: 1.47% Households: 1.06% 2 0 -2 -4 Shift from 3Q 2008 in -6 public sector: 1.81% of GDP -8 Corporate Sector (Non-Financial Sector + -10 General Financial Sector) Government (Financial Deficit) -12 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11Note: For the latest f igures, 4 quarter averages ending with 3Q/11 are used.Sources: Banca dItalia, Eurostat 26
  27. 27. 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 figures, 4 quarter averages ending with 3Q/11 are used. Sources: Banca dItalia, Eurostat 27
  28. 28. Exhibit 27. Italian Households Are Not Affected by Crisis (as a percentage of nominal GDP) (as a percentage of nominal GDP, inverted) 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 11Note: For the latest f igures, 4 quarter averages ending with 3Q/11 are used.Sources: Banca dItalia, Eurostat 28
  29. 29. Exhibit 28. Greek Private Sector Is Drawing Down Savings to Survive Financial Surplus or Deficit by Sector (as a ratio to nominal GDP, %, quarterly) 25 (Financial Surplus) Rest of the World 20 Households Shift from 15 2Q 2008 in private sector: 10 1.18% of GDP Corporate: 4.27% Households: -3.09% 5 0 -5 Shift from 3Q 2008 in -10 public sector: 1.82% of GDP Corporate Sector -15 (Non-Financial Sector + General Financial Sector) (Financial Deficit) Government -20 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: Bank of Greece, Eurostat 29
  30. 30. 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 30
  31. 31. 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 31
  32. 32. Exhibit 31. ECB Facing Balance Sheet Recession Can Supply Large Amounts of Liquidity without Igniting Inflation (Aug. 2008 = 100, seasonally adjusted) 350 325 Eurozone Monetary Base US 300 (=Liquidity) US-like UK monetary 275 Eurozone easing would allow ECB to Money Supply US supply € 250 945.5 bil. UK 225 worth of additional 200 liquidity. 175 Aug. 2008 150 estimates 125 100 75 2007 2008 2009 2010 2011 2012 Notes: 1. UKs reserve balances data are seasonally unadjusted. 2. UKs money supply and bank lending data exclude intermmediate f inancial institutions. 3. Base moneys figures of Eurozone are seasonally adjusted by Nomura Research Institute. Source: Nomura Research Institute, based on FRB, ECB and Bank of England data. 32
  33. 33. 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) Households 12 Shift from 9 4Q 2008 in private sector: 6 Rest of 5.76% of GDP the World Corporate: 3.29% 3 Households: 2.47% 0 -3 -6 Shift from -9 4Q 2008 in Corporate Sector General Government public sector: -12 (Non-Financial Sector + 6.86% of GDP Financial Sector) Balance Sheet Recession Global -15 (Financial Deficit) Financial -18 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 33
  34. 34. Exhibit 33. Japanese Corporates Are Increasing Savings (as a percentage of nominal GDP) (as a percentage of nominal GDP, inverted) 25 -25 Financial 20 left scale -20 Assets 15 -15 10 -10 5 -5 0 0 -5 5-10 10-15 15-20 20 Financial Liabilities right scale-25 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 34
  35. 35. 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 -21 left scale Financial Assets 18 -18 15 -15 12 -12 9 -9 6 -6 3 -3 0 0 -3 3 -6 6 Financial Liabilities right scale -9 9 -12 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 35
  36. 36. 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, %, quarterly) 15 (Financial Surplus) Shift from 10 Telecom Bubble Households 3Q 2000 to 1Q 2005 in private sector: 5 12.59% of GDP Corporate: 9.98% Households: 2.60% 0 -5 General Shift from -10 Government Balance 3Q 2000 Sheet to 1Q 2005 Recession in public sector: Corporate Sector -15 (Non-Financial Sector + 4.91% of GDP 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 agencys 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
  37. 37. 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 -15 15 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 agencys 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
  38. 38. Exhibit 37. German Households Are Refusing to Borrow (as a percentage of nominal GDP) (as a percentage of nominal GDP, inverted) 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 11Notes: The assumption of Treuhand agencys debt by the Redemption Fund f or Inherited Liabilities in 1995 is adjusted. For thelatest f igures, 4 quarter averages ending with 3Q/11 are used.Source: Deutche Bundesbank 38
  39. 39. Exhibit 38. Exit Problem (III): U.S. Took 30 Years to Normalize Interest Rate after 1929 (%) Because of Private Sector Aversion to Debt 9 US government bond yields 8 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 Oct 29 NY Stock Dec 41 Pearl Jun 50 Korean 6 Market Crash Harbor Attack War 33~ 5 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 39
  40. 40. Exhibit 39. Japanese Money Kept Up byKept up by Government Borrowings Money Supply Is Supply Government Borrowings (II) Balance Sheets of Banks in Japan December 1998 December 2007 Assets Liabilities Assets Liabilities Credit Extended to the Private Credit Sector Extended to Money Supply Money Supply ¥501.8 tril. the Private (M2+CD) (M2+CD) (-99.8) Sector ¥621.5 tril. ¥744.4 tril. ¥601.6 tril. (+122.9) Credit Extended to the Credit Extended to the Public Public Sector Sector ¥247.2 tril. ¥140.4 tril. (+106.8) Other Liabilities (net) Foreign assets Foreign Assets Other Liabilities ¥153.2 tril. (net) (net) (net) ¥74.1 tril. ¥32.7 tril. ¥78.7 tril. (+41.4) (-74.5) Total Assets ¥774.7 tril. Total Assets ¥823.1 tril. (+48.4) Source: Bank of Japan "Monetary Survey" 40
  41. 41. Exhibit 40. US Money Supply Increased after 1933 because of Government Borrowings Balance Sheets of All Member Banks June 1929 June 1936 Assets Liabilities Assets Liabilities Credit Extended to the Deposits Private Credit $32.18 bil. June 1933 Sector Deposits Extended to Assets Liabilities $34.10 bil. $15.71 bil. the Private Credit (+10.74) Sector (-0.09) Extended to Deposits (= Money Supply) $29.63 bil. the Private $23.36 bil. Sector (-8.82) Credit $15.80 bil. Extended (-13.83) to the Public Credit Sector Extended $16.30 bil. Credit to the (+7.67) Extended to Public the Public Sector Other Other Sector $8.63 bil. Other Other Liabilities (+3.18) Assets $5.45 bil. Liabilities $8.91 bil. Liabilities $6.93 bil. $4.84 bil. $7.19 bil. Other (+2.54) (-2.09) (+2.35) Other Assets Assets $8.02 bil. $6.37 bil. (-1.65) Reserves Capital Capital $5.61 bil. Capital Reserves $4.84 bil. $5.24 bil. $6.35 bil. $2.24 bil. (+3.37) Reserves (-1.51) (+0.40) $2.36 bil. (-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 41
  42. 42. Exhibit 41. Recovery from Lehman Shock Is NOT Recovery from Balance Sheet Recession Bubble Lehman Shock Likely GDP Path Burst without Lehman Shock Weaker Demand from Private Sector Economic weakness De-leveraging from private-sector (A) de-leveraging ? Economic weakness from policy mistake (B) on Lehman Stronger Demand Actual GDP from Governments Path Fiscal Stimulus Current Location Source: Nomura Research Institute 42
  43. 43. Exhibit 42. Yin Yang Cycle of Bubbles and Balance Sheet Recessions Yin (=Shadow) Bubble Yang (=Light) (1) Monetary policy is tightened, leading the bubble to collapse. (9) Overconfident private sector triggers a bubble. US (2) Collapse in asset prices leaves private sector with excess liabilities, (8) With the economy healthy, the private sector regains its vigour, forcing it into debt minimization mode. Spain The economy falls into a balance sheet recession. and confidence returns. UK (3) With everybody paying down debt, monetary policy stops working. (7) Monetary policy becomes the main Fiscal policy becomes the main economic tool economic tool, while deficit reduction to maintain demand. becomes the top fiscal priority. (4) Eventually private sector finishes its debt repayments, ending the balance sheet recession. (6) Private sector fund demand recovers, But it still has a phobia about borrowing which keeps and monetary policy starts working again.Germany interest rates low, and the economy less than fully vibrant. Fiscal policy begins to crowd out private investment. Economy prone to mini-bubbles. Japan (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. 43
  44. 44. Exhibit 43. Contrast Between Yin and Yang Phases of Cycle Yang Yin 1) Phenomenon Textbook economy Balance sheet recession 2) Fundamental driver Adam Smiths "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) Quick NPL disposal Normal NPL disposal a) Localized11) Remedy for Pursue accountability Pursue accountabilityBanking Crisis Slow NPL disposal Slow NPL disposal b) Systemic Fat spread Capital injectionSource: Richard Koo, The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession ,John Wiley & Sons, Singapore, 2008 44

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