Tuesday, April 27, 2010

Richard Koo – “Balance Sheet Recession”

Richard Koo, Chief Economist, Nomura Research Institute describes what he calls “Balance Sheet Recession.” He struggles for a term for it, but what he describes is exactly what I call “Debt Saturation.”

His discussion is good because it shows the dilemma and cycle created by deficit spending - deficits increase until they are no longer tolerated, financial reform comes in and that causes yet another contraction because balance sheets (debt saturation) have not been repaired.

This is why financial reform will fail – because you are saturated with debt, financial reform causes another contraction. Where Mr. Koo misses the boat in discussing Keynes is that the root cause of this dilemma is our monetary system – it is what sets up the need for fiscal stimulus and is the root of that cycle. We will not escape the problems created with debt cycles until we fix our underlying monetary system. (ht Kevin)