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Balance sheet recession is a relatively new term outlining the factors involved in the aftermath of financial crashes which decimate the value of property and stock portfolios such as the 1929 crash, the Japanese crash of 1990, and the 2007 8 global financial crash GFC.It was coined in 2010 by Japan based Richard C Koo, the author of The Escape from Balance Sheet Recession and the QE Trap and chief economist for the Nomura Research Institute The book is important because it explores Japan Balance sheet recession is a relatively new term outlining the factors involved in the aftermath of financial crashes which decimate the value of property and stock portfolios such as the 1929 crash, the Japanese crash of 1990, and the 2007 8 global financial crash GFC.It was coined in 2010 by Japan based Richard C Koo, the author of The Escape from Balance Sheet Recession and the QE Trap and chief economist for the Nomura Research Institute The book is important because it explores Japan s response from the 1990 bursting of its economic bubble through to the successful rebooting of its economy via a process that only finally reconciled the books in 2010 For 20 years the country s policymakers were somewhat flying in the dark, an excuse which the class of today, facing a not dissimilar set of circumstances, doesn t have Japan s crisis began when the markets crashed in 1990, wiping 1,500 trillion Yen 60 per cent of its previous value in wealth destroyed by falling land and share prices The write down was the largest economic peacetime loss ever, equal to three years GDP Even the 1929 Wall Street Crash was equivalent to only one years GDP for the US But what happened within the Japanese economy not fully explored or explained as yet to my knowledge was hugely instructive Japanese firms rushed to repair balance sheets by paying down debt The fundamentals of Japanese firms making new stuff and selling it were still healthy They weren t doing anything wrong when the markets starting with the property sector self annilihated The resulting plunge in domestic asset prices opened a large hole in corporate balance sheets Many companies saw their net worth plunge into negative territory But in that situation a classic balance sheet recession the industrial and manufacturing sector had healthy cash flows which it could use to pay down debt as quickly as possible The key point is that during a balance sheet recession the healthy option for firms is not the maximisation of profit for the shareholder but the minimisation of debt Not something the markets might want to hear but tough, y know The correct and preferable course of action from the perspective of all corporate stakeholders, therefore, is to pay down debt with cash flow As long as cash flow remains healthy, time will solve the issue of technical insolvency What happens next is the key part of the recovery from this ordeal Japan s government initiated an annual dose of fiscal stimulus which was directed towards repairing and building infrastructure such as roads and bridges It should be noted and it is, during the masterful sixth and final chapter, China s Economic Challenges that China went even further with this policy when it suffered an equivalent balance sheet recession during the fallout from the GFC After 2009 China built ghost stadia and ghost towns as part of its emergency stimulus They were public works projects designed to preserve the 60 million jobs that would have been lost as a result of the GFC, which originated in the West, Koo explains.Anyway, by identifying and implementing the correct policy of fiscal stimulus rather than, say, propping up share prices by investing in the bond market via QE anyone called Mr Osborne listening the Japanese economy maintained GDP at pre bubble peak levels every year over the next 20 odd years despite the fact that commercial land prices plunged 87 per cent and back to the levels of 1973.Koo kicks off at the delay in accepting his formulation It took so long to understand and overcome this recession because no university teaches that technically insolvent companies will choose to minimise debt instead of maximise profit Not just universities the quality of writing in the media was, Koo suggests, woeful possibly destructive and certainly corrosive Journalists combed Japan for examples of wasteful public works projects and cited them as evidence that the government had wasted taxpayer money These have a go heroes of the Press were bashing the stimulus based on the totally unfounded assumption that Japan would have been able to maintain zero growth without any help from the government Japan hasn t been the only example of a state implementing strategies Koo identifies as appropriate The US initiated a fiscal programme which pulled it out of post GFC recession faster than expected andefficiently than those places which dithered, or embarked on a programme of austerity Which brings us to the eurozone Koo s insights really are worth getting to grips with Never was the fug of current debate on this topicthoroughly cleared than in the penultimate chapter, Euro Crisis Facts and Resolution This topic is why I picked up the book, because it I thought it might answer the question of why the Eurozone hasn t at the time of writing adopted quantitative easing It s hard to think of any good reason why the euro should survive when you read Koo s gimlet eyed assessment of how it has piled self inflicted woe upon self inflicted woe Having said that, a unique combination of circumstances meant that in 2009, just when a policy of fiscal stimulus was needed post GFC, the full facts of Greece s fiscal profligacy were revealed In previous circumstances Greece would have devalued the drachma but of course this was no longer an option The tragedy was that the countries Ireland, Spain and Portugal that were in balance sheet recession the opposite of the state that Greece was in were forced to respond in the same way as Greece, tipping them into deflationary spirals.This catastrophic policy error occurred for two reasons The Maastricht Treaty that underlies the Euro is a defective document that makes no allowance for countries in balance sheet recessions is the first The second point is that nation states within the eurozone are still able to sell their own government bonds The plurality of government bond markets within the same currency zone means that the self corrective mechanism for balance sheet recessions functions poorly, if at all, in the eurozone The deficit reduction policy imposed on the eurozone because Greece had been hiding the extent of its fiscal deficits before joining the euro in 2002 has proved a disaster unimpeded by policy makers and analysts Indeed the Toronto Summit in 2010 saw austerity gain momentum when the G20 agreed to reduce their fiscal deficits in half, and again in 2011 as eurozone countries adopted a new fiscal compact at Germany s urging.So, to Germany Koo states that it implemented its own structural reforms after the dotcom bubble burst in 2000, seriously shaking its economic stability which had invested big in the IT sector As a result of this experience Germany s policy makers decided that structural reform requires a crisis ie that implementing reforms during a crisis is in fact the optimal state of affairs and further signs of additional strain are, in the Bundesbank s view, signs that even greater reforms are required Thus the tableau is set for a crisis that now threatens not just the economic well being of the eurozone, but its democratic future too Germany misread a balance sheet recession as a sign of underlying structural problems and imposed fiscal consolidation the one policy that governments must not use during a balance sheet recession The result has been mayhem, bringing all involved to the brink of oblivion The eurozone crisis would never have happened if Greece had been kicked out when the true scale of its deficits ably masked by investment bankers became apparent And if the policy of fiscal consolidation continues there will be a crisis in democracy as was apparent in last year s EU elections The two defects in the euro if they were fixed would save the currency which Koo calls one of humanity s greatest achievements One is to adjust the Maastricht Treaty to take account of balance sheet recessions The second is to address the plurality of government bond markets within the same currency zone Just these two finishing touches and the euro would be functional again no need for quantitative easing The trap part of the title, by the way, refers to the fact that once you embark on a QE strategy, you can t wind it down without the risk of generating tremendous inflation so you have to keep on doing it with evergusto Forget Thomas Piketty Richard Koo has written one of most important books of its type, outlining a new mechanism which can t become part of the canon of economic theory quickly enough Koo s discussion of balance sheet recessions is an essential read for all interested in understanding the dynamics of the modern economy in the aftermath of the Great Recession Balance sheet recessions occur rarely, but their impact is severe and long lasting, impacting the overall economy through multiple channels deflationary pressures, contracting credit, and private incentives to save motivated by clear economic and psychological rationales The book lucidly explains balance sheet rece Koo s discussion of balance sheet recessions is an essential read for all interested in understanding the dynamics of the modern economy in the aftermath of the Great Recession Balance sheet recessions occur rarely, but their impact is severe and long lasting, impacting the overall economy through multiple channels deflationary pressures, contracting credit, and private incentives to save motivated by clear economic and psychological rationales The book lucidly explains balance sheet recessions, fiscal and monetary policy responses, and makes a compelling argument that balance sheet recessions represent a unique economic challenge, are of significant importance to economics and public policy, and remain outside of the scope of mainstream understanding in the worlds of economics and public policy While a background in economics and an understanding of banking sector dynamics is valuable, it is not essential to capture Koo s main arguments The book is a rich and valuable text that deserves a place on the bookshelves of financial professionals, economists, and policy makers Interesting idea and theory on balance sheet recession The author used the theory to understand what happened to Japanese economies and Eurozone crisis, and he provides a consistent and a new perspective to explain those events The only drawback is that some of the texts are repetitive and verbose, and the book can beconcise. Only slightly less repetitive than The Holy Grail It gets to you a bit but it helps drive home his message balance sheet recessions need fiscal stimulus by the government.Theinteresting part was what to do with QE and how we might avoid the QE trap. [ KINDLE ] ☥ The Escape from Balance Sheet Recession and the QE Trap: A Hazardous Road for the World Economy ♺ Compare global experiences during the balance sheet recession and find out what is needed for a full recoveryThe Escape from Balance Sheet Recession and the QE Trap details the many hidden dangers remaining as the world slowly recovers from the balance sheet recession ofAuthor and leading economist Richard Koo explains the unique political and economic pitfalls that stand in the way of recovery from this rare type of recession that was largely overlooked by economists Koo anticipated the current predicament in the West long before others and issued warnings in his previous books Balance Sheet Recession and The Holy Grail of Macroeconomics This new book illustrates how history is repeating itself in Europe while the United States, which learnt from the Japanese experience, is doing better by avoiding the fiscal cliff However, because of the liberal dosage of quantitative easing already implemented, the United States, the United Kingdom, and Japan may face a treacherous path to normalcy in what Koo calls the QE Trap He argues that it is necessary to understand balance sheet recession in order to resolve the Eurozone crisis, particularly the competitiveness problems Koo issues warnings against those who are too ready to argue for structural reforms when the problems are actually with balance sheets He re examines Japan s two decades of experiences with this rare recession and offers an insider view on the Abenomics On China, readers will gain a very different historical perspective as Koo argues that western commentators have forgotten their own history when they talk about the re balancing of the Chinese economy Learn from Japan which experienced the same predicament afflicting the West fifteen years earlier Discover how unwinding of quantitative easing will affect the United States, the United Kingdom, Japan, as well as the emerging world Examine solutions to the Eurozone problems caused by two balance sheet recessions eight years apart Gain insight into China s problems from the West s own experiences with urbanisation Koo, who developed the concept of balance sheet recession based on Japan s experience, took the revolution in macroeconomics started by John Maynard Keynes into a new height The Escape from Balance Sheet Recession and the QE Trap offers the world cure for balance sheet recession A bit repetitive as I have previously read the Holy Grail, but the chapters on the Eurozone and China were a great read, they offered a novel approach of analysing both economies.The Eurozone chapter is a great complement to Martin Wolfe s The Shifts and the Shocks.I also liked Koo s take on Piketty s work. Read what Central Bankers around the world have read this book Unfortunately, the fiscal side hasn t read it yet.Koo has clarity of thought Reading him helped me see foresee the GFC s negative impact on the US consumer and make the right changes in my investments to make it through. Interesting perspective about GFC and its aftermath. Strong analysis but desperately in need of an editor Too repetitive, too many digressions, too much name dropping and I told you so ism Could easily have been half as long. Brilliant