Yesterday, we looked at whether a "Japan-lite" "lost decade" might be in prospect for Western economies.
Richard Koo, Chief Economist at Tokyo's Nomura Research Institute, believes that Japan's lost decade can be characterised as a "balance sheet recession."
He believes that the US, EU and China would do well to learn from its example.
Koo offers the following definition of a balance sheet recession, and suggests that austerity measures are not the best solution:
A balance sheet recession emerges after the bursting of a debt-financed asset price bubble that leaves many private sector balance sheets with more liabilities than assets. [...] The economy will not enter self-sustaining growth until private sector balance sheets are repaired. Fiscal consolidation should begin only after it is ascertained that funds NOT borrowed by the government will be borrowed and spent by the private sector.
In a July 2011 presentation
to the CIPFA conference in Birmingham, Koo argued that the UK economy is now at the "entry point"
to a balance sheet recession. PublicFinance.co.uk reports on what Koo had to say:
The lesson from Japan was that, due to the lack of demand in the private sector, the government needed to keep spending to maintain economic growth until the private sector is ready to borrow again. He told the conference that Japanese government spending had helped maintain growth, but added that, at 7.3% of gross domestic product, the UK government's economic stimulus was not enough to cover for the savings of 8.7% of GDP that the private sector had made. 'In the UK I would argue that isn't large enough to stabilise the British economy.'
See: XpertHR economic commentary September 2011: Icebergs and tectonic shifts
Read the complete post at http://www.xperthr.co.uk/blogs/employment-intelligence/2011/09/lessons-from-japan-2-is-the-uk.html
8 Sep 2011 8:00 AM
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