US bond-buying scheme proves ineffective: Koo
By Kathryn Chiu, The China PostTAIPEI, Taiwan -- Taiwanese-American economist Richard C. Koo (辜朝明) yesterday slammed the benefits of the U.S. bond-buying stimulus program, saying the measure failed to channel excess liquidity into the “physical” economy.
August 30, 2013, 12:00 am TWN
Instead of letting households and business entities use excessive liquidity to merely increase savings or pay down debts, world governments should borrow from banks and enlarge public spending, Koo said.
Koo, Chief Economist at the Nomura Research Institute (野村綜合研究所), yesterday gave a global economic outlook while making a keynote address at an annual seminar organized by the Taiwan Institute of Economic Research (TIER,台灣經濟研究院).
According to United Evening News, he opened the speech by questioning “why near-zero interest rates of 0-0.5 percent and massive liquidity injections are still failing to bring life to world economies including the U.S., Japan and the UK?”
Richard Koo has previously written that Japan's “Great Recession,” which began in 1990, was a “balance sheet recession.” It was triggered by a collapse in land and stock prices, which caused the assets of Japanese firms to be worth less than their liabilities.
Despite zero interest rates and an expansion of the money supply to encourage borrowing, Japanese corporations in aggregate opted to pay down their debts from their own business earnings rather than borrow to invest as firms typically do.
Koo argued in his speech that the EU and the U.S. are experiencing a “balance sheet recession” of which Japan is still battling to pull itself from.
The Bank of Japan has increased its monetary base from 100 in 1990 to 363 today, but instead of having a triple digit inflation rate, it is instead suffering from deflation. The same story goes for the EU and the U.S., Koo said.
These unusual phenomena are all caused by the fact that households and business entities in all of these countries are massively increasing savings or paying down debt despite record low interest rates, Koo added.
Koo said the corporate sector's behavior runs totally counter to the conventional framework of economic theory that profit-maximizing firms are expected to increase borrowing when offered such low interest rates.
Households and business entities in all of these countries are increasing savings or paying down debt because their balance sheets were badly damaged when asset price bubbles burst in those countries.
Koo urged the world's governments to step in and provide the necessary liquidity on the borrowing and spending side to prevent industrial output from dropping even further.
Richard C. Koo is a member of the renowned Lukang Koos family, which began to gain prominence when Taiwan was ceded to Japan in the late 19th century.
According to analysts, Koo's implication for the reemergence of the balance sheet recession in current times in Japan is to support Japan Prime Minster Shizo Abe's economic policies, which focus on stronger stimuli (fiscal and monetary) to once again provide the necessary liquidity in the economy and encourage people to borrow and spend.