1 00:00:12,080 --> 00:00:15,400 Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast. 2 00:00:15,480 --> 00:00:19,960 Speaker 1: I'm Tracy Allaway and I'm Joe. Wasn't thal Joe? Do 3 00:00:20,000 --> 00:00:22,639 Speaker 1: you think everyone knows what a balance sheet recession is 4 00:00:22,680 --> 00:00:25,520 Speaker 1: by now? I don't think that only the cool people 5 00:00:25,760 --> 00:00:28,800 Speaker 1: know what a balance sheet recession. Only the only the 6 00:00:28,840 --> 00:00:31,400 Speaker 1: real nerds who are reading up of this stuff pre 7 00:00:31,520 --> 00:00:34,320 Speaker 1: and post crisis were into that. But I think for 8 00:00:34,320 --> 00:00:36,479 Speaker 1: the vast majority of people, including I would say the 9 00:00:36,520 --> 00:00:41,000 Speaker 1: vast majority of economists, unfortunately, I don't think that concept 10 00:00:41,080 --> 00:00:43,360 Speaker 1: is one that's like really in their their language and 11 00:00:43,400 --> 00:00:46,320 Speaker 1: their terminology. Typically. Yeah, I kind of have to remind 12 00:00:46,320 --> 00:00:49,800 Speaker 1: myself of this because I got into financial journalism right 13 00:00:49,880 --> 00:00:53,600 Speaker 1: after the two thousand eight financial crisis, and balance sheet 14 00:00:53,680 --> 00:00:56,560 Speaker 1: recession was sort of the hot thing then. It was 15 00:00:56,600 --> 00:00:59,760 Speaker 1: the parallel that everyone was reaching forward to explain what 16 00:00:59,800 --> 00:01:02,760 Speaker 1: was happening to the US at the time. But of 17 00:01:02,800 --> 00:01:06,000 Speaker 1: course it's still a relatively new concept, and it's still 18 00:01:06,160 --> 00:01:11,240 Speaker 1: a relatively rare type of recession, I guess, right. And 19 00:01:11,280 --> 00:01:14,440 Speaker 1: you know, again, this sort of one of the questions 20 00:01:14,480 --> 00:01:18,760 Speaker 1: that developed market economies are dealing with right now is 21 00:01:19,280 --> 00:01:23,360 Speaker 1: why have the traditional tools that governments and central banks 22 00:01:23,520 --> 00:01:27,840 Speaker 1: use to stimulate the economy not been effective? Why have 23 00:01:27,959 --> 00:01:32,000 Speaker 1: lower interest rates not caused faster growth and more rapid inflation? 24 00:01:32,520 --> 00:01:35,800 Speaker 1: Why don't we see uh, more rapid growth and inflation 25 00:01:35,920 --> 00:01:40,000 Speaker 1: thanks to budget deficits that are essentially near their highest 26 00:01:40,080 --> 00:01:43,800 Speaker 1: levels of all time and places like the US and elsewhere, 27 00:01:44,200 --> 00:01:46,679 Speaker 1: And so it kind of in keeping things we've talked 28 00:01:46,680 --> 00:01:49,760 Speaker 1: about long time, like well, what is really wrong with 29 00:01:49,880 --> 00:01:52,120 Speaker 1: the framework? And is there a different way to think 30 00:01:52,160 --> 00:01:54,920 Speaker 1: about the malaise that we see across so much of 31 00:01:54,960 --> 00:01:57,200 Speaker 1: the world's economy. Is right, and I think we are 32 00:01:57,240 --> 00:02:00,360 Speaker 1: seeing more and more policymakers who are arguing that school 33 00:02:00,360 --> 00:02:03,120 Speaker 1: stimulus is the way forward, or that fiscal is the 34 00:02:03,160 --> 00:02:06,800 Speaker 1: new monetary policy, and a lot of that thinking stems 35 00:02:07,200 --> 00:02:11,040 Speaker 1: from the balance sheet recession ideas. So why don't we 36 00:02:11,080 --> 00:02:13,400 Speaker 1: go ahead and dig into it. I'm really happy to 37 00:02:13,440 --> 00:02:16,679 Speaker 1: say that our guest on today's episode is Richard Coup, 38 00:02:16,800 --> 00:02:21,399 Speaker 1: the chief economist of Nomura Research Institute and the man 39 00:02:21,520 --> 00:02:25,400 Speaker 1: who the term balance sheet recession is actually attributed to. 40 00:02:25,560 --> 00:02:28,519 Speaker 1: So Richard, thank you so much for coming on, Thank 41 00:02:28,520 --> 00:02:31,240 Speaker 1: you for having me here. So why don't we start 42 00:02:31,280 --> 00:02:34,600 Speaker 1: with with the obvious question, what exactly is a balance 43 00:02:34,680 --> 00:02:39,079 Speaker 1: sheet recession? And how did you come to start thinking 44 00:02:39,280 --> 00:02:43,840 Speaker 1: about recessions in that way. I have to first disclose 45 00:02:43,919 --> 00:02:47,840 Speaker 1: my UH geography, because I think in Japan for the 46 00:02:47,919 --> 00:02:52,800 Speaker 1: last thirty six years, starting around close, Japan fell into 47 00:02:52,840 --> 00:02:57,200 Speaker 1: this what I go, balancee recession and boj brought rates 48 00:02:57,240 --> 00:03:00,160 Speaker 1: down to almost zero. WHI I to stimulate the economy 49 00:03:00,280 --> 00:03:04,280 Speaker 1: and nothing seemed to work. And it took me about 50 00:03:04,280 --> 00:03:08,360 Speaker 1: seven years to figure out that perhaps we have to 51 00:03:08,560 --> 00:03:12,120 Speaker 1: come out of our ordinary in a private sect always 52 00:03:12,200 --> 00:03:16,239 Speaker 1: maximizing profits kind of framework to understand what's going on. 53 00:03:17,080 --> 00:03:20,960 Speaker 1: And one day I stumbled upon the chart that indicated 54 00:03:21,600 --> 00:03:24,519 Speaker 1: the Japanese companies are not borrowing money at all, they're 55 00:03:24,560 --> 00:03:28,440 Speaker 1: actually paying down debt. And then it came to me 56 00:03:28,520 --> 00:03:31,560 Speaker 1: that why would a private sector company is willing to 57 00:03:31,600 --> 00:03:35,320 Speaker 1: pay down debt when interest rates are zero? And then 58 00:03:35,360 --> 00:03:37,640 Speaker 1: of course it's the only reason that can happen is 59 00:03:37,680 --> 00:03:40,560 Speaker 1: that they have a financial problems of some sort, perhaps 60 00:03:40,560 --> 00:03:43,720 Speaker 1: balance it under water. And then when I start thinking 61 00:03:43,720 --> 00:03:47,720 Speaker 1: in those terms, everything kind of fell in place. That 62 00:03:47,880 --> 00:03:50,480 Speaker 1: is to say, during the bubble days, people typically leverage 63 00:03:50,560 --> 00:03:52,440 Speaker 1: themselves up thinking that they're going to make lots of 64 00:03:52,480 --> 00:03:56,640 Speaker 1: money very quickly. When the bubble bursts, as the prices collapse, 65 00:03:56,880 --> 00:04:01,320 Speaker 1: all that liabilities remain. Their balance is underwater, and people 66 00:04:01,360 --> 00:04:04,880 Speaker 1: all start paying down that at the same time and 67 00:04:05,080 --> 00:04:09,160 Speaker 1: paying down that. It becomes kind of a survival issue 68 00:04:09,200 --> 00:04:13,680 Speaker 1: for them because if people outside outside the companies, for example, 69 00:04:13,760 --> 00:04:18,080 Speaker 1: find out that your company is actually in a negative equity, 70 00:04:18,400 --> 00:04:21,800 Speaker 1: they will stop trading you on credit. They demand everything 71 00:04:21,920 --> 00:04:25,520 Speaker 1: to be settled in cash. Your best employee could leave 72 00:04:25,640 --> 00:04:28,440 Speaker 1: because realizing that you know, this company might be under 73 00:04:28,440 --> 00:04:31,760 Speaker 1: water for many years to come. When all these things 74 00:04:31,800 --> 00:04:37,359 Speaker 1: come to surface, you're basically dead. So people inside the 75 00:04:37,360 --> 00:04:41,520 Speaker 1: companies who understands the actual situation keeps their mouth shut, 76 00:04:42,240 --> 00:04:45,880 Speaker 1: tell investors, shareholders whatever they want to hear. They try 77 00:04:45,920 --> 00:04:49,280 Speaker 1: to repair their balances as quickly and quietly as possible. 78 00:04:50,400 --> 00:04:53,120 Speaker 1: And that's, of course, on the individual level, the right 79 00:04:53,160 --> 00:04:55,600 Speaker 1: thing to do. If I were running one of those companies, 80 00:04:55,640 --> 00:04:58,480 Speaker 1: are we doing it? Many of the people listening in 81 00:04:58,560 --> 00:05:00,719 Speaker 1: this podcast in the same situation will probably do the 82 00:05:00,760 --> 00:05:04,320 Speaker 1: same because if you have a cash flow, and in 83 00:05:04,360 --> 00:05:06,599 Speaker 1: the Japanese cage, a lot of companies still had cash flow. 84 00:05:06,680 --> 00:05:09,040 Speaker 1: Japan was running the largest trace of plus in the world. 85 00:05:09,600 --> 00:05:12,040 Speaker 1: People wanted to buy Japanese products all over the world. 86 00:05:12,800 --> 00:05:14,960 Speaker 1: So the main line of business was okay. They had 87 00:05:14,960 --> 00:05:18,640 Speaker 1: a cash flow, but their balance sheets were horribly under water. 88 00:05:19,839 --> 00:05:22,840 Speaker 1: So all these people start paying down debt to repair 89 00:05:22,839 --> 00:05:25,440 Speaker 1: their balance sheets. And that way you don't have to 90 00:05:25,440 --> 00:05:28,240 Speaker 1: tell your shareholders. It's it's not the shares all piece 91 00:05:28,320 --> 00:05:30,280 Speaker 1: of paper. Now you don't have to do bankers, it's 92 00:05:30,279 --> 00:05:33,120 Speaker 1: not all non performing loans. And most importantly, you don't 93 00:05:33,160 --> 00:05:36,440 Speaker 1: have to their workers. They are normal jobs tomorrow. So 94 00:05:36,520 --> 00:05:39,359 Speaker 1: of all the stakeholders involved, using the cash flow to 95 00:05:39,360 --> 00:05:42,120 Speaker 1: pay down that is the right thing to do. But 96 00:05:42,200 --> 00:05:44,680 Speaker 1: when everybody does that at the same time, we fall 97 00:05:44,720 --> 00:05:48,200 Speaker 1: into this fallacy of composition problems in that even though 98 00:05:48,240 --> 00:05:50,760 Speaker 1: everybody is doing the right things collectively, you get the 99 00:05:50,800 --> 00:05:54,880 Speaker 1: wrong result. And you get this wrong result because in 100 00:05:54,920 --> 00:05:58,320 Speaker 1: the national economy, if someone is saving money or paying 101 00:05:58,320 --> 00:06:01,479 Speaker 1: down debt, someone else has to be borrowing those money 102 00:06:01,520 --> 00:06:04,760 Speaker 1: and putting them back into the income stream. If everybody 103 00:06:04,800 --> 00:06:07,040 Speaker 1: is saving money or paying down dead and no one's 104 00:06:07,080 --> 00:06:11,400 Speaker 1: borrowing money, the economy is just implode. When all these 105 00:06:11,400 --> 00:06:16,520 Speaker 1: people start paying down dead, economy began to uh desalerate 106 00:06:16,920 --> 00:06:21,719 Speaker 1: and the situation that wasn't wasn't worth. They tried to 107 00:06:21,760 --> 00:06:24,960 Speaker 1: do monetary stimulus, but if you balance it is underwater. 108 00:06:25,400 --> 00:06:28,599 Speaker 1: You cannot borrow and the banks won't lend your money either. 109 00:06:30,160 --> 00:06:34,320 Speaker 1: So I read your book, like many people I think 110 00:06:34,440 --> 00:06:37,440 Speaker 1: in our field did I probably I came across it 111 00:06:37,600 --> 00:06:42,800 Speaker 1: in the book The Holy Grail of macro Economics, where 112 00:06:42,839 --> 00:06:47,400 Speaker 1: you lay out this theory essentially by looking at exactly 113 00:06:47,440 --> 00:06:52,120 Speaker 1: what you described the Japan scenario post where despite lower 114 00:06:52,120 --> 00:06:55,000 Speaker 1: and lower interest rates, nothing could change on the corporate 115 00:06:55,040 --> 00:06:59,799 Speaker 1: behavior because corporates were incentivized to pay down debt. How much, though, 116 00:07:00,200 --> 00:07:03,400 Speaker 1: is this concept of the balance sheet recession? And what 117 00:07:03,480 --> 00:07:05,440 Speaker 1: you see is sort of like you know, on the 118 00:07:05,480 --> 00:07:08,840 Speaker 1: individual level, corporate level makes sense to pay down debt, 119 00:07:09,000 --> 00:07:12,200 Speaker 1: but in the aggregate level it's real, it's really problematic. 120 00:07:12,720 --> 00:07:16,400 Speaker 1: But how much is this different or essentially a new 121 00:07:16,480 --> 00:07:20,880 Speaker 1: reframing of sort of very old Keynesian ideas about how 122 00:07:20,920 --> 00:07:24,240 Speaker 1: what might make sense for one householder a company suddenly 123 00:07:24,280 --> 00:07:29,240 Speaker 1: becomes very problematic when it's the behavior of the overall economy. 124 00:07:29,880 --> 00:07:32,800 Speaker 1: As you mentioned at the beginning, is a real occurrence 125 00:07:34,040 --> 00:07:37,200 Speaker 1: not this type of recession because most of the time, 126 00:07:37,280 --> 00:07:40,640 Speaker 1: people are very careful with their finances, they're very careful 127 00:07:40,720 --> 00:07:45,080 Speaker 1: with their balance sheets. But during the bubble days, that 128 00:07:45,160 --> 00:07:49,760 Speaker 1: discipline disappears and people just leverage themselves up as much 129 00:07:49,800 --> 00:07:51,800 Speaker 1: as they can so that they can make tons of 130 00:07:51,800 --> 00:07:55,840 Speaker 1: money very quickly. And when that bubble burst, the number 131 00:07:55,880 --> 00:07:59,920 Speaker 1: of people who are affected it will be far large 132 00:08:00,160 --> 00:08:04,960 Speaker 1: than in ordinary circumstances. And when they all collectively start 133 00:08:05,000 --> 00:08:07,680 Speaker 1: paying down debt, even if there were some people who 134 00:08:07,720 --> 00:08:11,800 Speaker 1: were still borrowing money on the net basis, private sector 135 00:08:11,920 --> 00:08:15,840 Speaker 1: as a group becomes a net saver, and in that 136 00:08:16,000 --> 00:08:20,720 Speaker 1: case we fall into balancee recessions. So I'm curious, where 137 00:08:20,720 --> 00:08:23,880 Speaker 1: do you see, given that these are relatively rare types 138 00:08:23,920 --> 00:08:27,440 Speaker 1: of recessions, where do you see balance sheet recessions now 139 00:08:27,520 --> 00:08:31,240 Speaker 1: in the world? Is it still in Japan, possibly still 140 00:08:31,240 --> 00:08:33,760 Speaker 1: in the US or in Europe? Where where would you 141 00:08:33,800 --> 00:08:38,680 Speaker 1: say and at what stages? Well, I say rare because 142 00:08:38,840 --> 00:08:43,199 Speaker 1: bubbles are relatively rare occurrences, and so balance sheet recession, 143 00:08:43,240 --> 00:08:47,280 Speaker 1: which typically follows the bursting of the bubble, is rare 144 00:08:47,400 --> 00:08:52,560 Speaker 1: because of that reason. Now Japan, the bubble birs, and 145 00:08:52,600 --> 00:08:57,200 Speaker 1: it's already thirty years from that. Corporate balances in Japan 146 00:08:57,280 --> 00:09:00,640 Speaker 1: are in very good shape now. They the balance sheet 147 00:09:01,080 --> 00:09:06,480 Speaker 1: recession powers probably ended around UH five, five to ten 148 00:09:06,559 --> 00:09:12,240 Speaker 1: years ago. Some companies may still be struggling, but on average, 149 00:09:12,920 --> 00:09:16,760 Speaker 1: Japanese companies are in pretty good shape. But even after 150 00:09:16,800 --> 00:09:21,640 Speaker 1: the balance sheets are repaired, because of the this process 151 00:09:21,679 --> 00:09:24,480 Speaker 1: of the leveraging process of paying down that is such 152 00:09:24,520 --> 00:09:29,839 Speaker 1: a painful process. Most companies that comes out are still 153 00:09:29,840 --> 00:09:33,040 Speaker 1: saying to themselves, oh, that was terrible experience, will never 154 00:09:33,120 --> 00:09:36,440 Speaker 1: borrow money again. So this is a kind of trauma 155 00:09:36,520 --> 00:09:40,440 Speaker 1: that gets stuck with this this mindset. And when you 156 00:09:40,480 --> 00:09:43,559 Speaker 1: look at what happened to Americans after the Great Depression, 157 00:09:44,200 --> 00:09:47,680 Speaker 1: the Great Depression was this type of recession. Everybody was 158 00:09:47,760 --> 00:09:50,440 Speaker 1: leveraging up. Once the bubble burst, everybody start paying down 159 00:09:50,480 --> 00:09:53,440 Speaker 1: that all at the same time and GDP collapsed, but 160 00:09:53,520 --> 00:09:56,520 Speaker 1: people still paying down that and those Americans who lift 161 00:09:56,559 --> 00:10:01,400 Speaker 1: through the Great Depression never borrow money until they died 162 00:10:02,160 --> 00:10:05,760 Speaker 1: because the trauma was so bad. In Japan, we have 163 00:10:05,840 --> 00:10:08,360 Speaker 1: a mini version of that. A lot of people still 164 00:10:08,400 --> 00:10:12,240 Speaker 1: not borrowing money because the previous experience was so bad. 165 00:10:12,880 --> 00:10:16,040 Speaker 1: Now us I think household take the balance it are 166 00:10:16,040 --> 00:10:20,840 Speaker 1: becoming much cleaner thanks to all the help from the 167 00:10:20,920 --> 00:10:24,880 Speaker 1: government and the Federal Reserve, and so I think US 168 00:10:25,040 --> 00:10:28,120 Speaker 1: is almost to the end of this process, but I 169 00:10:28,160 --> 00:10:31,679 Speaker 1: think the trauma pot will be still with us for 170 00:10:31,920 --> 00:10:35,840 Speaker 1: maybe some more years. In Europe, because they had a 171 00:10:35,840 --> 00:10:39,600 Speaker 1: double deep recession with the European crisis starting around twenty 172 00:10:39,640 --> 00:10:45,080 Speaker 1: eleven twelve, the problem got a lot worse and they 173 00:10:45,120 --> 00:10:50,160 Speaker 1: are beginning to look better, but European economies at the 174 00:10:50,200 --> 00:10:54,440 Speaker 1: moment are very much dependent on exports, and with the 175 00:10:54,600 --> 00:10:59,800 Speaker 1: exports weakening all around the world, they're slowing down even faster, 176 00:11:00,400 --> 00:11:04,080 Speaker 1: and so for Europe it might take much longer. And 177 00:11:04,120 --> 00:11:07,480 Speaker 1: even after the balances are repaired, this this trauma period 178 00:11:07,920 --> 00:11:11,720 Speaker 1: who also going to be last thing for quite some time. 179 00:11:11,960 --> 00:11:14,640 Speaker 1: So if we go back to Japan, and you mentioned 180 00:11:14,679 --> 00:11:18,439 Speaker 1: that maybe the balance sheet recession in Japan only and 181 00:11:18,960 --> 00:11:22,199 Speaker 1: maybe about ten years ago or less, so essentially it 182 00:11:22,320 --> 00:11:25,080 Speaker 1: was a twenty year balance sheet recession in your view 183 00:11:26,000 --> 00:11:28,400 Speaker 1: during that time, and the sort of standard view I 184 00:11:28,440 --> 00:11:30,839 Speaker 1: think that people would say is okay. The way to 185 00:11:31,600 --> 00:11:33,720 Speaker 1: or at least within your framework, the way to address 186 00:11:33,840 --> 00:11:38,560 Speaker 1: too much debt overhanging the private sector is for essentially 187 00:11:38,559 --> 00:11:41,200 Speaker 1: to move the debt onto the government's books because the 188 00:11:41,240 --> 00:11:46,319 Speaker 1: government operates differently, and uh, that sort of theoretically relieves 189 00:11:46,520 --> 00:11:48,480 Speaker 1: the burden and the government has all the debt, but 190 00:11:48,559 --> 00:11:51,920 Speaker 1: the government can service the debt because it's the government. Now, 191 00:11:52,000 --> 00:11:54,760 Speaker 1: Japan did that to some extent because the deficits and 192 00:11:54,800 --> 00:12:00,679 Speaker 1: the national debt sword sky high during this balance sheet recession. 193 00:12:00,720 --> 00:12:03,000 Speaker 1: So at the same time, during this long painful day 194 00:12:03,040 --> 00:12:07,680 Speaker 1: leveraging prices, the Japanese public debt absolutely sword. But why 195 00:12:07,800 --> 00:12:10,600 Speaker 1: wasn't that enough? Why wasn't some of the most eye 196 00:12:10,640 --> 00:12:13,840 Speaker 1: watering levels we've ever seen of debt to GDP anywhere 197 00:12:13,880 --> 00:12:16,360 Speaker 1: in the world. In fact, Japan is famous for the 198 00:12:16,400 --> 00:12:19,280 Speaker 1: size of the stock of its public debt. Why wasn't 199 00:12:19,360 --> 00:12:24,360 Speaker 1: that enough? Two more quickly alleviate the private sector's problems 200 00:12:24,480 --> 00:12:27,360 Speaker 1: At the beginning, no one has this framework in their minds, 201 00:12:27,559 --> 00:12:32,480 Speaker 1: including myself, I have to admit. And so they when 202 00:12:32,520 --> 00:12:35,800 Speaker 1: they put on the fiscal stimulus to keep the economy going, 203 00:12:36,440 --> 00:12:42,360 Speaker 1: they thought, with one big jolt, who act as a 204 00:12:42,440 --> 00:12:45,080 Speaker 1: pump priming and economy will come out very quickly, and 205 00:12:45,120 --> 00:12:48,480 Speaker 1: then they can rescind the fiscal stimulus afterwards. You know, 206 00:12:48,520 --> 00:12:52,000 Speaker 1: when US fell into one in two thousand and eight. 207 00:12:52,400 --> 00:12:55,839 Speaker 1: It was Professor Barry Summers who said, oh, we all, 208 00:12:55,880 --> 00:12:59,040 Speaker 1: we needed a big jolt to get the economy going again, 209 00:12:59,440 --> 00:13:02,640 Speaker 1: a bit jolt of fiscal stimulus. The same argument was 210 00:13:02,720 --> 00:13:05,640 Speaker 1: made in Japan eighteen years earlier. So they put in 211 00:13:05,679 --> 00:13:08,800 Speaker 1: the fiscal stimulus and fiscal stimulus government spending money. Of course, 212 00:13:08,840 --> 00:13:13,000 Speaker 1: economy responds very quickly, but at that time the balances 213 00:13:13,040 --> 00:13:17,240 Speaker 1: are still under under repair. But people didn't realize that part. 214 00:13:17,760 --> 00:13:20,240 Speaker 1: As soon as the economy begin to show improvement, they 215 00:13:20,280 --> 00:13:22,520 Speaker 1: decided to cut the deficit because that, you know, we 216 00:13:22,520 --> 00:13:24,480 Speaker 1: don't want to leave any that to our children and 217 00:13:24,480 --> 00:13:28,439 Speaker 1: all that kind of argument. And so even though households, 218 00:13:28,640 --> 00:13:31,000 Speaker 1: households and companies was still repairing balance, she is the 219 00:13:31,040 --> 00:13:34,560 Speaker 1: fiscal stimulus or was cart economy tanked again? And then 220 00:13:34,600 --> 00:13:37,360 Speaker 1: they put a lot of fiscal stimulus. Economy improved again, 221 00:13:37,440 --> 00:13:39,760 Speaker 1: and they cut the fiscal stimulus again. So we had 222 00:13:39,800 --> 00:13:43,760 Speaker 1: actually this on and off situation for a very long time. 223 00:13:43,920 --> 00:13:47,080 Speaker 1: And that is not the way to to to fight 224 00:13:47,160 --> 00:13:51,400 Speaker 1: this this recession. It has to be sufficient and it 225 00:13:51,440 --> 00:13:55,200 Speaker 1: has to be consistently applied sustained, and that was not 226 00:13:55,400 --> 00:14:01,360 Speaker 1: how it was applied unfortunately, and we made even bigger mistakes. 227 00:14:01,400 --> 00:14:04,559 Speaker 1: Are really trying to cut the budget deficits, thinking that 228 00:14:04,760 --> 00:14:08,440 Speaker 1: economy is already strong enough. And at that time I M. 229 00:14:08,520 --> 00:14:11,200 Speaker 1: F or E. C D, who also didn't understand anything 230 00:14:11,200 --> 00:14:16,040 Speaker 1: about balanced recession UH strongly insisted that Japan should reduce 231 00:14:16,080 --> 00:14:19,040 Speaker 1: its budget deficit. And when that was put in place, 232 00:14:19,760 --> 00:14:23,120 Speaker 1: we have five consecutive cultus of negative growth, complete breakdown 233 00:14:23,120 --> 00:14:25,720 Speaker 1: in the banking system, and that became the second one, 234 00:14:25,800 --> 00:14:29,080 Speaker 1: that became the double dip, the real double dip. And 235 00:14:29,160 --> 00:14:31,640 Speaker 1: once you have a double dip in already this very 236 00:14:31,680 --> 00:14:37,280 Speaker 1: difficult circumstances, people become very, very pessimistic, and that's why 237 00:14:37,400 --> 00:14:40,520 Speaker 1: it took us nearly twenty years to come out of it. 238 00:14:40,960 --> 00:14:44,440 Speaker 1: If these were understood from the very beginning and physical 239 00:14:44,480 --> 00:14:47,840 Speaker 1: stimulus were applied in a sufficient amount in a sustained way, 240 00:14:48,240 --> 00:14:52,040 Speaker 1: I'm sure that time period could have been cut significantly. 241 00:15:14,480 --> 00:15:18,680 Speaker 1: So talk to us about how fiscal stimulus actually affects 242 00:15:19,000 --> 00:15:23,480 Speaker 1: private sector borrowing and how you get companies specifically to 243 00:15:23,640 --> 00:15:27,160 Speaker 1: move out of this debt trauma, because it seems really difficult, 244 00:15:27,520 --> 00:15:29,720 Speaker 1: at least in the case of Japan, and I think 245 00:15:29,760 --> 00:15:34,240 Speaker 1: even today, you know Japanese companies don't actually borrow that much. 246 00:15:34,320 --> 00:15:37,400 Speaker 1: I think we had the first ever Japanese junk bond 247 00:15:37,480 --> 00:15:41,040 Speaker 1: sale just this year, and something like half of Japanese 248 00:15:41,080 --> 00:15:44,240 Speaker 1: companies have no outstanding debt at all. So to some 249 00:15:44,280 --> 00:15:47,600 Speaker 1: degree it seems like we're still struggling with this debt 250 00:15:47,640 --> 00:15:52,600 Speaker 1: trauma issue, at least in Japan. Yes. Um, the way 251 00:15:52,680 --> 00:15:55,960 Speaker 1: it works is that once everybody started paying down that 252 00:15:56,080 --> 00:15:58,840 Speaker 1: at the same time there will be no borrowers. But 253 00:15:59,040 --> 00:16:03,680 Speaker 1: households actors do saving money do these de leveraged funds 254 00:16:03,720 --> 00:16:07,920 Speaker 1: also counters the savings, and the economy begins to shrink. 255 00:16:08,120 --> 00:16:11,960 Speaker 1: Right If I may give you an America example, Suppose 256 00:16:12,000 --> 00:16:13,840 Speaker 1: I have thousand dollars of income and I spend nine 257 00:16:13,880 --> 00:16:17,040 Speaker 1: hundred myself. The nine is already someone else's income, so 258 00:16:17,080 --> 00:16:20,000 Speaker 1: that's not a problem. It's already circulating in the economy. 259 00:16:20,120 --> 00:16:21,960 Speaker 1: The hundred dollars I decided to say, if you go 260 00:16:22,080 --> 00:16:25,400 Speaker 1: through financial sector and will be lent to someone who 261 00:16:25,400 --> 00:16:28,080 Speaker 1: can use it. When that person borrows and spends it, 262 00:16:28,360 --> 00:16:31,320 Speaker 1: the total expenditure will be nine hundred dollars I spent 263 00:16:31,600 --> 00:16:35,800 Speaker 1: plus this hundred dollars that this borrower spent uh combined 264 00:16:35,840 --> 00:16:39,200 Speaker 1: would be thousand dollars against my original income a thousand dollars. 265 00:16:39,320 --> 00:16:42,520 Speaker 1: Then economy moves forward. If there are too many borrowers 266 00:16:42,840 --> 00:16:45,880 Speaker 1: rates interestect the raised two few borrows interest the lower, 267 00:16:46,280 --> 00:16:48,880 Speaker 1: sometimes with the help of the central bank to make 268 00:16:48,920 --> 00:16:53,280 Speaker 1: sure that this income psychle is maintained. That's the usual economy. 269 00:16:53,480 --> 00:16:55,960 Speaker 1: Then when you're in balancing recession, what happens is that 270 00:16:56,000 --> 00:16:58,680 Speaker 1: I have thousand dollars of income, I spend nine hundred myself. 271 00:16:58,760 --> 00:17:02,400 Speaker 1: Nine is already in a circulated in economy, so that's 272 00:17:02,440 --> 00:17:04,960 Speaker 1: not a problem. But the hundred dollars I decided to say, 273 00:17:05,080 --> 00:17:07,640 Speaker 1: get stuck in a financial sector because there's no borrowers, 274 00:17:07,680 --> 00:17:12,040 Speaker 1: even at zero negative interest rates, because everybody is repairing 275 00:17:12,040 --> 00:17:15,000 Speaker 1: balance sheets. When this hundred dollars gets stuck in a 276 00:17:15,040 --> 00:17:18,480 Speaker 1: financial sector not coming out, only nine hundred dollars is 277 00:17:18,520 --> 00:17:21,440 Speaker 1: spent in the economy, So economy shrinks ten percent from 278 00:17:21,440 --> 00:17:24,680 Speaker 1: one thousand to nine hundred. The person who receives a 279 00:17:24,800 --> 00:17:27,320 Speaker 1: nine hundred. If that person says, okay, let's save ten 280 00:17:27,320 --> 00:17:30,920 Speaker 1: percent and saves ninety dollars, spends eight hundred ten the 281 00:17:31,040 --> 00:17:34,040 Speaker 1: ninety dollars gets stuck in the financial sector again, because 282 00:17:34,119 --> 00:17:38,560 Speaker 1: repairing balance sheet takes a long time five ten twenty years, 283 00:17:38,800 --> 00:17:41,639 Speaker 1: so economy could go from one thousand, nine hundred hundred 284 00:17:41,640 --> 00:17:45,359 Speaker 1: ten seven hundred thirty very very quickly, even with zero 285 00:17:45,400 --> 00:17:48,600 Speaker 1: interest rates. And the last time this actually happened was 286 00:17:48,640 --> 00:17:52,080 Speaker 1: the Great Depression I mentioned to earlier, when United States 287 00:17:52,119 --> 00:17:55,119 Speaker 1: lost forty six percent of its nominal GDP in just 288 00:17:55,320 --> 00:17:58,080 Speaker 1: four years because of this process one thousand, nine hundred 289 00:17:58,200 --> 00:18:02,679 Speaker 1: hundred ten seven. Now, if the government comes in and 290 00:18:02,720 --> 00:18:06,440 Speaker 1: borrow the hundred dollars at the beginning, then economy will 291 00:18:06,520 --> 00:18:08,840 Speaker 1: be kept that thousand dollars because I spent the nine 292 00:18:08,880 --> 00:18:12,159 Speaker 1: hundred government bar and spend a hundred so combined with 293 00:18:12,400 --> 00:18:16,080 Speaker 1: thousand dollars, so the income is maintained. If the income 294 00:18:16,160 --> 00:18:19,960 Speaker 1: is maintained, people have the income to repair their balance sheets. 295 00:18:20,119 --> 00:18:24,960 Speaker 1: And that's basically why why the government acting as borrower 296 00:18:25,040 --> 00:18:27,480 Speaker 1: of lost the result is so important in these type 297 00:18:27,480 --> 00:18:31,720 Speaker 1: of recessions because by keeping income from falling, people have 298 00:18:32,400 --> 00:18:36,920 Speaker 1: resources to repair their balance sheets. And after the balancets 299 00:18:36,920 --> 00:18:38,800 Speaker 1: are repaired, then of course you have to reverse the 300 00:18:38,840 --> 00:18:43,600 Speaker 1: situation private sector borrowing money and government repairing balance sheets. 301 00:18:43,640 --> 00:18:47,080 Speaker 1: But we haven't got there yet in any of these countries, unfortunately. 302 00:18:47,920 --> 00:18:51,840 Speaker 1: So we recently did a episode with Michael Pettis and 303 00:18:51,920 --> 00:18:55,480 Speaker 1: we talked about China and the challenges it's facing right 304 00:18:55,520 --> 00:19:00,840 Speaker 1: now with its gigantic or ursioning private sector debt load. 305 00:19:00,880 --> 00:19:03,840 Speaker 1: And I've seen a lot of people lately talking about 306 00:19:03,880 --> 00:19:06,639 Speaker 1: this idea that was, Uh, there has been this huge 307 00:19:07,000 --> 00:19:11,320 Speaker 1: private sector debt build up in China, opportunities are coming 308 00:19:11,359 --> 00:19:13,680 Speaker 1: to an end, and that there is now the risk 309 00:19:14,080 --> 00:19:18,240 Speaker 1: of a long drawn out Japan style balance sheet recession 310 00:19:18,440 --> 00:19:21,560 Speaker 1: in China simply due to the high level of private 311 00:19:21,560 --> 00:19:25,680 Speaker 1: sector debt. Do you see a similar situation playing out 312 00:19:25,760 --> 00:19:31,080 Speaker 1: with what we know about the Chinese economy. Well, uh, 313 00:19:31,240 --> 00:19:33,960 Speaker 1: there are a lot of economists who like to throw 314 00:19:34,040 --> 00:19:39,200 Speaker 1: these huge debt numbers and see people going wow, I'm 315 00:19:39,240 --> 00:19:42,679 Speaker 1: afraid I'm not one of them, even though I'm the 316 00:19:42,720 --> 00:19:45,320 Speaker 1: one who started talking about that before others. And so 317 00:19:45,359 --> 00:19:47,280 Speaker 1: I'm kind of glad that people are paying more attention 318 00:19:47,320 --> 00:19:51,440 Speaker 1: to this issue. This big debt numbers that people throw around, 319 00:19:52,320 --> 00:19:56,879 Speaker 1: I am not ah particularly happy about. And the reason 320 00:19:56,880 --> 00:20:00,240 Speaker 1: it's quite simple, and that is that unless some money 321 00:20:00,320 --> 00:20:04,560 Speaker 1: saving money, you cannot have a debt right that cannot 322 00:20:04,560 --> 00:20:07,520 Speaker 1: come out from nowhere. Someone has to be saving money 323 00:20:08,080 --> 00:20:11,960 Speaker 1: for someone to be borrowing money. So that's one key 324 00:20:12,000 --> 00:20:14,800 Speaker 1: point that a lot of people have forgotten. And the 325 00:20:14,840 --> 00:20:18,760 Speaker 1: second point is that if someone is saving money, someone 326 00:20:18,880 --> 00:20:21,120 Speaker 1: has to be borrowing money to keep the economy going. 327 00:20:21,880 --> 00:20:25,840 Speaker 1: This uh, you know one thousand and nine issue comes 328 00:20:25,880 --> 00:20:28,840 Speaker 1: from there. And when you look at some of the 329 00:20:28,880 --> 00:20:32,359 Speaker 1: debt numbers and a huge but when you look at 330 00:20:32,400 --> 00:20:36,159 Speaker 1: the savings numbers and compare with it, savings numbers are 331 00:20:36,440 --> 00:20:40,040 Speaker 1: of course those are available from flow funds data, and 332 00:20:40,080 --> 00:20:44,080 Speaker 1: they are of course growing, but growing nowhere near the 333 00:20:44,119 --> 00:20:49,440 Speaker 1: debt numbers. So how do you describe how they explain 334 00:20:49,520 --> 00:20:54,320 Speaker 1: this this discrepancy? And I think this this discrepancy exists 335 00:20:54,840 --> 00:20:58,360 Speaker 1: because those of us in the financial sector has all 336 00:20:58,400 --> 00:21:02,760 Speaker 1: sorts of ways to increase these numbers through so constructured 337 00:21:03,040 --> 00:21:07,680 Speaker 1: products for one thing, and more. In the most simplified way, 338 00:21:08,040 --> 00:21:11,399 Speaker 1: suppose a large state on enterprises in China was able 339 00:21:11,440 --> 00:21:15,720 Speaker 1: to obtain funds from banks that are relatively are cheap 340 00:21:15,760 --> 00:21:19,480 Speaker 1: interest low interest rates. Then if this state on enterprises 341 00:21:19,520 --> 00:21:23,840 Speaker 1: then supply credit to its supplies let's say smaller private 342 00:21:23,840 --> 00:21:28,760 Speaker 1: sector companies that are slightly higher interest rates. There will 343 00:21:28,800 --> 00:21:32,520 Speaker 1: be increased in a debt number because and so we 344 00:21:33,119 --> 00:21:36,520 Speaker 1: borrowed it first, and it lent the money to another 345 00:21:36,520 --> 00:21:40,800 Speaker 1: private sector companies, so the debt is doubled, but the 346 00:21:40,840 --> 00:21:44,399 Speaker 1: actual borrower is the last borrow, right, the private sector borrow. 347 00:21:45,440 --> 00:21:48,200 Speaker 1: But the numbers could grow very rapidly as a result, 348 00:21:48,520 --> 00:21:52,000 Speaker 1: the debt number can grow very rapidly. And if you 349 00:21:52,320 --> 00:21:56,640 Speaker 1: look at Chinese flow funds data carefully, I don't see 350 00:21:56,680 --> 00:22:00,680 Speaker 1: the kind of craze that happened in Japan and all 351 00:22:00,760 --> 00:22:04,280 Speaker 1: in the United States prior to two thousand eight, where 352 00:22:04,640 --> 00:22:08,400 Speaker 1: for example, household sector, which should be saving money becoming 353 00:22:08,400 --> 00:22:11,520 Speaker 1: a net borrower. We actually happened in the United States, 354 00:22:12,160 --> 00:22:16,680 Speaker 1: Spain and Ireland during the really bad bubble days. That 355 00:22:16,800 --> 00:22:20,520 Speaker 1: is not happening in China. Household sector is still saving 356 00:22:20,560 --> 00:22:27,119 Speaker 1: money and corporate sector still borrowing money, but nothing especially 357 00:22:27,119 --> 00:22:32,560 Speaker 1: irregular that you would expect to see in really bubbic 358 00:22:32,640 --> 00:22:37,200 Speaker 1: situations that happened in Japan and other places. So yes, 359 00:22:37,680 --> 00:22:41,800 Speaker 1: I think Chinese house real estate prices are high and 360 00:22:42,000 --> 00:22:46,320 Speaker 1: the bubble could burst. Chinese household sector COPA sector did 361 00:22:46,359 --> 00:22:51,920 Speaker 1: not really went as crazy as some of the household 362 00:22:51,920 --> 00:22:57,480 Speaker 1: sector and and COPA sector in the West during the 363 00:22:57,480 --> 00:23:02,040 Speaker 1: three to two thousand eight period. Well, a related question, 364 00:23:02,200 --> 00:23:06,960 Speaker 1: but in trying to resolve a balance sheet recession by 365 00:23:07,080 --> 00:23:10,320 Speaker 1: getting the private sector to lend again, how do you 366 00:23:10,960 --> 00:23:13,159 Speaker 1: how do you make sure that you don't end up 367 00:23:13,280 --> 00:23:17,520 Speaker 1: inflating another bubble, Because at least in the US, and 368 00:23:17,640 --> 00:23:20,520 Speaker 1: you know, you can agree or disagree that what happened 369 00:23:20,560 --> 00:23:23,480 Speaker 1: in two tho was a balance sheet recession or not, 370 00:23:23,720 --> 00:23:26,040 Speaker 1: there does seem to be a lot of concern that 371 00:23:26,440 --> 00:23:29,760 Speaker 1: the corporate sector is borrowing too much and we are 372 00:23:29,880 --> 00:23:32,800 Speaker 1: on the verge of another sort of corporate bond bubble 373 00:23:32,920 --> 00:23:36,720 Speaker 1: of some form or another. So how should policymakers walk 374 00:23:36,840 --> 00:23:42,440 Speaker 1: that that line? Well, first of all, I think all 375 00:23:42,520 --> 00:23:48,520 Speaker 1: the reliance on monetary policy is the shortest way to 376 00:23:48,560 --> 00:23:53,600 Speaker 1: get another bubble in place, because doing balance sheet recessions, 377 00:23:53,720 --> 00:23:58,200 Speaker 1: private sector borrows basically a present themselves. So the fund 378 00:23:58,280 --> 00:24:05,560 Speaker 1: managers point ninancial industry basically flood absolutely flooded with with cash. 379 00:24:05,680 --> 00:24:10,240 Speaker 1: Because household sectors continue to save as they have done 380 00:24:10,240 --> 00:24:14,160 Speaker 1: in the last five thousand years. Corporate sector is the well. 381 00:24:14,520 --> 00:24:17,080 Speaker 1: And then there's de leveraged funds coming back into the 382 00:24:17,640 --> 00:24:22,440 Speaker 1: UH financial sector that basically the debt repayments, and then 383 00:24:22,440 --> 00:24:26,679 Speaker 1: the central bank, believing that they have to maintain the 384 00:24:26,680 --> 00:24:30,679 Speaker 1: two percent inflation rate or something, continues to add funds 385 00:24:30,920 --> 00:24:37,040 Speaker 1: through que So during balancing recessions, everyone else are short 386 00:24:37,080 --> 00:24:41,280 Speaker 1: of money except the financial sector flooded with money. And 387 00:24:42,400 --> 00:24:45,280 Speaker 1: if the government is the only borrower left, a large 388 00:24:45,280 --> 00:24:47,920 Speaker 1: portion of that funds will move towards the government bonds. 389 00:24:47,960 --> 00:24:50,480 Speaker 1: And that's the reason why government bonds come down to 390 00:24:50,520 --> 00:24:56,600 Speaker 1: these ridiculously low levels during balancing recessions, even with ever 391 00:24:56,680 --> 00:25:00,560 Speaker 1: larger public debt. For example, us to their a public 392 00:25:00,640 --> 00:25:03,000 Speaker 1: that is pretty large compared to what we were used 393 00:25:03,040 --> 00:25:09,240 Speaker 1: to before, but tenure treasury is only one Japan. Even 394 00:25:09,280 --> 00:25:12,480 Speaker 1: before b o J went on to this q q 395 00:25:12,640 --> 00:25:16,520 Speaker 1: E under Governor Coroda, the public that was already close 396 00:25:16,560 --> 00:25:20,040 Speaker 1: to two g g d P, but j GB was 397 00:25:20,040 --> 00:25:23,840 Speaker 1: building only zero point seven. That all comes from the 398 00:25:23,840 --> 00:25:28,120 Speaker 1: fact that the excess funds in the private sector all 399 00:25:28,200 --> 00:25:32,760 Speaker 1: head towards the only borrower left, meaning the government. But 400 00:25:32,840 --> 00:25:36,159 Speaker 1: if the government doesn't play its role and abserve all 401 00:25:36,200 --> 00:25:40,000 Speaker 1: these excess savings, what happens to the remaining funds. The 402 00:25:40,080 --> 00:25:44,520 Speaker 1: remaining funds will have to go to fix the existing assets, right, 403 00:25:44,560 --> 00:25:49,360 Speaker 1: because companies are not borrowing money for investments, so these 404 00:25:49,359 --> 00:25:51,320 Speaker 1: funds have to go to some sort of a fixed 405 00:25:51,320 --> 00:25:55,000 Speaker 1: assets such as commercial real estate stocks and and things 406 00:25:55,040 --> 00:25:59,520 Speaker 1: like that, and that's where you could have another bubble growing. 407 00:26:00,320 --> 00:26:03,199 Speaker 1: And US commercial real estate prices if I see my 408 00:26:03,320 --> 00:26:07,080 Speaker 1: last number, it was forty forty four and higher than 409 00:26:07,119 --> 00:26:10,520 Speaker 1: the previous peak. And when Janet E. Allen and those 410 00:26:10,560 --> 00:26:13,600 Speaker 1: people talked about the problem in bubble in the commercial 411 00:26:13,640 --> 00:26:18,159 Speaker 1: real estate, well, it is actually there. And part of 412 00:26:18,200 --> 00:26:21,119 Speaker 1: that I think comes from the fact that it's overreliance 413 00:26:21,160 --> 00:26:25,560 Speaker 1: on monetary policy. If we switch from reliance and monetory 414 00:26:25,640 --> 00:26:29,080 Speaker 1: policy to fiscal policy, fiscal policy means government will be 415 00:26:29,080 --> 00:26:32,720 Speaker 1: borrowing more money, so the excess savings that have to 416 00:26:32,760 --> 00:26:37,000 Speaker 1: go to existing assets will be absorbed by the government, 417 00:26:37,680 --> 00:26:40,919 Speaker 1: and so there will be less chance of having another bubble. 418 00:26:41,480 --> 00:26:45,040 Speaker 1: So you worry about bubbles right now? Or how worried 419 00:26:45,040 --> 00:26:47,440 Speaker 1: about bubbles are you right now? If you look and 420 00:26:47,520 --> 00:26:53,239 Speaker 1: say the US economy, well, share prices and commercial real 421 00:26:53,320 --> 00:26:56,520 Speaker 1: estate prices worry something. In my view, yes, I am 422 00:26:56,560 --> 00:27:00,359 Speaker 1: somewhat worried, and many companies US come and he is 423 00:27:00,400 --> 00:27:03,600 Speaker 1: also used this very low and interest environment to buy 424 00:27:03,640 --> 00:27:06,399 Speaker 1: back their shares. Right, That's why the corporate that is 425 00:27:06,840 --> 00:27:11,879 Speaker 1: so much higher buying back shares still keeps money in 426 00:27:11,880 --> 00:27:15,879 Speaker 1: the financial sector. It just changes the the nature of 427 00:27:15,880 --> 00:27:20,080 Speaker 1: the liabilities from equity to bonds. But the money is 428 00:27:20,080 --> 00:27:25,640 Speaker 1: still in the financial sector. And so people who received 429 00:27:25,640 --> 00:27:29,080 Speaker 1: that payment, who I, still want to invest in something, 430 00:27:29,440 --> 00:27:32,640 Speaker 1: and so that could still end up creating more bibbles 431 00:27:33,800 --> 00:27:38,360 Speaker 1: while weaken in the corporate balance sheets. So you've identified 432 00:27:38,440 --> 00:27:41,320 Speaker 1: one of the key sort of themes, which is that 433 00:27:41,400 --> 00:27:46,600 Speaker 1: in all these post post balance sheet recession periods, there's 434 00:27:46,640 --> 00:27:51,520 Speaker 1: this reluctance to lean heavily on fiscal policy and over 435 00:27:51,560 --> 00:27:54,520 Speaker 1: alliance on monetary policy. You talked about the fits and 436 00:27:54,600 --> 00:27:59,200 Speaker 1: starts of fiscal stimulus in Japan after and how that setback. 437 00:27:59,520 --> 00:28:02,399 Speaker 1: You talk about the bubbles that we've seen here or 438 00:28:02,440 --> 00:28:05,119 Speaker 1: that maybe brewing here in the US because we've relied 439 00:28:05,160 --> 00:28:10,359 Speaker 1: so much on monetary policy. I'm curious in your conversations 440 00:28:10,760 --> 00:28:15,280 Speaker 1: that you've had over the years with policy makers, investors, 441 00:28:15,320 --> 00:28:17,800 Speaker 1: and so on, what is it, What is it that 442 00:28:17,920 --> 00:28:21,879 Speaker 1: explains this sort of like innate reluctance or distrust to 443 00:28:22,000 --> 00:28:25,800 Speaker 1: add public debt and it doesn't seem like it almost 444 00:28:25,800 --> 00:28:28,080 Speaker 1: doesn't seem to matter what period of the cycle we're in. 445 00:28:28,400 --> 00:28:30,840 Speaker 1: You could go back to two thousand nine. Even then 446 00:28:30,880 --> 00:28:34,560 Speaker 1: Bernanke was talking about the need to eventually take care 447 00:28:34,600 --> 00:28:38,360 Speaker 1: of the public debt or fiscal consolidation. Why this pervasive 448 00:28:38,440 --> 00:28:41,320 Speaker 1: view among policy makers everywhere, including those at the I, 449 00:28:41,440 --> 00:28:44,719 Speaker 1: m F and so forth, UH to be very reluctant 450 00:28:45,000 --> 00:28:50,080 Speaker 1: about public spending and to be overreliant on lower interest rates. 451 00:28:51,480 --> 00:28:54,040 Speaker 1: I think that comes from the fact that all the 452 00:28:54,080 --> 00:28:58,080 Speaker 1: economics we learn in universities based on this key premise 453 00:28:58,400 --> 00:29:02,760 Speaker 1: that privacyctis maximizing fits. But for private sector to be 454 00:29:02,800 --> 00:29:06,920 Speaker 1: maximizing profits, two conditions who have to be met. One 455 00:29:07,000 --> 00:29:09,840 Speaker 1: is that they have clean balance sheets and the other 456 00:29:09,960 --> 00:29:14,440 Speaker 1: is that they are flooded with interesting investment opportunities. In 457 00:29:14,560 --> 00:29:19,160 Speaker 1: that world, if government comes in and borrow tries to borrow, 458 00:29:19,600 --> 00:29:23,479 Speaker 1: you end up crowding our private sector investments, pushes up 459 00:29:23,520 --> 00:29:27,240 Speaker 1: interest rates, maybe miss allocate resources because government is not 460 00:29:27,360 --> 00:29:32,200 Speaker 1: very good at uh spending money. It's all negative, very 461 00:29:32,280 --> 00:29:37,520 Speaker 1: few positives. And that world where households sectors saving money, 462 00:29:37,520 --> 00:29:40,440 Speaker 1: but corporate sector was very eagerly borrowing money to expand 463 00:29:40,480 --> 00:29:43,680 Speaker 1: factories and so forth. That world did exist all the 464 00:29:43,720 --> 00:29:48,600 Speaker 1: way to maybe around eighties in the United States and Japan, 465 00:29:48,680 --> 00:29:53,800 Speaker 1: maybe into the mid nineties. Our textbook economics is based 466 00:29:53,880 --> 00:29:57,560 Speaker 1: on that period where there's very strong demand for private 467 00:29:57,720 --> 00:30:01,520 Speaker 1: funds from the private sector and household sectors saving companies 468 00:30:01,560 --> 00:30:05,560 Speaker 1: are borrowing. In that world, I fully agree with them 469 00:30:05,600 --> 00:30:09,400 Speaker 1: that ciscal policies should be discouraged and it should be 470 00:30:09,440 --> 00:30:12,920 Speaker 1: handled with monetary policy, because monety works. Policy works very 471 00:30:12,920 --> 00:30:15,480 Speaker 1: well when there are lots of people who want who's 472 00:30:15,520 --> 00:30:18,760 Speaker 1: out there willing to borrow money. In that case, when 473 00:30:18,800 --> 00:30:21,360 Speaker 1: central bank raises rates a lower rate, they will have 474 00:30:21,440 --> 00:30:25,840 Speaker 1: immediate impact on the economy. But we are not in 475 00:30:25,880 --> 00:30:30,400 Speaker 1: that world anymore. Households are still saving money, but corporates 476 00:30:30,400 --> 00:30:35,120 Speaker 1: are not borrowing money. And once you enter this different stage, 477 00:30:36,480 --> 00:30:39,680 Speaker 1: we have to change our mindset completely that we don't 478 00:30:39,720 --> 00:30:42,680 Speaker 1: have borrowers there save us us still there, but the 479 00:30:42,760 --> 00:30:48,480 Speaker 1: borrowers have absented themselves. But this is so hard for 480 00:30:48,640 --> 00:30:51,440 Speaker 1: economy is who are trained in this whole notion. The 481 00:30:51,520 --> 00:30:56,840 Speaker 1: private sector is always maximizing profits to accept and so 482 00:30:57,200 --> 00:30:59,600 Speaker 1: they kept on saying, well, if you do, how more 483 00:30:59,720 --> 00:31:02,960 Speaker 1: money there is stimulus. Let's say, go to helicopter money 484 00:31:02,960 --> 00:31:05,880 Speaker 1: on negative interest rate, so deepen the negative interest is 485 00:31:06,080 --> 00:31:09,960 Speaker 1: something got to happen that they're still working on this 486 00:31:10,440 --> 00:31:13,240 Speaker 1: premise that that we are still in the textbook world. 487 00:31:13,680 --> 00:31:17,640 Speaker 1: We're privacy, the PLANTI privacy, the borrowers out there, but 488 00:31:17,720 --> 00:31:20,440 Speaker 1: we are not in that world anymore. But no one 489 00:31:20,520 --> 00:31:25,320 Speaker 1: has told them that in this this different world, we 490 00:31:25,400 --> 00:31:28,040 Speaker 1: have to think differently except you. You wrote the book, 491 00:31:28,160 --> 00:31:32,280 Speaker 1: The Holy Grail of Macroeconomics. It's we Tracy and I read. 492 00:31:32,320 --> 00:31:38,480 Speaker 1: Why hasn't everyone else read it? Well? Maybe uh, I 493 00:31:38,520 --> 00:31:42,440 Speaker 1: didn't work hard enough. Hopefully, hopefully they're listening to the podcast. Wait, 494 00:31:42,480 --> 00:31:45,000 Speaker 1: I have I have one more question. So I mentioned 495 00:31:45,120 --> 00:31:48,280 Speaker 1: in the intro that the idea that fiscal is the 496 00:31:48,280 --> 00:31:51,440 Speaker 1: new monetary policy seems to be gaining some ground. And 497 00:31:51,760 --> 00:31:54,800 Speaker 1: you just hear policymaker after policymaker talk about the need 498 00:31:54,840 --> 00:31:58,520 Speaker 1: for fiscal stimulus, but rarely do they actually get into 499 00:31:58,560 --> 00:32:01,920 Speaker 1: detail about what that call stimulus could be. Does it 500 00:32:02,160 --> 00:32:06,120 Speaker 1: matter to you in your model what type of fiscal 501 00:32:06,240 --> 00:32:11,240 Speaker 1: expenditure government's actually use, like corporate tax cuts, infrastructure spending. 502 00:32:11,520 --> 00:32:15,960 Speaker 1: Is there a difference to you? Yes, there is You're 503 00:32:16,040 --> 00:32:17,760 Speaker 1: right in pointing out that a lot of people are 504 00:32:17,760 --> 00:32:21,320 Speaker 1: not talking about fiscal stimulus because they argue that multi 505 00:32:21,360 --> 00:32:25,360 Speaker 1: policy has it had reached its limits zero, low, abound. 506 00:32:25,400 --> 00:32:28,360 Speaker 1: You know that kind of talk, And what I find 507 00:32:28,400 --> 00:32:32,520 Speaker 1: it wanting is that they should not talk about fiscal 508 00:32:32,560 --> 00:32:36,480 Speaker 1: stimulus just because interestrates and zero they have. They should 509 00:32:36,560 --> 00:32:39,880 Speaker 1: really explain to the people why interestrates a zero to 510 00:32:39,920 --> 00:32:44,200 Speaker 1: begin with, because that's the key. Interestates a zero because 511 00:32:44,200 --> 00:32:47,400 Speaker 1: people are not borrowing money. But if in the national 512 00:32:47,400 --> 00:32:50,840 Speaker 1: economy someone is saving money, someone has to borrow money 513 00:32:50,880 --> 00:32:53,800 Speaker 1: to keep the economy going, then what do you do 514 00:32:54,240 --> 00:32:57,000 Speaker 1: with the private sector's not borrowing money, the public sector 515 00:32:57,040 --> 00:32:59,000 Speaker 1: will have to borrow money to keep the economy going. 516 00:32:59,800 --> 00:33:04,400 Speaker 1: That part of the explanation hasn't come from Mr Powell, 517 00:33:05,000 --> 00:33:10,320 Speaker 1: of Mr Draggy, or even from uh MS LA Guarde, 518 00:33:10,760 --> 00:33:13,560 Speaker 1: even though they all three are now talking about the 519 00:33:14,160 --> 00:33:17,840 Speaker 1: importance of fiscal stimulus, and was the September eighteen talk 520 00:33:18,880 --> 00:33:21,959 Speaker 1: German Powell even said fiscal policy is more powerful than 521 00:33:22,000 --> 00:33:26,160 Speaker 1: monitor policy. The key reason why fiscal stimulus is needed 522 00:33:27,000 --> 00:33:30,960 Speaker 1: is not given in my view that they are actually 523 00:33:31,680 --> 00:33:35,080 Speaker 1: lack of private sector borrowers. So I like to see 524 00:33:35,120 --> 00:33:39,440 Speaker 1: that uh made clear first and the second point your 525 00:33:39,440 --> 00:33:43,080 Speaker 1: point about the nature of fiscal stimulus. It matters a 526 00:33:43,080 --> 00:33:46,000 Speaker 1: lot in this instance because if you give them a 527 00:33:47,360 --> 00:33:51,080 Speaker 1: people who are repairing balance sheets a tax cut, they 528 00:33:51,080 --> 00:33:53,840 Speaker 1: were used to attack cut to pay down debt. So 529 00:33:54,080 --> 00:33:58,320 Speaker 1: in that case GDP will not be affected. So in 530 00:33:58,360 --> 00:34:01,840 Speaker 1: this type of situation, I'm afraid one has to use 531 00:34:02,520 --> 00:34:06,840 Speaker 1: public works government actually spending and creating demand to make 532 00:34:06,840 --> 00:34:10,239 Speaker 1: sure that our income level is maintained. And only by 533 00:34:10,280 --> 00:34:13,399 Speaker 1: keep maintaining the income level, people have resources to pay 534 00:34:13,400 --> 00:34:16,560 Speaker 1: down there and repair their balance sheets. And so during 535 00:34:16,600 --> 00:34:20,560 Speaker 1: this type of recessions, government has to be the borrow 536 00:34:20,600 --> 00:34:24,560 Speaker 1: of last resort and the spender of last resort. Now, 537 00:34:24,840 --> 00:34:27,160 Speaker 1: this think takes a long time to repair the balance 538 00:34:27,320 --> 00:34:31,160 Speaker 1: repair takes in many years. Japan took nearly twenty years, 539 00:34:31,200 --> 00:34:34,920 Speaker 1: although he didn't have to be twenty. Uh. Once we 540 00:34:35,040 --> 00:34:38,920 Speaker 1: know that in advance, then we should really put together, 541 00:34:38,960 --> 00:34:43,120 Speaker 1: for example, an independent commission, put our bright best and 542 00:34:43,160 --> 00:34:47,560 Speaker 1: brightest people in it and let them trying to find 543 00:34:47,600 --> 00:34:52,640 Speaker 1: out um those public works projects that earns the very 544 00:34:52,640 --> 00:34:56,240 Speaker 1: low rate of return that we see on government bounds today. 545 00:34:56,280 --> 00:34:59,719 Speaker 1: For example, if it's ten year treasuries are yielding one 546 00:34:59,719 --> 00:35:03,360 Speaker 1: point eleven percent les. So today, if we can find 547 00:35:03,960 --> 00:35:07,000 Speaker 1: a public works project that earns the social rate of 548 00:35:07,080 --> 00:35:11,080 Speaker 1: returned about one by all means we should do it. 549 00:35:11,760 --> 00:35:15,120 Speaker 1: Because those projects will be self enancing. You will not 550 00:35:15,160 --> 00:35:18,600 Speaker 1: be a burden on our future taxpayers. And that's the 551 00:35:18,640 --> 00:35:22,640 Speaker 1: way we should be thinking. And unfortunately, in Japan back 552 00:35:23,160 --> 00:35:27,560 Speaker 1: twenty years ago or after two or eight, people needed 553 00:35:27,640 --> 00:35:30,120 Speaker 1: riscal stimulus right away because otherwise it would be in 554 00:35:30,120 --> 00:35:34,879 Speaker 1: the one thousand, nine hundred and seven cycle. So they 555 00:35:34,920 --> 00:35:37,600 Speaker 1: had to do all sorts of things very quickly. Some 556 00:35:37,760 --> 00:35:42,480 Speaker 1: of them were not very well sought out, and that's 557 00:35:42,480 --> 00:35:45,040 Speaker 1: why you end up bridges to nowhere, roads to nowhere. 558 00:35:45,120 --> 00:35:47,239 Speaker 1: If we knew in advance that these things can take 559 00:35:47,280 --> 00:35:51,600 Speaker 1: a long time. Of course, some stop gap measures are necessary, 560 00:35:51,760 --> 00:35:53,960 Speaker 1: but we should have set up some sort of independent 561 00:35:54,000 --> 00:35:58,000 Speaker 1: commission to make sure that we pick good projects that 562 00:35:58,080 --> 00:36:02,560 Speaker 1: are self enancing at these ridiculously low government bond yields, 563 00:36:03,760 --> 00:36:07,120 Speaker 1: then everything will be sustainable. Well, Richard, I really don't 564 00:36:07,200 --> 00:36:09,640 Speaker 1: understand the excuse that people have, because I thought you're 565 00:36:09,640 --> 00:36:13,359 Speaker 1: writing has always been very clear. But nonetheless, I hope 566 00:36:13,960 --> 00:36:16,799 Speaker 1: people listen to this podcast and continue to read your 567 00:36:16,800 --> 00:36:19,440 Speaker 1: work because it makes a lot of sense to me. 568 00:36:19,520 --> 00:36:22,080 Speaker 1: And as you point out, these issues aren't going away. 569 00:36:22,560 --> 00:36:26,720 Speaker 1: Large private sector debt loads still exist in the US. 570 00:36:27,120 --> 00:36:31,360 Speaker 1: There's uh bubbles in the US. There's a unwillingness to 571 00:36:31,400 --> 00:36:33,719 Speaker 1: borrow that we're obviously seeing in Europe, and that's going 572 00:36:33,760 --> 00:36:37,080 Speaker 1: to scar the region for a long time because of 573 00:36:37,080 --> 00:36:39,959 Speaker 1: the double dip nature. As you said, So hopefully we uh, 574 00:36:40,000 --> 00:36:42,480 Speaker 1: we've done some good here. But I really appreciate you 575 00:36:42,600 --> 00:36:45,799 Speaker 1: coming out of always been a big fan of your work. Oh, 576 00:36:45,920 --> 00:36:48,439 Speaker 1: thank you very much. Thanks so much, Richard. That was great. 577 00:37:12,440 --> 00:37:14,359 Speaker 1: So Joe, I don't have to ask you. I can 578 00:37:14,400 --> 00:37:17,880 Speaker 1: tell that you enjoyed that conversation. I love Richard. Like 579 00:37:18,000 --> 00:37:21,200 Speaker 1: I said, I read his book in I was like, oh, 580 00:37:21,320 --> 00:37:23,719 Speaker 1: this makes sense, and you called it the Holy Grill 581 00:37:23,800 --> 00:37:26,759 Speaker 1: of mecro economics, and it might seem you know, all 582 00:37:26,760 --> 00:37:29,560 Speaker 1: you were saying is that Japan has a lot of 583 00:37:29,680 --> 00:37:31,520 Speaker 1: lessons for the rest of the world. That's what you're saying. 584 00:37:31,520 --> 00:37:34,239 Speaker 1: You look at Japan and you could see what how 585 00:37:34,280 --> 00:37:37,120 Speaker 1: the economy works in a way that elsewhere could be applied. 586 00:37:37,160 --> 00:37:40,200 Speaker 1: But there hasn't been much application of it since then. Yeah, 587 00:37:40,239 --> 00:37:42,320 Speaker 1: And one thing I really like about his whole theory 588 00:37:42,520 --> 00:37:45,600 Speaker 1: is the behavioral aspect of it all, the idea of 589 00:37:45,640 --> 00:37:48,400 Speaker 1: this debt trauma, because you don't often see that in 590 00:37:48,480 --> 00:37:52,600 Speaker 1: traditional economics textbooks. People don't talk about what past experience 591 00:37:52,719 --> 00:37:56,120 Speaker 1: actually means to the way economics is supposed to work. 592 00:37:56,360 --> 00:37:58,879 Speaker 1: And of course if people have a bad experience, then 593 00:37:58,920 --> 00:38:01,560 Speaker 1: they might not act rationally in the future, so they 594 00:38:01,640 --> 00:38:04,600 Speaker 1: might not borrow money even if interest rates are really 595 00:38:04,680 --> 00:38:08,720 Speaker 1: low or below zero even totally. I think, Uh, there's 596 00:38:08,920 --> 00:38:11,400 Speaker 1: a lot of economists have this sort of like overly 597 00:38:11,560 --> 00:38:15,239 Speaker 1: mechanical view of how the economy is supposed to work 598 00:38:15,280 --> 00:38:20,600 Speaker 1: and how firms maximize profits or households maximize incomes, and 599 00:38:20,680 --> 00:38:23,840 Speaker 1: if you have x opportunity to invest and your cost 600 00:38:23,840 --> 00:38:26,600 Speaker 1: of capitalist below X, then you're just going to do it. 601 00:38:27,000 --> 00:38:29,640 Speaker 1: But that of course ignores, as you say, and as 602 00:38:29,760 --> 00:38:35,000 Speaker 1: Richard pointed out, how one's historical experience may inform in 603 00:38:35,040 --> 00:38:38,880 Speaker 1: a very significant degree, to a significant degree, how you 604 00:38:38,920 --> 00:38:42,480 Speaker 1: behave Yeah, exactly. Well. One other thing that really struck 605 00:38:42,560 --> 00:38:46,080 Speaker 1: me is it's kind of interesting to me how Coup 606 00:38:46,840 --> 00:38:49,520 Speaker 1: has this sort of middle ground I think between sort 607 00:38:49,560 --> 00:38:52,880 Speaker 1: of mainstream macro on one end and mm T on 608 00:38:52,920 --> 00:38:55,920 Speaker 1: the other end, because in the MMT framework it's almost 609 00:38:56,000 --> 00:39:01,280 Speaker 1: you should always rely on fiscal policymakers and that deficits 610 00:39:01,280 --> 00:39:04,720 Speaker 1: are never really a problem extent except to the extent 611 00:39:04,800 --> 00:39:08,799 Speaker 1: that they cause inflation due to uh an economy at 612 00:39:09,000 --> 00:39:12,160 Speaker 1: maximum potential, where it's clear that he is does not 613 00:39:12,239 --> 00:39:14,680 Speaker 1: quite buy this view. So he like more sees the 614 00:39:14,800 --> 00:39:17,480 Speaker 1: sort of sectoral balances view in a way that I 615 00:39:17,480 --> 00:39:20,560 Speaker 1: think mainstream hasn't come around too. But he still thinks 616 00:39:20,600 --> 00:39:24,360 Speaker 1: that in normal times, the basic idea that the central 617 00:39:24,360 --> 00:39:27,600 Speaker 1: bank should do demand management and the government it's dangerous 618 00:39:27,600 --> 00:39:30,759 Speaker 1: to run up debt is something he agrees. He just 619 00:39:30,800 --> 00:39:34,160 Speaker 1: doesn't think these are normal times for developed economies right. Well. 620 00:39:34,200 --> 00:39:38,879 Speaker 1: He argues that eventually governments should concentrate on fixing their 621 00:39:38,920 --> 00:39:42,239 Speaker 1: own balance sheets, but only after they've sort of substituted 622 00:39:42,320 --> 00:39:44,879 Speaker 1: the private sector and stepped in and done a bunch 623 00:39:44,920 --> 00:39:47,840 Speaker 1: of stuff, and in a way that I think would 624 00:39:47,840 --> 00:39:52,640 Speaker 1: probably happen decades after the fact anyway. Um, but it 625 00:39:52,760 --> 00:39:55,920 Speaker 1: is very different to MMT in that respect. You're right, 626 00:39:56,280 --> 00:40:01,080 Speaker 1: it is a nice middle ground, radical but middle This 627 00:40:01,200 --> 00:40:04,600 Speaker 1: has been another episode of the All Thoughts podcast. I'm 628 00:40:04,640 --> 00:40:08,200 Speaker 1: Tracy Alloway. You can follow me on Twitter at Tracy Alloway, 629 00:40:08,840 --> 00:40:11,640 Speaker 1: and I'm Joe Wisenthal. You could follow me on Twitter 630 00:40:11,880 --> 00:40:15,320 Speaker 1: at the Stalwarts, and be sure to follow our producer 631 00:40:15,440 --> 00:40:19,640 Speaker 1: on Twitter, Laura Carlson. She's at Laura M. Carlson. And 632 00:40:19,719 --> 00:40:22,880 Speaker 1: check out all the Bloomberg podcasts on Twitter at the 633 00:40:22,920 --> 00:40:25,600 Speaker 1: handle at podcasts. Thanks for listening.