WEBVTT - Why Governments Haven't Learned The Lessons Of Japan 0:00:12.080 --> 0:00:15.400 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:15.480 --> 0:00:19.960 I'm Tracy Allaway and I'm Joe. Wasn't thal Joe? Do 0:00:20.000 --> 0:00:22.639 you think everyone knows what a balance sheet recession is 0:00:22.680 --> 0:00:25.520 by now? I don't think that only the cool people 0:00:25.760 --> 0:00:28.800 know what a balance sheet recession. Only the only the 0:00:28.840 --> 0:00:31.400 real nerds who are reading up of this stuff pre 0:00:31.520 --> 0:00:34.320 and post crisis were into that. But I think for 0:00:34.320 --> 0:00:36.479 the vast majority of people, including I would say the 0:00:36.520 --> 0:00:41.000 vast majority of economists, unfortunately, I don't think that concept 0:00:41.080 --> 0:00:43.360 is one that's like really in their their language and 0:00:43.400 --> 0:00:46.320 their terminology. Typically. Yeah, I kind of have to remind 0:00:46.320 --> 0:00:49.800 myself of this because I got into financial journalism right 0:00:49.880 --> 0:00:53.600 after the two thousand eight financial crisis, and balance sheet 0:00:53.680 --> 0:00:56.560 recession was sort of the hot thing then. It was 0:00:56.600 --> 0:00:59.760 the parallel that everyone was reaching forward to explain what 0:00:59.800 --> 0:01:02.760 was happening to the US at the time. But of 0:01:02.800 --> 0:01:06.000 course it's still a relatively new concept, and it's still 0:01:06.160 --> 0:01:11.240 a relatively rare type of recession, I guess, right. And 0:01:11.280 --> 0:01:14.440 you know, again, this sort of one of the questions 0:01:14.480 --> 0:01:18.760 that developed market economies are dealing with right now is 0:01:19.280 --> 0:01:23.360 why have the traditional tools that governments and central banks 0:01:23.520 --> 0:01:27.840 use to stimulate the economy not been effective? Why have 0:01:27.959 --> 0:01:32.000 lower interest rates not caused faster growth and more rapid inflation? 0:01:32.520 --> 0:01:35.800 Why don't we see uh, more rapid growth and inflation 0:01:35.920 --> 0:01:40.000 thanks to budget deficits that are essentially near their highest 0:01:40.080 --> 0:01:43.800 levels of all time and places like the US and elsewhere, 0:01:44.200 --> 0:01:46.679 And so it kind of in keeping things we've talked 0:01:46.680 --> 0:01:49.760 about long time, like well, what is really wrong with 0:01:49.880 --> 0:01:52.120 the framework? And is there a different way to think 0:01:52.160 --> 0:01:54.920 about the malaise that we see across so much of 0:01:54.960 --> 0:01:57.200 the world's economy. Is right, and I think we are 0:01:57.240 --> 0:02:00.360 seeing more and more policymakers who are arguing that school 0:02:00.360 --> 0:02:03.120 stimulus is the way forward, or that fiscal is the 0:02:03.160 --> 0:02:06.800 new monetary policy, and a lot of that thinking stems 0:02:07.200 --> 0:02:11.040 from the balance sheet recession ideas. So why don't we 0:02:11.080 --> 0:02:13.400 go ahead and dig into it. I'm really happy to 0:02:13.440 --> 0:02:16.679 say that our guest on today's episode is Richard Coup, 0:02:16.800 --> 0:02:21.399 the chief economist of Nomura Research Institute and the man 0:02:21.520 --> 0:02:25.400 who the term balance sheet recession is actually attributed to. 0:02:25.560 --> 0:02:28.519 So Richard, thank you so much for coming on, Thank 0:02:28.520 --> 0:02:31.240 you for having me here. So why don't we start 0:02:31.280 --> 0:02:34.600 with with the obvious question, what exactly is a balance 0:02:34.680 --> 0:02:39.079 sheet recession? And how did you come to start thinking 0:02:39.280 --> 0:02:43.840 about recessions in that way. I have to first disclose 0:02:43.919 --> 0:02:47.840 my UH geography, because I think in Japan for the 0:02:47.919 --> 0:02:52.800 last thirty six years, starting around close, Japan fell into 0:02:52.840 --> 0:02:57.200 this what I go, balancee recession and boj brought rates 0:02:57.240 --> 0:03:00.160 down to almost zero. WHI I to stimulate the economy 0:03:00.280 --> 0:03:04.280 and nothing seemed to work. And it took me about 0:03:04.280 --> 0:03:08.360 seven years to figure out that perhaps we have to 0:03:08.560 --> 0:03:12.120 come out of our ordinary in a private sect always 0:03:12.200 --> 0:03:16.239 maximizing profits kind of framework to understand what's going on. 0:03:17.080 --> 0:03:20.960 And one day I stumbled upon the chart that indicated 0:03:21.600 --> 0:03:24.519 the Japanese companies are not borrowing money at all, they're 0:03:24.560 --> 0:03:28.440 actually paying down debt. And then it came to me 0:03:28.520 --> 0:03:31.560 that why would a private sector company is willing to 0:03:31.600 --> 0:03:35.320 pay down debt when interest rates are zero? And then 0:03:35.360 --> 0:03:37.640 of course it's the only reason that can happen is 0:03:37.680 --> 0:03:40.560 that they have a financial problems of some sort, perhaps 0:03:40.560 --> 0:03:43.720 balance it under water. And then when I start thinking 0:03:43.720 --> 0:03:47.720 in those terms, everything kind of fell in place. That 0:03:47.880 --> 0:03:50.480 is to say, during the bubble days, people typically leverage 0:03:50.560 --> 0:03:52.440 themselves up thinking that they're going to make lots of 0:03:52.480 --> 0:03:56.640 money very quickly. When the bubble bursts, as the prices collapse, 0:03:56.880 --> 0:04:01.320 all that liabilities remain. Their balance is underwater, and people 0:04:01.360 --> 0:04:04.880 all start paying down that at the same time and 0:04:05.080 --> 0:04:09.160 paying down that. It becomes kind of a survival issue 0:04:09.200 --> 0:04:13.680 for them because if people outside outside the companies, for example, 0:04:13.760 --> 0:04:18.080 find out that your company is actually in a negative equity, 0:04:18.400 --> 0:04:21.800 they will stop trading you on credit. They demand everything 0:04:21.920 --> 0:04:25.520 to be settled in cash. Your best employee could leave 0:04:25.640 --> 0:04:28.440 because realizing that you know, this company might be under 0:04:28.440 --> 0:04:31.760 water for many years to come. When all these things 0:04:31.800 --> 0:04:37.359 come to surface, you're basically dead. So people inside the 0:04:37.360 --> 0:04:41.520 companies who understands the actual situation keeps their mouth shut, 0:04:42.240 --> 0:04:45.880 tell investors, shareholders whatever they want to hear. They try 0:04:45.920 --> 0:04:49.280 to repair their balances as quickly and quietly as possible. 0:04:50.400 --> 0:04:53.120 And that's, of course, on the individual level, the right 0:04:53.160 --> 0:04:55.600 thing to do. If I were running one of those companies, 0:04:55.640 --> 0:04:58.480 are we doing it? Many of the people listening in 0:04:58.560 --> 0:05:00.719 this podcast in the same situation will probably do the 0:05:00.760 --> 0:05:04.320 same because if you have a cash flow, and in 0:05:04.360 --> 0:05:06.599 the Japanese cage, a lot of companies still had cash flow. 0:05:06.680 --> 0:05:09.040 Japan was running the largest trace of plus in the world. 0:05:09.600 --> 0:05:12.040 People wanted to buy Japanese products all over the world. 0:05:12.800 --> 0:05:14.960 So the main line of business was okay. They had 0:05:14.960 --> 0:05:18.640 a cash flow, but their balance sheets were horribly under water. 0:05:19.839 --> 0:05:22.840 So all these people start paying down debt to repair 0:05:22.839 --> 0:05:25.440 their balance sheets. And that way you don't have to 0:05:25.440 --> 0:05:28.240 tell your shareholders. It's it's not the shares all piece 0:05:28.320 --> 0:05:30.280 of paper. Now you don't have to do bankers, it's 0:05:30.279 --> 0:05:33.120 not all non performing loans. And most importantly, you don't 0:05:33.160 --> 0:05:36.440 have to their workers. They are normal jobs tomorrow. So 0:05:36.520 --> 0:05:39.359 of all the stakeholders involved, using the cash flow to 0:05:39.360 --> 0:05:42.120 pay down that is the right thing to do. But 0:05:42.200 --> 0:05:44.680 when everybody does that at the same time, we fall 0:05:44.720 --> 0:05:48.200 into this fallacy of composition problems in that even though 0:05:48.240 --> 0:05:50.760 everybody is doing the right things collectively, you get the 0:05:50.800 --> 0:05:54.880 wrong result. And you get this wrong result because in 0:05:54.920 --> 0:05:58.320 the national economy, if someone is saving money or paying 0:05:58.320 --> 0:06:01.479 down debt, someone else has to be borrowing those money 0:06:01.520 --> 0:06:04.760 and putting them back into the income stream. If everybody 0:06:04.800 --> 0:06:07.040 is saving money or paying down dead and no one's 0:06:07.080 --> 0:06:11.400 borrowing money, the economy is just implode. When all these 0:06:11.400 --> 0:06:16.520 people start paying down dead, economy began to uh desalerate 0:06:16.920 --> 0:06:21.719 and the situation that wasn't wasn't worth. They tried to 0:06:21.760 --> 0:06:24.960 do monetary stimulus, but if you balance it is underwater. 0:06:25.400 --> 0:06:28.599 You cannot borrow and the banks won't lend your money either. 0:06:30.160 --> 0:06:34.320 So I read your book, like many people I think 0:06:34.440 --> 0:06:37.440 in our field did I probably I came across it 0:06:37.600 --> 0:06:42.800 in the book The Holy Grail of macro Economics, where 0:06:42.839 --> 0:06:47.400 you lay out this theory essentially by looking at exactly 0:06:47.440 --> 0:06:52.120 what you described the Japan scenario post where despite lower 0:06:52.120 --> 0:06:55.000 and lower interest rates, nothing could change on the corporate 0:06:55.040 --> 0:06:59.799 behavior because corporates were incentivized to pay down debt. How much, though, 0:07:00.200 --> 0:07:03.400 is this concept of the balance sheet recession? And what 0:07:03.480 --> 0:07:05.440 you see is sort of like you know, on the 0:07:05.480 --> 0:07:08.840 individual level, corporate level makes sense to pay down debt, 0:07:09.000 --> 0:07:12.200 but in the aggregate level it's real, it's really problematic. 0:07:12.720 --> 0:07:16.400 But how much is this different or essentially a new 0:07:16.480 --> 0:07:20.880 reframing of sort of very old Keynesian ideas about how 0:07:20.920 --> 0:07:24.240 what might make sense for one householder a company suddenly 0:07:24.280 --> 0:07:29.240 becomes very problematic when it's the behavior of the overall economy. 0:07:29.880 --> 0:07:32.800 As you mentioned at the beginning, is a real occurrence 0:07:34.040 --> 0:07:37.200 not this type of recession because most of the time, 0:07:37.280 --> 0:07:40.640 people are very careful with their finances, they're very careful 0:07:40.720 --> 0:07:45.080 with their balance sheets. But during the bubble days, that 0:07:45.160 --> 0:07:49.760 discipline disappears and people just leverage themselves up as much 0:07:49.800 --> 0:07:51.800 as they can so that they can make tons of 0:07:51.800 --> 0:07:55.840 money very quickly. And when that bubble burst, the number 0:07:55.880 --> 0:07:59.920 of people who are affected it will be far large 0:08:00.160 --> 0:08:04.960 than in ordinary circumstances. And when they all collectively start 0:08:05.000 --> 0:08:07.680 paying down debt, even if there were some people who 0:08:07.720 --> 0:08:11.800 were still borrowing money on the net basis, private sector 0:08:11.920 --> 0:08:15.840 as a group becomes a net saver, and in that 0:08:16.000 --> 0:08:20.720 case we fall into balancee recessions. So I'm curious, where 0:08:20.720 --> 0:08:23.880 do you see, given that these are relatively rare types 0:08:23.920 --> 0:08:27.440 of recessions, where do you see balance sheet recessions now 0:08:27.520 --> 0:08:31.240 in the world? Is it still in Japan, possibly still 0:08:31.240 --> 0:08:33.760 in the US or in Europe? Where where would you 0:08:33.800 --> 0:08:38.680 say and at what stages? Well, I say rare because 0:08:38.840 --> 0:08:43.199 bubbles are relatively rare occurrences, and so balance sheet recession, 0:08:43.240 --> 0:08:47.280 which typically follows the bursting of the bubble, is rare 0:08:47.400 --> 0:08:52.560 because of that reason. Now Japan, the bubble birs, and 0:08:52.600 --> 0:08:57.200 it's already thirty years from that. Corporate balances in Japan 0:08:57.280 --> 0:09:00.640 are in very good shape now. They the balance sheet 0:09:01.080 --> 0:09:06.480 recession powers probably ended around UH five, five to ten 0:09:06.559 --> 0:09:12.240 years ago. Some companies may still be struggling, but on average, 0:09:12.920 --> 0:09:16.760 Japanese companies are in pretty good shape. But even after 0:09:16.800 --> 0:09:21.640 the balance sheets are repaired, because of the this process 0:09:21.679 --> 0:09:24.480 of the leveraging process of paying down that is such 0:09:24.520 --> 0:09:29.839 a painful process. Most companies that comes out are still 0:09:29.840 --> 0:09:33.040 saying to themselves, oh, that was terrible experience, will never 0:09:33.120 --> 0:09:36.440 borrow money again. So this is a kind of trauma 0:09:36.520 --> 0:09:40.440 that gets stuck with this this mindset. And when you 0:09:40.480 --> 0:09:43.559 look at what happened to Americans after the Great Depression, 0:09:44.200 --> 0:09:47.680 the Great Depression was this type of recession. Everybody was 0:09:47.760 --> 0:09:50.440 leveraging up. Once the bubble burst, everybody start paying down 0:09:50.480 --> 0:09:53.440 that all at the same time and GDP collapsed, but 0:09:53.520 --> 0:09:56.520 people still paying down that and those Americans who lift 0:09:56.559 --> 0:10:01.400 through the Great Depression never borrow money until they died 0:10:02.160 --> 0:10:05.760 because the trauma was so bad. In Japan, we have 0:10:05.840 --> 0:10:08.360 a mini version of that. A lot of people still 0:10:08.400 --> 0:10:12.240 not borrowing money because the previous experience was so bad. 0:10:12.880 --> 0:10:16.040 Now us I think household take the balance it are 0:10:16.040 --> 0:10:20.840 becoming much cleaner thanks to all the help from the 0:10:20.920 --> 0:10:24.880 government and the Federal Reserve, and so I think US 0:10:25.040 --> 0:10:28.120 is almost to the end of this process, but I 0:10:28.160 --> 0:10:31.679 think the trauma pot will be still with us for 0:10:31.920 --> 0:10:35.840 maybe some more years. In Europe, because they had a 0:10:35.840 --> 0:10:39.600 double deep recession with the European crisis starting around twenty 0:10:39.640 --> 0:10:45.080 eleven twelve, the problem got a lot worse and they 0:10:45.120 --> 0:10:50.160 are beginning to look better, but European economies at the 0:10:50.200 --> 0:10:54.440 moment are very much dependent on exports, and with the 0:10:54.600 --> 0:10:59.800 exports weakening all around the world, they're slowing down even faster, 0:11:00.400 --> 0:11:04.080 and so for Europe it might take much longer. And 0:11:04.120 --> 0:11:07.480 even after the balances are repaired, this this trauma period 0:11:07.920 --> 0:11:11.720 who also going to be last thing for quite some time. 0:11:11.960 --> 0:11:14.640 So if we go back to Japan, and you mentioned 0:11:14.679 --> 0:11:18.439 that maybe the balance sheet recession in Japan only and 0:11:18.960 --> 0:11:22.199 maybe about ten years ago or less, so essentially it 0:11:22.320 --> 0:11:25.080 was a twenty year balance sheet recession in your view 0:11:26.000 --> 0:11:28.400 during that time, and the sort of standard view I 0:11:28.440 --> 0:11:30.839 think that people would say is okay. The way to 0:11:31.600 --> 0:11:33.720 or at least within your framework, the way to address 0:11:33.840 --> 0:11:38.560 too much debt overhanging the private sector is for essentially 0:11:38.559 --> 0:11:41.200 to move the debt onto the government's books because the 0:11:41.240 --> 0:11:46.319 government operates differently, and uh, that sort of theoretically relieves 0:11:46.520 --> 0:11:48.480 the burden and the government has all the debt, but 0:11:48.559 --> 0:11:51.920 the government can service the debt because it's the government. Now, 0:11:52.000 --> 0:11:54.760 Japan did that to some extent because the deficits and 0:11:54.800 --> 0:12:00.679 the national debt sword sky high during this balance sheet recession. 0:12:00.720 --> 0:12:03.000 So at the same time, during this long painful day 0:12:03.040 --> 0:12:07.680 leveraging prices, the Japanese public debt absolutely sword. But why 0:12:07.800 --> 0:12:10.600 wasn't that enough? Why wasn't some of the most eye 0:12:10.640 --> 0:12:13.840 watering levels we've ever seen of debt to GDP anywhere 0:12:13.880 --> 0:12:16.360 in the world. In fact, Japan is famous for the 0:12:16.400 --> 0:12:19.280 size of the stock of its public debt. Why wasn't 0:12:19.360 --> 0:12:24.360 that enough? Two more quickly alleviate the private sector's problems 0:12:24.480 --> 0:12:27.360 At the beginning, no one has this framework in their minds, 0:12:27.559 --> 0:12:32.480 including myself, I have to admit. And so they when 0:12:32.520 --> 0:12:35.800 they put on the fiscal stimulus to keep the economy going, 0:12:36.440 --> 0:12:42.360 they thought, with one big jolt, who act as a 0:12:42.440 --> 0:12:45.080 pump priming and economy will come out very quickly, and 0:12:45.120 --> 0:12:48.480 then they can rescind the fiscal stimulus afterwards. You know, 0:12:48.520 --> 0:12:52.000 when US fell into one in two thousand and eight. 0:12:52.400 --> 0:12:55.839 It was Professor Barry Summers who said, oh, we all, 0:12:55.880 --> 0:12:59.040 we needed a big jolt to get the economy going again, 0:12:59.440 --> 0:13:02.640 a bit jolt of fiscal stimulus. The same argument was 0:13:02.720 --> 0:13:05.640 made in Japan eighteen years earlier. So they put in 0:13:05.679 --> 0:13:08.800 the fiscal stimulus and fiscal stimulus government spending money. Of course, 0:13:08.840 --> 0:13:13.000 economy responds very quickly, but at that time the balances 0:13:13.040 --> 0:13:17.240 are still under under repair. But people didn't realize that part. 0:13:17.760 --> 0:13:20.240 As soon as the economy begin to show improvement, they 0:13:20.280 --> 0:13:22.520 decided to cut the deficit because that, you know, we 0:13:22.520 --> 0:13:24.480 don't want to leave any that to our children and 0:13:24.480 --> 0:13:28.439 all that kind of argument. And so even though households, 0:13:28.640 --> 0:13:31.000 households and companies was still repairing balance, she is the 0:13:31.040 --> 0:13:34.560 fiscal stimulus or was cart economy tanked again? And then 0:13:34.600 --> 0:13:37.360 they put a lot of fiscal stimulus. Economy improved again, 0:13:37.440 --> 0:13:39.760 and they cut the fiscal stimulus again. So we had 0:13:39.800 --> 0:13:43.760 actually this on and off situation for a very long time. 0:13:43.920 --> 0:13:47.080 And that is not the way to to to fight 0:13:47.160 --> 0:13:51.400 this this recession. It has to be sufficient and it 0:13:51.440 --> 0:13:55.200 has to be consistently applied sustained, and that was not 0:13:55.400 --> 0:14:01.360 how it was applied unfortunately, and we made even bigger mistakes. 0:14:01.400 --> 0:14:04.559 Are really trying to cut the budget deficits, thinking that 0:14:04.760 --> 0:14:08.440 economy is already strong enough. And at that time I M. 0:14:08.520 --> 0:14:11.200 F or E. C D, who also didn't understand anything 0:14:11.200 --> 0:14:16.040 about balanced recession UH strongly insisted that Japan should reduce 0:14:16.080 --> 0:14:19.040 its budget deficit. And when that was put in place, 0:14:19.760 --> 0:14:23.120 we have five consecutive cultus of negative growth, complete breakdown 0:14:23.120 --> 0:14:25.720 in the banking system, and that became the second one, 0:14:25.800 --> 0:14:29.080 that became the double dip, the real double dip. And 0:14:29.160 --> 0:14:31.640 once you have a double dip in already this very 0:14:31.680 --> 0:14:37.280 difficult circumstances, people become very, very pessimistic, and that's why 0:14:37.400 --> 0:14:40.520 it took us nearly twenty years to come out of it. 0:14:40.960 --> 0:14:44.440 If these were understood from the very beginning and physical 0:14:44.480 --> 0:14:47.840 stimulus were applied in a sufficient amount in a sustained way, 0:14:48.240 --> 0:14:52.040 I'm sure that time period could have been cut significantly. 0:15:14.480 --> 0:15:18.680 So talk to us about how fiscal stimulus actually affects 0:15:19.000 --> 0:15:23.480 private sector borrowing and how you get companies specifically to 0:15:23.640 --> 0:15:27.160 move out of this debt trauma, because it seems really difficult, 0:15:27.520 --> 0:15:29.720 at least in the case of Japan, and I think 0:15:29.760 --> 0:15:34.240 even today, you know Japanese companies don't actually borrow that much. 0:15:34.320 --> 0:15:37.400 I think we had the first ever Japanese junk bond 0:15:37.480 --> 0:15:41.040 sale just this year, and something like half of Japanese 0:15:41.080 --> 0:15:44.240 companies have no outstanding debt at all. So to some 0:15:44.280 --> 0:15:47.600 degree it seems like we're still struggling with this debt 0:15:47.640 --> 0:15:52.600 trauma issue, at least in Japan. Yes. Um, the way 0:15:52.680 --> 0:15:55.960 it works is that once everybody started paying down that 0:15:56.080 --> 0:15:58.840 at the same time there will be no borrowers. But 0:15:59.040 --> 0:16:03.680 households actors do saving money do these de leveraged funds 0:16:03.720 --> 0:16:07.920 also counters the savings, and the economy begins to shrink. 0:16:08.120 --> 0:16:11.960 Right If I may give you an America example, Suppose 0:16:12.000 --> 0:16:13.840 I have thousand dollars of income and I spend nine 0:16:13.880 --> 0:16:17.040 hundred myself. The nine is already someone else's income, so 0:16:17.080 --> 0:16:20.000 that's not a problem. It's already circulating in the economy. 0:16:20.120 --> 0:16:21.960 The hundred dollars I decided to say, if you go 0:16:22.080 --> 0:16:25.400 through financial sector and will be lent to someone who 0:16:25.400 --> 0:16:28.080 can use it. When that person borrows and spends it, 0:16:28.360 --> 0:16:31.320 the total expenditure will be nine hundred dollars I spent 0:16:31.600 --> 0:16:35.800 plus this hundred dollars that this borrower spent uh combined 0:16:35.840 --> 0:16:39.200 would be thousand dollars against my original income a thousand dollars. 0:16:39.320 --> 0:16:42.520 Then economy moves forward. If there are too many borrowers 0:16:42.840 --> 0:16:45.880 rates interestect the raised two few borrows interest the lower, 0:16:46.280 --> 0:16:48.880 sometimes with the help of the central bank to make 0:16:48.920 --> 0:16:53.280 sure that this income psychle is maintained. That's the usual economy. 0:16:53.480 --> 0:16:55.960 Then when you're in balancing recession, what happens is that 0:16:56.000 --> 0:16:58.680 I have thousand dollars of income, I spend nine hundred myself. 0:16:58.760 --> 0:17:02.400 Nine is already in a circulated in economy, so that's 0:17:02.440 --> 0:17:04.960 not a problem. But the hundred dollars I decided to say, 0:17:05.080 --> 0:17:07.640 get stuck in a financial sector because there's no borrowers, 0:17:07.680 --> 0:17:12.040 even at zero negative interest rates, because everybody is repairing 0:17:12.040 --> 0:17:15.000 balance sheets. When this hundred dollars gets stuck in a 0:17:15.040 --> 0:17:18.480 financial sector not coming out, only nine hundred dollars is 0:17:18.520 --> 0:17:21.440 spent in the economy, So economy shrinks ten percent from 0:17:21.440 --> 0:17:24.680 one thousand to nine hundred. The person who receives a 0:17:24.800 --> 0:17:27.320 nine hundred. If that person says, okay, let's save ten 0:17:27.320 --> 0:17:30.920 percent and saves ninety dollars, spends eight hundred ten the 0:17:31.040 --> 0:17:34.040 ninety dollars gets stuck in the financial sector again, because 0:17:34.119 --> 0:17:38.560 repairing balance sheet takes a long time five ten twenty years, 0:17:38.800 --> 0:17:41.639 so economy could go from one thousand, nine hundred hundred 0:17:41.640 --> 0:17:45.359 ten seven hundred thirty very very quickly, even with zero 0:17:45.400 --> 0:17:48.600 interest rates. And the last time this actually happened was 0:17:48.640 --> 0:17:52.080 the Great Depression I mentioned to earlier, when United States 0:17:52.119 --> 0:17:55.119 lost forty six percent of its nominal GDP in just 0:17:55.320 --> 0:17:58.080 four years because of this process one thousand, nine hundred 0:17:58.200 --> 0:18:02.679 hundred ten seven. Now, if the government comes in and 0:18:02.720 --> 0:18:06.440 borrow the hundred dollars at the beginning, then economy will 0:18:06.520 --> 0:18:08.840 be kept that thousand dollars because I spent the nine 0:18:08.880 --> 0:18:12.159 hundred government bar and spend a hundred so combined with 0:18:12.400 --> 0:18:16.080 thousand dollars, so the income is maintained. If the income 0:18:16.160 --> 0:18:19.960 is maintained, people have the income to repair their balance sheets. 0:18:20.119 --> 0:18:24.960 And that's basically why why the government acting as borrower 0:18:25.040 --> 0:18:27.480 of lost the result is so important in these type 0:18:27.480 --> 0:18:31.720 of recessions because by keeping income from falling, people have 0:18:32.400 --> 0:18:36.920 resources to repair their balance sheets. And after the balancets 0:18:36.920 --> 0:18:38.800 are repaired, then of course you have to reverse the 0:18:38.840 --> 0:18:43.600 situation private sector borrowing money and government repairing balance sheets. 0:18:43.640 --> 0:18:47.080 But we haven't got there yet in any of these countries, unfortunately. 0:18:47.920 --> 0:18:51.840 So we recently did a episode with Michael Pettis and 0:18:51.920 --> 0:18:55.480 we talked about China and the challenges it's facing right 0:18:55.520 --> 0:19:00.840 now with its gigantic or ursioning private sector debt load. 0:19:00.880 --> 0:19:03.840 And I've seen a lot of people lately talking about 0:19:03.880 --> 0:19:06.639 this idea that was, Uh, there has been this huge 0:19:07.000 --> 0:19:11.320 private sector debt build up in China, opportunities are coming 0:19:11.359 --> 0:19:13.680 to an end, and that there is now the risk 0:19:14.080 --> 0:19:18.240 of a long drawn out Japan style balance sheet recession 0:19:18.440 --> 0:19:21.560 in China simply due to the high level of private 0:19:21.560 --> 0:19:25.680 sector debt. Do you see a similar situation playing out 0:19:25.760 --> 0:19:31.080 with what we know about the Chinese economy. Well, uh, 0:19:31.240 --> 0:19:33.960 there are a lot of economists who like to throw 0:19:34.040 --> 0:19:39.200 these huge debt numbers and see people going wow, I'm 0:19:39.240 --> 0:19:42.679 afraid I'm not one of them, even though I'm the 0:19:42.720 --> 0:19:45.320 one who started talking about that before others. And so 0:19:45.359 --> 0:19:47.280 I'm kind of glad that people are paying more attention 0:19:47.320 --> 0:19:51.440 to this issue. This big debt numbers that people throw around, 0:19:52.320 --> 0:19:56.879 I am not ah particularly happy about. And the reason 0:19:56.880 --> 0:20:00.240 it's quite simple, and that is that unless some money 0:20:00.320 --> 0:20:04.560 saving money, you cannot have a debt right that cannot 0:20:04.560 --> 0:20:07.520 come out from nowhere. Someone has to be saving money 0:20:08.080 --> 0:20:11.960 for someone to be borrowing money. So that's one key 0:20:12.000 --> 0:20:14.800 point that a lot of people have forgotten. And the 0:20:14.840 --> 0:20:18.760 second point is that if someone is saving money, someone 0:20:18.880 --> 0:20:21.120 has to be borrowing money to keep the economy going. 0:20:21.880 --> 0:20:25.840 This uh, you know one thousand and nine issue comes 0:20:25.880 --> 0:20:28.840 from there. And when you look at some of the 0:20:28.880 --> 0:20:32.359 debt numbers and a huge but when you look at 0:20:32.400 --> 0:20:36.159 the savings numbers and compare with it, savings numbers are 0:20:36.440 --> 0:20:40.040 of course those are available from flow funds data, and 0:20:40.080 --> 0:20:44.080 they are of course growing, but growing nowhere near the 0:20:44.119 --> 0:20:49.440 debt numbers. So how do you describe how they explain 0:20:49.520 --> 0:20:54.320 this this discrepancy? And I think this this discrepancy exists 0:20:54.840 --> 0:20:58.360 because those of us in the financial sector has all 0:20:58.400 --> 0:21:02.760 sorts of ways to increase these numbers through so constructured 0:21:03.040 --> 0:21:07.680 products for one thing, and more. In the most simplified way, 0:21:08.040 --> 0:21:11.399 suppose a large state on enterprises in China was able 0:21:11.440 --> 0:21:15.720 to obtain funds from banks that are relatively are cheap 0:21:15.760 --> 0:21:19.480 interest low interest rates. Then if this state on enterprises 0:21:19.520 --> 0:21:23.840 then supply credit to its supplies let's say smaller private 0:21:23.840 --> 0:21:28.760 sector companies that are slightly higher interest rates. There will 0:21:28.800 --> 0:21:32.520 be increased in a debt number because and so we 0:21:33.119 --> 0:21:36.520 borrowed it first, and it lent the money to another 0:21:36.520 --> 0:21:40.800 private sector companies, so the debt is doubled, but the 0:21:40.840 --> 0:21:44.399 actual borrower is the last borrow, right, the private sector borrow. 0:21:45.440 --> 0:21:48.200 But the numbers could grow very rapidly as a result, 0:21:48.520 --> 0:21:52.000 the debt number can grow very rapidly. And if you 0:21:52.320 --> 0:21:56.640 look at Chinese flow funds data carefully, I don't see 0:21:56.680 --> 0:22:00.680 the kind of craze that happened in Japan and all 0:22:00.760 --> 0:22:04.280 in the United States prior to two thousand eight, where 0:22:04.640 --> 0:22:08.400 for example, household sector, which should be saving money becoming 0:22:08.400 --> 0:22:11.520 a net borrower. We actually happened in the United States, 0:22:12.160 --> 0:22:16.680 Spain and Ireland during the really bad bubble days. That 0:22:16.800 --> 0:22:20.520 is not happening in China. Household sector is still saving 0:22:20.560 --> 0:22:27.119 money and corporate sector still borrowing money, but nothing especially 0:22:27.119 --> 0:22:32.560 irregular that you would expect to see in really bubbic 0:22:32.640 --> 0:22:37.200 situations that happened in Japan and other places. So yes, 0:22:37.680 --> 0:22:41.800 I think Chinese house real estate prices are high and 0:22:42.000 --> 0:22:46.320 the bubble could burst. Chinese household sector COPA sector did 0:22:46.359 --> 0:22:51.920 not really went as crazy as some of the household 0:22:51.920 --> 0:22:57.480 sector and and COPA sector in the West during the 0:22:57.480 --> 0:23:02.040 three to two thousand eight period. Well, a related question, 0:23:02.200 --> 0:23:06.960 but in trying to resolve a balance sheet recession by 0:23:07.080 --> 0:23:10.320 getting the private sector to lend again, how do you 0:23:10.960 --> 0:23:13.159 how do you make sure that you don't end up 0:23:13.280 --> 0:23:17.520 inflating another bubble, Because at least in the US, and 0:23:17.640 --> 0:23:20.520 you know, you can agree or disagree that what happened 0:23:20.560 --> 0:23:23.480 in two tho was a balance sheet recession or not, 0:23:23.720 --> 0:23:26.040 there does seem to be a lot of concern that 0:23:26.440 --> 0:23:29.760 the corporate sector is borrowing too much and we are 0:23:29.880 --> 0:23:32.800 on the verge of another sort of corporate bond bubble 0:23:32.920 --> 0:23:36.720 of some form or another. So how should policymakers walk 0:23:36.840 --> 0:23:42.440 that that line? Well, first of all, I think all 0:23:42.520 --> 0:23:48.520 the reliance on monetary policy is the shortest way to 0:23:48.560 --> 0:23:53.600 get another bubble in place, because doing balance sheet recessions, 0:23:53.720 --> 0:23:58.200 private sector borrows basically a present themselves. So the fund 0:23:58.280 --> 0:24:05.560 managers point ninancial industry basically flood absolutely flooded with with cash. 0:24:05.680 --> 0:24:10.240 Because household sectors continue to save as they have done 0:24:10.240 --> 0:24:14.160 in the last five thousand years. Corporate sector is the well. 0:24:14.520 --> 0:24:17.080 And then there's de leveraged funds coming back into the 0:24:17.640 --> 0:24:22.440 UH financial sector that basically the debt repayments, and then 0:24:22.440 --> 0:24:26.679 the central bank, believing that they have to maintain the 0:24:26.680 --> 0:24:30.679 two percent inflation rate or something, continues to add funds 0:24:30.920 --> 0:24:37.040 through que So during balancing recessions, everyone else are short 0:24:37.080 --> 0:24:41.280 of money except the financial sector flooded with money. And 0:24:42.400 --> 0:24:45.280 if the government is the only borrower left, a large 0:24:45.280 --> 0:24:47.920 portion of that funds will move towards the government bonds. 0:24:47.960 --> 0:24:50.480 And that's the reason why government bonds come down to 0:24:50.520 --> 0:24:56.600 these ridiculously low levels during balancing recessions, even with ever 0:24:56.680 --> 0:25:00.560 larger public debt. For example, us to their a public 0:25:00.640 --> 0:25:03.000 that is pretty large compared to what we were used 0:25:03.040 --> 0:25:09.240 to before, but tenure treasury is only one Japan. Even 0:25:09.280 --> 0:25:12.480 before b o J went on to this q q 0:25:12.640 --> 0:25:16.520 E under Governor Coroda, the public that was already close 0:25:16.560 --> 0:25:20.040 to two g g d P, but j GB was 0:25:20.040 --> 0:25:23.840 building only zero point seven. That all comes from the 0:25:23.840 --> 0:25:28.120 fact that the excess funds in the private sector all 0:25:28.200 --> 0:25:32.760 head towards the only borrower left, meaning the government. But 0:25:32.840 --> 0:25:36.159 if the government doesn't play its role and abserve all 0:25:36.200 --> 0:25:40.000