Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Tracy Allaway and I'm Joe. Wasn't thal Joe? Do
Speaker 1: you think everyone knows what a balance sheet recession is
Speaker 1: by now? I don't think that only the cool people
Speaker 1: know what a balance sheet recession. Only the only the
Speaker 1: real nerds who are reading up of this stuff pre
Speaker 1: and post crisis were into that. But I think for
Speaker 1: the vast majority of people, including I would say the
Speaker 1: vast majority of economists, unfortunately, I don't think that concept
Speaker 1: is one that's like really in their their language and
Speaker 1: their terminology. Typically. Yeah, I kind of have to remind
Speaker 1: myself of this because I got into financial journalism right
Speaker 1: after the two thousand eight financial crisis, and balance sheet
Speaker 1: recession was sort of the hot thing then. It was
Speaker 1: the parallel that everyone was reaching forward to explain what
Speaker 1: was happening to the US at the time. But of
Speaker 1: course it's still a relatively new concept, and it's still
Speaker 1: a relatively rare type of recession, I guess, right. And
Speaker 1: you know, again, this sort of one of the questions
Speaker 1: that developed market economies are dealing with right now is
Speaker 1: why have the traditional tools that governments and central banks
Speaker 1: use to stimulate the economy not been effective? Why have
Speaker 1: lower interest rates not caused faster growth and more rapid inflation?
Speaker 1: Why don't we see uh, more rapid growth and inflation
Speaker 1: thanks to budget deficits that are essentially near their highest
Speaker 1: levels of all time and places like the US and elsewhere,
Speaker 1: And so it kind of in keeping things we've talked
Speaker 1: about long time, like well, what is really wrong with
Speaker 1: the framework? And is there a different way to think
Speaker 1: about the malaise that we see across so much of
Speaker 1: the world's economy. Is right, and I think we are
Speaker 1: seeing more and more policymakers who are arguing that school
Speaker 1: stimulus is the way forward, or that fiscal is the
Speaker 1: new monetary policy, and a lot of that thinking stems
Speaker 1: from the balance sheet recession ideas. So why don't we
Speaker 1: go ahead and dig into it. I'm really happy to
Speaker 1: say that our guest on today's episode is Richard Coup,
Speaker 1: the chief economist of Nomura Research Institute and the man
Speaker 1: who the term balance sheet recession is actually attributed to.
Speaker 1: So Richard, thank you so much for coming on, Thank
Speaker 1: you for having me here. So why don't we start
Speaker 1: with with the obvious question, what exactly is a balance
Speaker 1: sheet recession? And how did you come to start thinking
Speaker 1: about recessions in that way. I have to first disclose
Speaker 1: my UH geography, because I think in Japan for the
Speaker 1: last thirty six years, starting around close, Japan fell into
Speaker 1: this what I go, balancee recession and boj brought rates
Speaker 1: down to almost zero. WHI I to stimulate the economy
Speaker 1: and nothing seemed to work. And it took me about
Speaker 1: seven years to figure out that perhaps we have to
Speaker 1: come out of our ordinary in a private sect always
Speaker 1: maximizing profits kind of framework to understand what's going on.
Speaker 1: And one day I stumbled upon the chart that indicated
Speaker 1: the Japanese companies are not borrowing money at all, they're
Speaker 1: actually paying down debt. And then it came to me
Speaker 1: that why would a private sector company is willing to
Speaker 1: pay down debt when interest rates are zero? And then
Speaker 1: of course it's the only reason that can happen is
Speaker 1: that they have a financial problems of some sort, perhaps
Speaker 1: balance it under water. And then when I start thinking
Speaker 1: in those terms, everything kind of fell in place. That
Speaker 1: is to say, during the bubble days, people typically leverage
Speaker 1: themselves up thinking that they're going to make lots of
Speaker 1: money very quickly. When the bubble bursts, as the prices collapse,
Speaker 1: all that liabilities remain. Their balance is underwater, and people
Speaker 1: all start paying down that at the same time and
Speaker 1: paying down that. It becomes kind of a survival issue
Speaker 1: for them because if people outside outside the companies, for example,
Speaker 1: find out that your company is actually in a negative equity,
Speaker 1: they will stop trading you on credit. They demand everything
Speaker 1: to be settled in cash. Your best employee could leave
Speaker 1: because realizing that you know, this company might be under
Speaker 1: water for many years to come. When all these things
Speaker 1: come to surface, you're basically dead. So people inside the
Speaker 1: companies who understands the actual situation keeps their mouth shut,
Speaker 1: tell investors, shareholders whatever they want to hear. They try
Speaker 1: to repair their balances as quickly and quietly as possible.
Speaker 1: And that's, of course, on the individual level, the right
Speaker 1: thing to do. If I were running one of those companies,
Speaker 1: are we doing it? Many of the people listening in
Speaker 1: this podcast in the same situation will probably do the
Speaker 1: same because if you have a cash flow, and in
Speaker 1: the Japanese cage, a lot of companies still had cash flow.
Speaker 1: Japan was running the largest trace of plus in the world.
Speaker 1: People wanted to buy Japanese products all over the world.
Speaker 1: So the main line of business was okay. They had
Speaker 1: a cash flow, but their balance sheets were horribly under water.
Speaker 1: So all these people start paying down debt to repair
Speaker 1: their balance sheets. And that way you don't have to
Speaker 1: tell your shareholders. It's it's not the shares all piece
Speaker 1: of paper. Now you don't have to do bankers, it's
Speaker 1: not all non performing loans. And most importantly, you don't
Speaker 1: have to their workers. They are normal jobs tomorrow. So
Speaker 1: of all the stakeholders involved, using the cash flow to
Speaker 1: pay down that is the right thing to do. But
Speaker 1: when everybody does that at the same time, we fall
Speaker 1: into this fallacy of composition problems in that even though
Speaker 1: everybody is doing the right things collectively, you get the
Speaker 1: wrong result. And you get this wrong result because in
Speaker 1: the national economy, if someone is saving money or paying
Speaker 1: down debt, someone else has to be borrowing those money
Speaker 1: and putting them back into the income stream. If everybody
Speaker 1: is saving money or paying down dead and no one's
Speaker 1: borrowing money, the economy is just implode. When all these
Speaker 1: people start paying down dead, economy began to uh desalerate
Speaker 1: and the situation that wasn't wasn't worth. They tried to
Speaker 1: do monetary stimulus, but if you balance it is underwater.
Speaker 1: You cannot borrow and the banks won't lend your money either.
Speaker 1: So I read your book, like many people I think
Speaker 1: in our field did I probably I came across it
Speaker 1: in the book The Holy Grail of macro Economics, where
Speaker 1: you lay out this theory essentially by looking at exactly
Speaker 1: what you described the Japan scenario post where despite lower
Speaker 1: and lower interest rates, nothing could change on the corporate
Speaker 1: behavior because corporates were incentivized to pay down debt. How much, though,
Speaker 1: is this concept of the balance sheet recession? And what
Speaker 1: you see is sort of like you know, on the
Speaker 1: individual level, corporate level makes sense to pay down debt,
Speaker 1: but in the aggregate level it's real, it's really problematic.
Speaker 1: But how much is this different or essentially a new
Speaker 1: reframing of sort of very old Keynesian ideas about how
Speaker 1: what might make sense for one householder a company suddenly
Speaker 1: becomes very problematic when it's the behavior of the overall economy.
Speaker 1: As you mentioned at the beginning, is a real occurrence
Speaker 1: not this type of recession because most of the time,
Speaker 1: people are very careful with their finances, they're very careful
Speaker 1: with their balance sheets. But during the bubble days, that
Speaker 1: discipline disappears and people just leverage themselves up as much
Speaker 1: as they can so that they can make tons of
Speaker 1: money very quickly. And when that bubble burst, the number
Speaker 1: of people who are affected it will be far large
Speaker 1: than in ordinary circumstances. And when they all collectively start
Speaker 1: paying down debt, even if there were some people who
Speaker 1: were still borrowing money on the net basis, private sector
Speaker 1: as a group becomes a net saver, and in that
Speaker 1: case we fall into balancee recessions. So I'm curious, where
Speaker 1: do you see, given that these are relatively rare types
Speaker 1: of recessions, where do you see balance sheet recessions now
Speaker 1: in the world? Is it still in Japan, possibly still
Speaker 1: in the US or in Europe? Where where would you
Speaker 1: say and at what stages? Well, I say rare because
Speaker 1: bubbles are relatively rare occurrences, and so balance sheet recession,
Speaker 1: which typically follows the bursting of the bubble, is rare
Speaker 1: because of that reason. Now Japan, the bubble birs, and
Speaker 1: it's already thirty years from that. Corporate balances in Japan
Speaker 1: are in very good shape now. They the balance sheet
Speaker 1: recession powers probably ended around UH five, five to ten
Speaker 1: years ago. Some companies may still be struggling, but on average,
Speaker 1: Japanese companies are in pretty good shape. But even after
Speaker 1: the balance sheets are repaired, because of the this process
Speaker 1: of the leveraging process of paying down that is such
Speaker 1: a painful process. Most companies that comes out are still
Speaker 1: saying to themselves, oh, that was terrible experience, will never
Speaker 1: borrow money again. So this is a kind of trauma
Speaker 1: that gets stuck with this this mindset. And when you
Speaker 1: look at what happened to Americans after the Great Depression,
Speaker 1: the Great Depression was this type of recession. Everybody was
Speaker 1: leveraging up. Once the bubble burst, everybody start paying down
Speaker 1: that all at the same time and GDP collapsed, but
Speaker 1: people still paying down that and those Americans who lift
Speaker 1: through the Great Depression never borrow money until they died
Speaker 1: because the trauma was so bad. In Japan, we have
Speaker 1: a mini version of that. A lot of people still
Speaker 1: not borrowing money because the previous experience was so bad.
Speaker 1: Now us I think household take the balance it are
Speaker 1: becoming much cleaner thanks to all the help from the
Speaker 1: government and the Federal Reserve, and so I think US
Speaker 1: is almost to the end of this process, but I
Speaker 1: think the trauma pot will be still with us for
Speaker 1: maybe some more years. In Europe, because they had a
Speaker 1: double deep recession with the European crisis starting around twenty
Speaker 1: eleven twelve, the problem got a lot worse and they
Speaker 1: are beginning to look better, but European economies at the
Speaker 1: moment are very much dependent on exports, and with the
Speaker 1: exports weakening all around the world, they're slowing down even faster,
Speaker 1: and so for Europe it might take much longer. And
Speaker 1: even after the balances are repaired, this this trauma period
Speaker 1: who also going to be last thing for quite some time.
Speaker 1: So if we go back to Japan, and you mentioned
Speaker 1: that maybe the balance sheet recession in Japan only and
Speaker 1: maybe about ten years ago or less, so essentially it
Speaker 1: was a twenty year balance sheet recession in your view
Speaker 1: during that time, and the sort of standard view I
Speaker 1: think that people would say is okay. The way to
Speaker 1: or at least within your framework, the way to address
Speaker 1: too much debt overhanging the private sector is for essentially
Speaker 1: to move the debt onto the government's books because the
Speaker 1: government operates differently, and uh, that sort of theoretically relieves
Speaker 1: the burden and the government has all the debt, but
Speaker 1: the government can service the debt because it's the government. Now,
Speaker 1: Japan did that to some extent because the deficits and
Speaker 1: the national debt sword sky high during this balance sheet recession.
Speaker 1: So at the same time, during this long painful day
Speaker 1: leveraging prices, the Japanese public debt absolutely sword. But why
Speaker 1: wasn't that enough? Why wasn't some of the most eye
Speaker 1: watering levels we've ever seen of debt to GDP anywhere
Speaker 1: in the world. In fact, Japan is famous for the
Speaker 1: size of the stock of its public debt. Why wasn't
Speaker 1: that enough? Two more quickly alleviate the private sector's problems
Speaker 1: At the beginning, no one has this framework in their minds,
Speaker 1: including myself, I have to admit. And so they when
Speaker 1: they put on the fiscal stimulus to keep the economy going,
Speaker 1: they thought, with one big jolt, who act as a
Speaker 1: pump priming and economy will come out very quickly, and
Speaker 1: then they can rescind the fiscal stimulus afterwards. You know,
Speaker 1: when US fell into one in two thousand and eight.
Speaker 1: It was Professor Barry Summers who said, oh, we all,
Speaker 1: we needed a big jolt to get the economy going again,
Speaker 1: a bit jolt of fiscal stimulus. The same argument was
Speaker 1: made in Japan eighteen years earlier. So they put in
Speaker 1: the fiscal stimulus and fiscal stimulus government spending money. Of course,
Speaker 1: economy responds very quickly, but at that time the balances
Speaker 1: are still under under repair. But people didn't realize that part.
Speaker 1: As soon as the economy begin to show improvement, they
Speaker 1: decided to cut the deficit because that, you know, we
Speaker 1: don't want to leave any that to our children and
Speaker 1: all that kind of argument. And so even though households,
Speaker 1: households and companies was still repairing balance, she is the
Speaker 1: fiscal stimulus or was cart economy tanked again? And then
Speaker 1: they put a lot of fiscal stimulus. Economy improved again,
Speaker 1: and they cut the fiscal stimulus again. So we had
Speaker 1: actually this on and off situation for a very long time.
Speaker 1: And that is not the way to to to fight
Speaker 1: this this recession. It has to be sufficient and it
Speaker 1: has to be consistently applied sustained, and that was not
Speaker 1: how it was applied unfortunately, and we made even bigger mistakes.
Speaker 1: Are really trying to cut the budget deficits, thinking that
Speaker 1: economy is already strong enough. And at that time I M.
Speaker 1: F or E. C D, who also didn't understand anything
Speaker 1: about balanced recession UH strongly insisted that Japan should reduce
Speaker 1: its budget deficit. And when that was put in place,
Speaker 1: we have five consecutive cultus of negative growth, complete breakdown
Speaker 1: in the banking system, and that became the second one,
Speaker 1: that became the double dip, the real double dip. And
Speaker 1: once you have a double dip in already this very
Speaker 1: difficult circumstances, people become very, very pessimistic, and that's why
Speaker 1: it took us nearly twenty years to come out of it.
Speaker 1: If these were understood from the very beginning and physical
Speaker 1: stimulus were applied in a sufficient amount in a sustained way,
Speaker 1: I'm sure that time period could have been cut significantly.
Speaker 1: So talk to us about how fiscal stimulus actually affects
Speaker 1: private sector borrowing and how you get companies specifically to
Speaker 1: move out of this debt trauma, because it seems really difficult,
Speaker 1: at least in the case of Japan, and I think
Speaker 1: even today, you know Japanese companies don't actually borrow that much.
Speaker 1: I think we had the first ever Japanese junk bond
Speaker 1: sale just this year, and something like half of Japanese
Speaker 1: companies have no outstanding debt at all. So to some
Speaker 1: degree it seems like we're still struggling with this debt
Speaker 1: trauma issue, at least in Japan. Yes. Um, the way
Speaker 1: it works is that once everybody started paying down that
Speaker 1: at the same time there will be no borrowers. But
Speaker 1: households actors do saving money do these de leveraged funds
Speaker 1: also counters the savings, and the economy begins to shrink.
Speaker 1: Right If I may give you an America example, Suppose
Speaker 1: I have thousand dollars of income and I spend nine
Speaker 1: hundred myself. The nine is already someone else's income, so
Speaker 1: that's not a problem. It's already circulating in the economy.
Speaker 1: The hundred dollars I decided to say, if you go
Speaker 1: through financial sector and will be lent to someone who
Speaker 1: can use it. When that person borrows and spends it,
Speaker 1: the total expenditure will be nine hundred dollars I spent
Speaker 1: plus this hundred dollars that this borrower spent uh combined
Speaker 1: would be thousand dollars against my original income a thousand dollars.
Speaker 1: Then economy moves forward. If there are too many borrowers
Speaker 1: rates interestect the raised two few borrows interest the lower,
Speaker 1: sometimes with the help of the central bank to make
Speaker 1: sure that this income psychle is maintained. That's the usual economy.
Speaker 1: Then when you're in balancing recession, what happens is that
Speaker 1: I have thousand dollars of income, I spend nine hundred myself.
Speaker 1: Nine is already in a circulated in economy, so that's
Speaker 1: not a problem. But the hundred dollars I decided to say,
Speaker 1: get stuck in a financial sector because there's no borrowers,
Speaker 1: even at zero negative interest rates, because everybody is repairing
Speaker 1: balance sheets. When this hundred dollars gets stuck in a
Speaker 1: financial sector not coming out, only nine hundred dollars is
Speaker 1: spent in the economy, So economy shrinks ten percent from
Speaker 1: one thousand to nine hundred. The person who receives a
Speaker 1: nine hundred. If that person says, okay, let's save ten
Speaker 1: percent and saves ninety dollars, spends eight hundred ten the
Speaker 1: ninety dollars gets stuck in the financial sector again, because
Speaker 1: repairing balance sheet takes a long time five ten twenty years,
Speaker 1: so economy could go from one thousand, nine hundred hundred
Speaker 1: ten seven hundred thirty very very quickly, even with zero
Speaker 1: interest rates. And the last time this actually happened was
Speaker 1: the Great Depression I mentioned to earlier, when United States
Speaker 1: lost forty six percent of its nominal GDP in just
Speaker 1: four years because of this process one thousand, nine hundred
Speaker 1: hundred ten seven. Now, if the government comes in and
Speaker 1: borrow the hundred dollars at the beginning, then economy will
Speaker 1: be kept that thousand dollars because I spent the nine
Speaker 1: hundred government bar and spend a hundred so combined with
Speaker 1: thousand dollars, so the income is maintained. If the income
Speaker 1: is maintained, people have the income to repair their balance sheets.
Speaker 1: And that's basically why why the government acting as borrower
Speaker 1: of lost the result is so important in these type
Speaker 1: of recessions because by keeping income from falling, people have
Speaker 1: resources to repair their balance sheets. And after the balancets
Speaker 1: are repaired, then of course you have to reverse the
Speaker 1: situation private sector borrowing money and government repairing balance sheets.
Speaker 1: But we haven't got there yet in any of these countries, unfortunately.
Speaker 1: So we recently did a episode with Michael Pettis and
Speaker 1: we talked about China and the challenges it's facing right
Speaker 1: now with its gigantic or ursioning private sector debt load.
Speaker 1: And I've seen a lot of people lately talking about
Speaker 1: this idea that was, Uh, there has been this huge
Speaker 1: private sector debt build up in China, opportunities are coming
Speaker 1: to an end, and that there is now the risk
Speaker 1: of a long drawn out Japan style balance sheet recession
Speaker 1: in China simply due to the high level of private
Speaker 1: sector debt. Do you see a similar situation playing out
Speaker 1: with what we know about the Chinese economy. Well, uh,
Speaker 1: there are a lot of economists who like to throw
Speaker 1: these huge debt numbers and see people going wow, I'm
Speaker 1: afraid I'm not one of them, even though I'm the
Speaker 1: one who started talking about that before others. And so
Speaker 1: I'm kind of glad that people are paying more attention
Speaker 1: to this issue. This big debt numbers that people throw around,
Speaker 1: I am not ah particularly happy about. And the reason
Speaker 1: it's quite simple, and that is that unless some money
Speaker 1: saving money, you cannot have a debt right that cannot
Speaker 1: come out from nowhere. Someone has to be saving money
Speaker 1: for someone to be borrowing money. So that's one key
Speaker 1: point that a lot of people have forgotten. And the
Speaker 1: second point is that if someone is saving money, someone
Speaker 1: has to be borrowing money to keep the economy going.
Speaker 1: This uh, you know one thousand and nine issue comes
Speaker 1: from there. And when you look at some of the
Speaker 1: debt numbers and a huge but when you look at
Speaker 1: the savings numbers and compare with it, savings numbers are
Speaker 1: of course those are available from flow funds data, and
Speaker 1: they are of course growing, but growing nowhere near the
Speaker 1: debt numbers. So how do you describe how they explain
Speaker 1: this this discrepancy? And I think this this discrepancy exists
Speaker 1: because those of us in the financial sector has all
Speaker 1: sorts of ways to increase these numbers through so constructured
Speaker 1: products for one thing, and more. In the most simplified way,
Speaker 1: suppose a large state on enterprises in China was able
Speaker 1: to obtain funds from banks that are relatively are cheap
Speaker 1: interest low interest rates. Then if this state on enterprises
Speaker 1: then supply credit to its supplies let's say smaller private
Speaker 1: sector companies that are slightly higher interest rates. There will
Speaker 1: be increased in a debt number because and so we
Speaker 1: borrowed it first, and it lent the money to another
Speaker 1: private sector companies, so the debt is doubled, but the
Speaker 1: actual borrower is the last borrow, right, the private sector borrow.
Speaker 1: But the numbers could grow very rapidly as a result,
Speaker 1: the debt number can grow very rapidly. And if you
Speaker 1: look at Chinese flow funds data carefully, I don't see
Speaker 1: the kind of craze that happened in Japan and all
Speaker 1: in the United States prior to two thousand eight, where
Speaker 1: for example, household sector, which should be saving money becoming
Speaker 1: a net borrower. We actually happened in the United States,
Speaker 1: Spain and Ireland during the really bad bubble days. That
Speaker 1: is not happening in China. Household sector is still saving
Speaker 1: money and corporate sector still borrowing money, but nothing especially
Speaker 1: irregular that you would expect to see in really bubbic
Speaker 1: situations that happened in Japan and other places. So yes,
Speaker 1: I think Chinese house real estate prices are high and
Speaker 1: the bubble could burst. Chinese household sector COPA sector did
Speaker 1: not really went as crazy as some of the household
Speaker 1: sector and and COPA sector in the West during the
Speaker 1: three to two thousand eight period. Well, a related question,
Speaker 1: but in trying to resolve a balance sheet recession by
Speaker 1: getting the private sector to lend again, how do you
Speaker 1: how do you make sure that you don't end up
Speaker 1: inflating another bubble, Because at least in the US, and
Speaker 1: you know, you can agree or disagree that what happened
Speaker 1: in two tho was a balance sheet recession or not,
Speaker 1: there does seem to be a lot of concern that
Speaker 1: the corporate sector is borrowing too much and we are
Speaker 1: on the verge of another sort of corporate bond bubble
Speaker 1: of some form or another. So how should policymakers walk
Speaker 1: that that line? Well, first of all, I think all
Speaker 1: the reliance on monetary policy is the shortest way to
Speaker 1: get another bubble in place, because doing balance sheet recessions,
Speaker 1: private sector borrows basically a present themselves. So the fund
Speaker 1: managers point ninancial industry basically flood absolutely flooded with with cash.
Speaker 1: Because household sectors continue to save as they have done
Speaker 1: in the last five thousand years. Corporate sector is the well.
Speaker 1: And then there's de leveraged funds coming back into the
Speaker 1: UH financial sector that basically the debt repayments, and then
Speaker 1: the central bank, believing that they have to maintain the
Speaker 1: two percent inflation rate or something, continues to add funds
Speaker 1: through que So during balancing recessions, everyone else are short
Speaker 1: of money except the financial sector flooded with money. And
Speaker 1: if the government is the only borrower left, a large
Speaker 1: portion of that funds will move towards the government bonds.
Speaker 1: And that's the reason why government bonds come down to
Speaker 1: these ridiculously low levels during balancing recessions, even with ever
Speaker 1: larger public debt. For example, us to their a public
Speaker 1: that is pretty large compared to what we were used
Speaker 1: to before, but tenure treasury is only one Japan. Even
Speaker 1: before b o J went on to this q q
Speaker 1: E under Governor Coroda, the public that was already close
Speaker 1: to two g g d P, but j GB was
Speaker 1: building only zero point seven. That all comes from the
Speaker 1: fact that the excess funds in the private sector all
Speaker 1: head towards the only borrower left, meaning the government. But
Speaker 1: if the government doesn't play its role and abserve all
Speaker 1: these excess savings, what happens to the remaining funds. The
Speaker 1: remaining funds will have to go to fix the existing assets, right,
Speaker 1: because companies are not borrowing money for investments, so these
Speaker 1: funds have to go to some sort of a fixed
Speaker 1: assets such as commercial real estate stocks and and things
Speaker 1: like that, and that's where you could have another bubble growing.
Speaker 1: And US commercial real estate prices if I see my
Speaker 1: last number, it was forty forty four and higher than
Speaker 1: the previous peak. And when Janet E. Allen and those
Speaker 1: people talked about the problem in bubble in the commercial
Speaker 1: real estate, well, it is actually there. And part of
Speaker 1: that I think comes from the fact that it's overreliance
Speaker 1: on monetary policy. If we switch from reliance and monetory
Speaker 1: policy to fiscal policy, fiscal policy means government will be
Speaker 1: borrowing more money, so the excess savings that have to
Speaker 1: go to existing assets will be absorbed by the government,
Speaker 1: and so there will be less chance of having another bubble.
Speaker 1: So you worry about bubbles right now? Or how worried
Speaker 1: about bubbles are you right now? If you look and
Speaker 1: say the US economy, well, share prices and commercial real
Speaker 1: estate prices worry something. In my view, yes, I am
Speaker 1: somewhat worried, and many companies US come and he is
Speaker 1: also used this very low and interest environment to buy
Speaker 1: back their shares. Right, That's why the corporate that is
Speaker 1: so much higher buying back shares still keeps money in
Speaker 1: the financial sector. It just changes the the nature of
Speaker 1: the liabilities from equity to bonds. But the money is
Speaker 1: still in the financial sector. And so people who received
Speaker 1: that payment, who I, still want to invest in something,
Speaker 1: and so that could still end up creating more bibbles
Speaker 1: while weaken in the corporate balance sheets. So you've identified
Speaker 1: one of the key sort of themes, which is that
Speaker 1: in all these post post balance sheet recession periods, there's
Speaker 1: this reluctance to lean heavily on fiscal policy and over
Speaker 1: alliance on monetary policy. You talked about the fits and
Speaker 1: starts of fiscal stimulus in Japan after and how that setback.
Speaker 1: You talk about the bubbles that we've seen here or
Speaker 1: that maybe brewing here in the US because we've relied
Speaker 1: so much on monetary policy. I'm curious in your conversations
Speaker 1: that you've had over the years with policy makers, investors,
Speaker 1: and so on, what is it, What is it that
Speaker 1: explains this sort of like innate reluctance or distrust to
Speaker 1: add public debt and it doesn't seem like it almost
Speaker 1: doesn't seem to matter what period of the cycle we're in.
Speaker 1: You could go back to two thousand nine. Even then
Speaker 1: Bernanke was talking about the need to eventually take care
Speaker 1: of the public debt or fiscal consolidation. Why this pervasive
Speaker 1: view among policy makers everywhere, including those at the I,
Speaker 1: m F and so forth, UH to be very reluctant
Speaker 1: about public spending and to be overreliant on lower interest rates.
Speaker 1: I think that comes from the fact that all the
Speaker 1: economics we learn in universities based on this key premise
Speaker 1: that privacyctis maximizing fits. But for private sector to be
Speaker 1: maximizing profits, two conditions who have to be met. One
Speaker 1: is that they have clean balance sheets and the other
Speaker 1: is that they are flooded with interesting investment opportunities. In
Speaker 1: that world, if government comes in and borrow tries to borrow,
Speaker 1: you end up crowding our private sector investments, pushes up
Speaker 1: interest rates, maybe miss allocate resources because government is not
Speaker 1: very good at uh spending money. It's all negative, very
Speaker 1: few positives. And that world where households sectors saving money,
Speaker 1: but corporate sector was very eagerly borrowing money to expand
Speaker 1: factories and so forth. That world did exist all the
Speaker 1: way to maybe around eighties in the United States and Japan,
Speaker 1: maybe into the mid nineties. Our textbook economics is based
Speaker 1: on that period where there's very strong demand for private
Speaker 1: funds from the private sector and household sectors saving companies
Speaker 1: are borrowing. In that world, I fully agree with them
Speaker 1: that ciscal policies should be discouraged and it should be
Speaker 1: handled with monetary policy, because monety works. Policy works very
Speaker 1: well when there are lots of people who want who's
Speaker 1: out there willing to borrow money. In that case, when
Speaker 1: central bank raises rates a lower rate, they will have
Speaker 1: immediate impact on the economy. But we are not in
Speaker 1: that world anymore. Households are still saving money, but corporates
Speaker 1: are not borrowing money. And once you enter this different stage,
Speaker 1: we have to change our mindset completely that we don't
Speaker 1: have borrowers there save us us still there, but the
Speaker 1: borrowers have absented themselves. But this is so hard for
Speaker 1: economy is who are trained in this whole notion. The
Speaker 1: private sector is always maximizing profits to accept and so
Speaker 1: they kept on saying, well, if you do, how more
Speaker 1: money there is stimulus. Let's say, go to helicopter money
Speaker 1: on negative interest rate, so deepen the negative interest is
Speaker 1: something got to happen that they're still working on this
Speaker 1: premise that that we are still in the textbook world.
Speaker 1: We're privacy, the PLANTI privacy, the borrowers out there, but
Speaker 1: we are not in that world anymore. But no one
Speaker 1: has told them that in this this different world, we
Speaker 1: have to think differently except you. You wrote the book,
Speaker 1: The Holy Grail of Macroeconomics. It's we Tracy and I read.
Speaker 1: Why hasn't everyone else read it? Well? Maybe uh, I
Speaker 1: didn't work hard enough. Hopefully, hopefully they're listening to the podcast. Wait,
Speaker 1: I have I have one more question. So I mentioned
Speaker 1: in the intro that the idea that fiscal is the
Speaker 1: new monetary policy seems to be gaining some ground. And
Speaker 1: you just hear policymaker after policymaker talk about the need
Speaker 1: for fiscal stimulus, but rarely do they actually get into
Speaker 1: detail about what that call stimulus could be. Does it
Speaker 1: matter to you in your model what type of fiscal
Speaker 1: expenditure government's actually use, like corporate tax cuts, infrastructure spending.
Speaker 1: Is there a difference to you? Yes, there is You're
Speaker 1: right in pointing out that a lot of people are
Speaker 1: not talking about fiscal stimulus because they argue that multi
Speaker 1: policy has it had reached its limits zero, low, abound.
Speaker 1: You know that kind of talk, And what I find
Speaker 1: it wanting is that they should not talk about fiscal
Speaker 1: stimulus just because interestrates and zero they have. They should
Speaker 1: really explain to the people why interestrates a zero to
Speaker 1: begin with, because that's the key. Interestates a zero because
Speaker 1: people are not borrowing money. But if in the national
Speaker 1: economy someone is saving money, someone has to borrow money
Speaker 1: to keep the economy going, then what do you do
Speaker 1: with the private sector's not borrowing money, the public sector
Speaker 1: will have to borrow money to keep the economy going.
Speaker 1: That part of the explanation hasn't come from Mr Powell,
Speaker 1: of Mr Draggy, or even from uh MS LA Guarde,
Speaker 1: even though they all three are now talking about the
Speaker 1: importance of fiscal stimulus, and was the September eighteen talk
Speaker 1: German Powell even said fiscal policy is more powerful than
Speaker 1: monitor policy. The key reason why fiscal stimulus is needed
Speaker 1: is not given in my view that they are actually
Speaker 1: lack of private sector borrowers. So I like to see
Speaker 1: that uh made clear first and the second point your
Speaker 1: point about the nature of fiscal stimulus. It matters a
Speaker 1: lot in this instance because if you give them a
Speaker 1: people who are repairing balance sheets a tax cut, they
Speaker 1: were used to attack cut to pay down debt. So
Speaker 1: in that case GDP will not be affected. So in
Speaker 1: this type of situation, I'm afraid one has to use
Speaker 1: public works government actually spending and creating demand to make
Speaker 1: sure that our income level is maintained. And only by
Speaker 1: keep maintaining the income level, people have resources to pay
Speaker 1: down there and repair their balance sheets. And so during
Speaker 1: this type of recessions, government has to be the borrow
Speaker 1: of last resort and the spender of last resort. Now,
Speaker 1: this think takes a long time to repair the balance
Speaker 1: repair takes in many years. Japan took nearly twenty years,
Speaker 1: although he didn't have to be twenty. Uh. Once we
Speaker 1: know that in advance, then we should really put together,
Speaker 1: for example, an independent commission, put our bright best and
Speaker 1: brightest people in it and let them trying to find
Speaker 1: out um those public works projects that earns the very
Speaker 1: low rate of return that we see on government bounds today.
Speaker 1: For example, if it's ten year treasuries are yielding one
Speaker 1: point eleven percent les. So today, if we can find
Speaker 1: a public works project that earns the social rate of
Speaker 1: returned about one by all means we should do it.
Speaker 1: Because those projects will be self enancing. You will not
Speaker 1: be a burden on our future taxpayers. And that's the
Speaker 1: way we should be thinking. And unfortunately, in Japan back
Speaker 1: twenty years ago or after two or eight, people needed
Speaker 1: riscal stimulus right away because otherwise it would be in
Speaker 1: the one thousand, nine hundred and seven cycle. So they
Speaker 1: had to do all sorts of things very quickly. Some
Speaker 1: of them were not very well sought out, and that's
Speaker 1: why you end up bridges to nowhere, roads to nowhere.
Speaker 1: If we knew in advance that these things can take
Speaker 1: a long time. Of course, some stop gap measures are necessary,
Speaker 1: but we should have set up some sort of independent
Speaker 1: commission to make sure that we pick good projects that
Speaker 1: are self enancing at these ridiculously low government bond yields,
Speaker 1: then everything will be sustainable. Well, Richard, I really don't
Speaker 1: understand the excuse that people have, because I thought you're
Speaker 1: writing has always been very clear. But nonetheless, I hope
Speaker 1: people listen to this podcast and continue to read your
Speaker 1: work because it makes a lot of sense to me.
Speaker 1: And as you point out, these issues aren't going away.
Speaker 1: Large private sector debt loads still exist in the US.
Speaker 1: There's uh bubbles in the US. There's a unwillingness to
Speaker 1: borrow that we're obviously seeing in Europe, and that's going
Speaker 1: to scar the region for a long time because of
Speaker 1: the double dip nature. As you said, So hopefully we uh,
Speaker 1: we've done some good here. But I really appreciate you
Speaker 1: coming out of always been a big fan of your work. Oh,
Speaker 1: thank you very much. Thanks so much, Richard. That was great.
Speaker 1: So Joe, I don't have to ask you. I can
Speaker 1: tell that you enjoyed that conversation. I love Richard. Like
Speaker 1: I said, I read his book in I was like, oh,
Speaker 1: this makes sense, and you called it the Holy Grill
Speaker 1: of mecro economics, and it might seem you know, all
Speaker 1: you were saying is that Japan has a lot of
Speaker 1: lessons for the rest of the world. That's what you're saying.
Speaker 1: You look at Japan and you could see what how
Speaker 1: the economy works in a way that elsewhere could be applied.
Speaker 1: But there hasn't been much application of it since then. Yeah,
Speaker 1: And one thing I really like about his whole theory
Speaker 1: is the behavioral aspect of it all, the idea of
Speaker 1: this debt trauma, because you don't often see that in
Speaker 1: traditional economics textbooks. People don't talk about what past experience
Speaker 1: actually means to the way economics is supposed to work.
Speaker 1: And of course if people have a bad experience, then
Speaker 1: they might not act rationally in the future, so they
Speaker 1: might not borrow money even if interest rates are really
Speaker 1: low or below zero even totally. I think, Uh, there's
Speaker 1: a lot of economists have this sort of like overly
Speaker 1: mechanical view of how the economy is supposed to work
Speaker 1: and how firms maximize profits or households maximize incomes, and
Speaker 1: if you have x opportunity to invest and your cost
Speaker 1: of capitalist below X, then you're just going to do it.
Speaker 1: But that of course ignores, as you say, and as
Speaker 1: Richard pointed out, how one's historical experience may inform in
Speaker 1: a very significant degree, to a significant degree, how you
Speaker 1: behave Yeah, exactly. Well. One other thing that really struck
Speaker 1: me is it's kind of interesting to me how Coup
Speaker 1: has this sort of middle ground I think between sort
Speaker 1: of mainstream macro on one end and mm T on
Speaker 1: the other end, because in the MMT framework it's almost
Speaker 1: you should always rely on fiscal policymakers and that deficits
Speaker 1: are never really a problem extent except to the extent
Speaker 1: that they cause inflation due to uh an economy at
Speaker 1: maximum potential, where it's clear that he is does not
Speaker 1: quite buy this view. So he like more sees the
Speaker 1: sort of sectoral balances view in a way that I
Speaker 1: think mainstream hasn't come around too. But he still thinks
Speaker 1: that in normal times, the basic idea that the central
Speaker 1: bank should do demand management and the government it's dangerous
Speaker 1: to run up debt is something he agrees. He just
Speaker 1: doesn't think these are normal times for developed economies right. Well.
Speaker 1: He argues that eventually governments should concentrate on fixing their
Speaker 1: own balance sheets, but only after they've sort of substituted
Speaker 1: the private sector and stepped in and done a bunch
Speaker 1: of stuff, and in a way that I think would
Speaker 1: probably happen decades after the fact anyway. Um, but it
Speaker 1: is very different to MMT in that respect. You're right,
Speaker 1: it is a nice middle ground, radical but middle This
Speaker 1: has been another episode of the All Thoughts podcast. I'm
Speaker 1: Tracy Alloway. You can follow me on Twitter at Tracy Alloway,
Speaker 1: and I'm Joe Wisenthal. You could follow me on Twitter
Speaker 1: at the Stalwarts, and be sure to follow our producer
Speaker 1: on Twitter, Laura Carlson. She's at Laura M. Carlson. And
Speaker 1: check out all the Bloomberg podcasts on Twitter at the
Speaker 1: handle at podcasts. Thanks for listening.