WEBVTT - Richard Koo Explains Why The Recovery Will Be So Difficult 0:00:11.400 --> 0:00:15.280 Hello, and welcome to another episode of the Odd Lots Podcast. 0:00:15.320 --> 0:00:19.599 I'm Joe Wisenthal and I'm Tracy Allaway. Tracy, I know 0:00:19.760 --> 0:00:25.119 it's sort of ghost to rag or say anything too 0:00:25.160 --> 0:00:28.800 positive these days, isn't it ghost to use the word ghost? 0:00:29.080 --> 0:00:31.840 It's probably ghost to use the word ghost too, But 0:00:31.960 --> 0:00:35.080 I kind of want to brag about something, just real quickly, 0:00:35.159 --> 0:00:37.479 or sort of you know, pat ourselves on the shoulder 0:00:37.520 --> 0:00:40.479 for a second. Okay, go on, what is it? Well? 0:00:41.000 --> 0:00:45.480 I'm happy about the fact that prior to this crisis, 0:00:46.280 --> 0:00:49.920 we had a lot of guests on the podcast whose 0:00:49.960 --> 0:00:55.320 expertise seems very relevant to the situation at hand. Now, yeah, 0:00:55.440 --> 0:00:58.319 i'd say that's right. I mean, I'm trying to think 0:00:58.320 --> 0:01:00.920 of some specific names, but the list is pretty long 0:01:01.000 --> 0:01:04.360 at this point. Now the list is pretty long. We 0:01:04.440 --> 0:01:06.800 don't have to go through specific names. But I feel like, 0:01:06.880 --> 0:01:10.759 on some level, the fact that we have gone back 0:01:10.880 --> 0:01:14.319 on the last several weeks, we've done so many episodes 0:01:14.360 --> 0:01:17.399 with repeat guests, I think it says a sort of 0:01:17.680 --> 0:01:21.760 good thing about our our episode selection leading up to this, 0:01:21.800 --> 0:01:24.080 when we didn't know that there would be an imminent 0:01:24.440 --> 0:01:28.120 global economic and financial crisis. Oh, absolutely, we have the 0:01:28.680 --> 0:01:32.839 right people on speed dial. I'd put it that way, alright, alright, 0:01:32.840 --> 0:01:35.440 that so that we can we can end end the bragging. 0:01:35.760 --> 0:01:40.280 Uh now. But obviously once again we will be speaking 0:01:40.319 --> 0:01:44.280 with someone who we talked to previously. Ah um, so 0:01:44.360 --> 0:01:47.000 I know who it is. This time it's Richard Coup 0:01:47.280 --> 0:01:52.320 from Nomura of balance sheet recession fame, and the last 0:01:52.360 --> 0:01:55.680 time he came on it was really really interesting discussion 0:01:56.360 --> 0:01:58.560 and I think it's going to be absolutely fascinating to 0:01:58.600 --> 0:02:02.240 see how much of that balance sheet recession idea, if 0:02:02.280 --> 0:02:07.160 anything at all, actually applies to our current situation. Right. So, 0:02:07.280 --> 0:02:11.800 a lot of people, myself included, really discovered Richard Cou's 0:02:11.800 --> 0:02:15.640 work during the last crisis. He wrote a fantastic book, 0:02:15.720 --> 0:02:20.760 The Holy Grail of Macroeconomics, Lessons from Japan's Great Recession. 0:02:21.400 --> 0:02:25.360 He's talked a lot about the need for fiscal policy 0:02:25.600 --> 0:02:29.080 as a tool to restore balance sheet health, and of 0:02:29.120 --> 0:02:34.200 course in this crisis, there's been this widespread consensus that 0:02:34.280 --> 0:02:39.400 monetary policy alone is clearly insufficient to address the scale 0:02:39.480 --> 0:02:42.680 and scope of the downturn, to replace all of the 0:02:42.720 --> 0:02:46.640 lost income from households and businesses. And although we have 0:02:46.760 --> 0:02:49.600 seen a lot of fiscal action around the world. There 0:02:49.639 --> 0:02:52.680 continues to be a lot of debate about whether the 0:02:52.720 --> 0:02:55.359 tools are right, and whether they're sufficient, and what kind 0:02:55.360 --> 0:02:59.400 of recovery we have. So um looking forward to talking 0:02:59.440 --> 0:03:03.079 to Richard now, Richard Coua, thank you very much for 0:03:03.160 --> 0:03:05.960 joining us. Oh, thank you for having me here again. 0:03:06.880 --> 0:03:11.760 So let's start big picture, or let's actually start in 0:03:11.840 --> 0:03:18.480 the US, we saw a fairly substantial fiscal action performance 0:03:18.560 --> 0:03:21.440 sort of passed at the end of March. Today is 0:03:21.600 --> 0:03:26.440 April twenty three, and we're expected to see another tranch 0:03:26.840 --> 0:03:30.160 of more grants being made available to businesses to keep 0:03:30.160 --> 0:03:34.519 workers on payeroll plus a few other things expected to 0:03:35.400 --> 0:03:41.680 pass this week. In your view, how sufficient or insufficient 0:03:41.720 --> 0:03:44.040 have the policy measures that you've seen put in place 0:03:44.040 --> 0:03:47.600 in the US so far been to address the size 0:03:47.600 --> 0:03:51.120 and scope of this downturn. Well, if we take a 0:03:51.200 --> 0:03:55.720 snapshot of g d P in all these countries United 0:03:55.760 --> 0:04:00.120 States included, they have probably down quite substantially from what 0:04:00.200 --> 0:04:04.880 we consider normal levels. But this is brought about by 0:04:04.920 --> 0:04:11.120 this external shock, which is this coronavirus, and so ordinary 0:04:11.200 --> 0:04:15.960 measures like uh riscal and MONELTI policies won't be a 0:04:16.160 --> 0:04:21.120 match held because just because we had a loose monety 0:04:21.160 --> 0:04:24.800 policy doesn't mean I will supply Jain problems or lockdown 0:04:24.880 --> 0:04:28.760 problems will go away. And so this time I think 0:04:28.760 --> 0:04:33.159 policies will have to be very specific to help those 0:04:33.160 --> 0:04:37.479 people who are affected by this coronavirus, which is airlines 0:04:37.640 --> 0:04:42.080 and traveling, the industry's restaurants, service sectors, and so forth. 0:04:42.920 --> 0:04:45.640 And I think US has done a very good job 0:04:46.800 --> 0:04:50.680 in coming up with these big policies very quickly. I 0:04:50.800 --> 0:04:54.240 understand that large number of people already receiving payments from 0:04:54.279 --> 0:04:58.719 the government, and once you see your bank accounts uh 0:04:58.920 --> 0:05:01.680 filled with some some money from the government, I think 0:05:01.680 --> 0:05:06.960 people will feel that all the government is really uh 0:05:07.240 --> 0:05:11.760 worrying about myself and the economy. And I think that 0:05:11.839 --> 0:05:16.360 has been very helpful in keeping people from becoming even 0:05:16.400 --> 0:05:21.840 more desperate or falling into despair, because if you compare 0:05:21.920 --> 0:05:25.440 that with what's happening in Japan, where I am, unusually 0:05:25.839 --> 0:05:30.680 I am, they talked about a lot, but very little 0:05:30.680 --> 0:05:33.839 payments have been made yet. And when you listen to 0:05:33.880 --> 0:05:37.480 the people there, they say, well, then pliticians are talking 0:05:37.920 --> 0:05:41.960 all these honesties, but we haven't seen anything yet. So 0:05:42.040 --> 0:05:45.480 compared to that, I think the United States Germany are 0:05:45.560 --> 0:05:49.240 doing a much better job. But whether that's sufficient or not, 0:05:49.560 --> 0:05:52.120 I think we need to know how long this thing 0:05:52.240 --> 0:05:55.000 is going to go on, when the vaccines would be 0:05:55.040 --> 0:05:59.280 developed or some other ways we can we are able 0:05:59.320 --> 0:06:04.000 to contain this this coronavirus, and that's a medical question unfortunately, 0:06:04.000 --> 0:06:07.919 not an economic question, And so I think we have 0:06:08.000 --> 0:06:13.080 to be ready to putting more at as it becomes necessary. 0:06:13.400 --> 0:06:15.680 Just to step back for the for a second. One 0:06:15.720 --> 0:06:18.680 of the things that I personally like about your balance 0:06:18.680 --> 0:06:21.560 sheet recession framework is that there's a big focus on 0:06:21.600 --> 0:06:25.760 the psychological impact of debt crises, and there's this notion 0:06:25.839 --> 0:06:29.640 that people are so sort of emotionally scarred by the 0:06:29.680 --> 0:06:32.920 experience that they're afraid to take on debt for years 0:06:32.960 --> 0:06:37.279 to come. How much of the balance sheet recession framework 0:06:37.480 --> 0:06:41.680 applies to the current economic crisis, because I can see 0:06:41.800 --> 0:06:44.800 maybe not debt being an issue here, but I could see, 0:06:44.800 --> 0:06:48.480 for instance, people increasing their savings for years to come 0:06:48.600 --> 0:06:52.280 after this shock, right right, You know, there are a 0:06:52.360 --> 0:06:54.640 lot of people out there who were worried that with 0:06:54.720 --> 0:06:57.760 so much money into the system by the Federal Reserve 0:06:58.000 --> 0:07:02.400 and the government also borrowing money, definitely inflation will be 0:07:02.440 --> 0:07:04.960 a huge problem once we come out of this recession. 0:07:05.720 --> 0:07:09.320 But when you think about it, those people who have savings, 0:07:09.960 --> 0:07:16.120 that it's companies and individuals, they probably quite well about me, 0:07:17.200 --> 0:07:20.480 sustained less damage than those people who didn't have much 0:07:20.480 --> 0:07:23.360 savings so didn't have much retained earnings. In the companies, 0:07:24.000 --> 0:07:26.280 I mean, if you didn't have much retained earnings, or 0:07:26.560 --> 0:07:29.920 you bought back your shells and so forth, and then 0:07:29.960 --> 0:07:33.720 suddenly your your revenue drives up or you're in a 0:07:33.840 --> 0:07:37.200 huge mess, and I'm sure they have to scramble to 0:07:37.240 --> 0:07:39.280 get the cash in place so that they can make 0:07:39.320 --> 0:07:43.880 the payments. That kind of shock can affect people for 0:07:44.000 --> 0:07:49.360 a very long time. And if you remember two US 0:07:49.400 --> 0:07:52.760 had a banking crisis also, and it was a credit crunch, 0:07:53.640 --> 0:07:58.400 and those businesses who suffered during that period almost never 0:07:58.480 --> 0:08:01.760 bought money for the the rest following ten years or so. 0:08:02.120 --> 0:08:05.600 If you remember that banking crisis, that was George Bush 0:08:05.680 --> 0:08:08.160 the father, and I think the same thing will happen 0:08:08.320 --> 0:08:11.800 this time again. With so many people talking about second wave, 0:08:12.080 --> 0:08:16.120 third wave of of this coronavirus. Even we come out 0:08:16.120 --> 0:08:19.800 of this one, the first wave, I'm sure people will 0:08:19.880 --> 0:08:23.080 say to themselves. We really have to have some savings 0:08:23.120 --> 0:08:26.320 for the rainy days. And if they go back to 0:08:26.400 --> 0:08:31.800 this savings mode, corporates and individuals, then all the money 0:08:31.840 --> 0:08:34.520 that was pumped into the system will be used to 0:08:34.559 --> 0:08:40.400 save money instead of going into consumption or investments, and 0:08:40.600 --> 0:08:44.320 that will keep inflation rates from picking up. And that's 0:08:44.360 --> 0:08:47.760 exactly what happened during the balancy recession. For balancy recession, 0:08:48.160 --> 0:08:53.760 people actually paying back debt because prior to the two 0:08:53.920 --> 0:08:58.240 or eight leaving crisis, people leveraging themselves up to invest 0:08:58.280 --> 0:09:01.120 in all sorts of assets. Then crisis happened as the 0:09:01.200 --> 0:09:05.120 prices collapse, liabilities remain, their balances under water, so people 0:09:05.160 --> 0:09:08.800 have to pay down debt, and that's what caused a 0:09:08.840 --> 0:09:11.600 balancy recession because in the national economy, if someone is 0:09:11.640 --> 0:09:14.520 saving money, including paying down debt, someone has to be 0:09:14.559 --> 0:09:17.600 borrowing money to keep the economy going. Luckily, the US 0:09:18.440 --> 0:09:21.559 did that, Japan did that, euro Zone didn't do that, 0:09:21.960 --> 0:09:25.040 and that's how we saw all these differences in macro 0:09:25.120 --> 0:09:30.679 performances this time around. Once we come out of this recession, 0:09:31.280 --> 0:09:33.760 people will be saving money. They won't be paying down 0:09:33.800 --> 0:09:36.800 debt perhaps, but they'll be saving money. But macro economically, 0:09:37.000 --> 0:09:41.720 saving money and paying down debt have almost exactly the 0:09:41.760 --> 0:09:45.640 same effect on the micro economy, and so I would 0:09:45.640 --> 0:09:50.280 think that inflation is not a big problem going forward, 0:09:50.800 --> 0:09:53.440 even after we come out of this this first way 0:09:53.960 --> 0:09:57.240 or it's a last way. But and if that's not 0:09:57.320 --> 0:10:00.680 the big worry, then the central bank, in the federal 0:10:00.679 --> 0:10:04.280 government shoe a few shook a few much more ease 0:10:04.600 --> 0:10:09.160 in putting additional policy major assess they become necessary. So 0:10:09.200 --> 0:10:12.880 this is really interesting because at least so far, you 0:10:13.040 --> 0:10:17.720 view the US fiscal responses having been fairly decent, at 0:10:17.760 --> 0:10:20.400 least compared to Japan and perhaps some other places in 0:10:20.520 --> 0:10:24.160 terms of how fast money is getting into bank accounts 0:10:24.200 --> 0:10:28.200 and so forth. But sort of what it sounds like is, 0:10:28.600 --> 0:10:30.839 you know, everyone, and it's kind of a cliche, is 0:10:30.880 --> 0:10:33.400 trying to figure out the so called shape of the 0:10:33.440 --> 0:10:36.400 recovery and U shape and W shape and V shape. 0:10:36.679 --> 0:10:39.800 I don't want to I don't think that's necessarily the 0:10:39.840 --> 0:10:42.600 most useful thing to talk about, but just this idea 0:10:42.640 --> 0:10:45.760 that this is going to leave a searing scar on 0:10:45.880 --> 0:10:49.200 corporate behavior, and so whether it's buy backed or actual 0:10:49.280 --> 0:10:54.120 capex or hiring, the experience that we're facing right now 0:10:54.480 --> 0:10:58.920 will alter corporate behavior and potentially household behavior for years 0:10:58.960 --> 0:11:03.920 to come. Yes, I believe so, just like this banking crisis, 0:11:04.000 --> 0:11:09.240 the credit crunch back in that period effect that corporate 0:11:09.320 --> 0:11:13.160 behavior for our for the following ten years. I think 0:11:13.200 --> 0:11:16.640 we're going to see something similar that people said, oh gods, 0:11:16.760 --> 0:11:19.679 we really have to have some savings, we cannot really 0:11:20.800 --> 0:11:27.680 run two lean and that will affect macroeconomic performances if 0:11:27.720 --> 0:11:31.320 so many people are increasing savings all at the same time. 0:11:32.520 --> 0:11:37.360 So what does that imply for the policy response? Because 0:11:37.440 --> 0:11:40.720 I guess when you have a balance sheet recession and 0:11:40.760 --> 0:11:44.600 the emphasis emphasis is on debt, then the ideal policy 0:11:44.679 --> 0:11:48.559 responses that governments sort of become the borrowers of last 0:11:48.600 --> 0:11:52.440 resort and do stimulusm in various ways along those lines. 0:11:52.520 --> 0:11:57.160 But if you have a crisis of sort of savings 0:11:57.240 --> 0:12:02.160 I guess, or or cash flow, what can governments or 0:12:02.200 --> 0:12:04.839 central banks actually do here? What what's the best thing 0:12:04.920 --> 0:12:09.320 for them to do? Well? During balance recession, we have 0:12:09.400 --> 0:12:15.280 a very special situation in which financial market and financial 0:12:15.320 --> 0:12:20.319 market alone, or financial sector alone, it is flooded with cash. 0:12:20.520 --> 0:12:25.240 Everyone else have no money. Uh, households are paying down 0:12:25.280 --> 0:12:30.480 that companies are paying down debt, but financial market, if 0:12:30.480 --> 0:12:32.800 you put yourself in the o position of the fund manager, 0:12:33.679 --> 0:12:36.760 and all these savings, newly generated savings on the household 0:12:36.760 --> 0:12:41.160 sectors coming to you, those corporate debt payments are coming 0:12:41.200 --> 0:12:44.880 back to you. In the central bank trying to meet 0:12:44.920 --> 0:12:47.880 the inflation targets also pumping money, which you have to 0:12:47.920 --> 0:12:51.240 manage at some point, so you're flooded with cash, and 0:12:51.320 --> 0:12:54.400 flooded in a sense that because everybody is paying down 0:12:54.400 --> 0:12:56.760 that no one's borrowing money, so you're kind of stuck 0:12:56.840 --> 0:13:00.200 with this cash. And if you're stuck with cash, there's 0:13:00.240 --> 0:13:03.440 only one borrow we left, which is the government. You 0:13:03.559 --> 0:13:06.600 end up buying government box. And that's the reason why 0:13:06.960 --> 0:13:10.720 during the balancy recession, government bond iselds in spite of 0:13:10.760 --> 0:13:14.360 a huge deficit, keeps on coming down. And we saw 0:13:14.400 --> 0:13:17.360 that in Japan first, and then people thought that was 0:13:17.480 --> 0:13:20.719 a bond market bubble, but it wasn't because government was 0:13:20.760 --> 0:13:23.160 the only bara left, so all the money had to 0:13:23.160 --> 0:13:25.600 go to the government, and then it happened after two 0:13:25.640 --> 0:13:30.840 thousand eight. Also, that part, the fact that financial market 0:13:30.880 --> 0:13:34.760 is flooded with cash, is one of the key characteristics 0:13:34.800 --> 0:13:40.040 of balancy recession. Now, in this recession or coronavirus recession, 0:13:40.720 --> 0:13:44.240 we have a different problem, and that is that everybody, 0:13:44.559 --> 0:13:47.920 at least for the moment until the economy recovers, they 0:13:47.960 --> 0:13:52.040 will be withdrawing money from the financial market, right because 0:13:52.040 --> 0:13:55.680 people have to rely on their savings to make pends meet. 0:13:56.559 --> 0:14:01.400 So households will be withdrawing savings, corporates will be withdrawing savings, 0:14:01.520 --> 0:14:04.520 and corporates, some of them who don't have enough savings, 0:14:04.600 --> 0:14:08.720 would be desperately borrowing money the distress, borrowing to make 0:14:08.760 --> 0:14:13.840 the ends meet. So instead of this problem of not 0:14:13.960 --> 0:14:17.800 having enough borrowers, which is the characteristics of balancing recession, 0:14:18.440 --> 0:14:22.120 at the moment, we have a situation where savers are 0:14:22.120 --> 0:14:26.760 disappearing because people are forced to dis save, whereas government 0:14:26.760 --> 0:14:29.480 would be coming in to borrow, and corporates who needs 0:14:29.560 --> 0:14:33.320 cash also are coming to borrow. And so financial market 0:14:33.360 --> 0:14:38.920 gets much tighter, very sharply tighter in this type of recession, 0:14:39.680 --> 0:14:43.000 and we already see that in credit spars in the 0:14:43.040 --> 0:14:46.280 corporate bond market, where corporates used to be able to 0:14:46.280 --> 0:14:49.200 borrow a very low rates until around the beginning of March, 0:14:49.480 --> 0:14:53.880 and then suddenly all these corporates with slightly less than 0:14:53.920 --> 0:14:59.280 the pristine credit ratings suddenly faced much higher borrowing rates. 0:14:59.360 --> 0:15:03.520 And that's the characteristics of this type of recession. I mean, 0:15:03.520 --> 0:15:06.200 this federal result brought rates down to zero, pump comes 0:15:06.240 --> 0:15:10.040 on money into the system, but corporate borrowing rates are 0:15:10.160 --> 0:15:14.680 significantly higher now than just two months ago. And a 0:15:14.760 --> 0:15:18.360 so called financial condition index, the one that Chicago Fed 0:15:18.920 --> 0:15:22.320 puts out, which shows how tight the financial market is, 0:15:22.800 --> 0:15:26.160 we see that it's much tighter now in spite of 0:15:26.200 --> 0:15:30.280 all the work by the Fed. So in this situation 0:15:30.840 --> 0:15:34.960 financial market flooded with cash, that characteristics and balancing recession 0:15:35.200 --> 0:15:39.360 doesn't apply. And if you have a very tight financial 0:15:39.400 --> 0:15:42.760 market as we do now, central bank will have to 0:15:43.040 --> 0:15:46.240 continuously pump money into the system to make sure that 0:15:46.360 --> 0:15:48.400 we really don't get into the kind of crisis we 0:15:48.440 --> 0:15:52.400 saw back into thousand and eight, and so this time around, 0:15:52.480 --> 0:15:55.880 I would say that central bank has a huge role 0:15:55.920 --> 0:15:59.360 to play, in addition to fiscal policy by the government, 0:16:00.080 --> 0:16:04.760 to make sure that financial market continues to operate in 0:16:04.760 --> 0:16:08.680 in halfway decent manner. When you look at the actions 0:16:08.880 --> 0:16:12.080 of the Federal Reserve or other central banks, do you 0:16:12.080 --> 0:16:17.280 feel good that they recognize this. I think I believe 0:16:17.320 --> 0:16:21.960 that they are doing a good job. And only central 0:16:22.000 --> 0:16:25.920 bank that I worry about is the ECB, because ECB 0:16:26.160 --> 0:16:31.080 cannot openly try to help individual governments, right that that's 0:16:31.120 --> 0:16:34.520 against the brandate. But everyone else Bank of Japan, Bank 0:16:34.600 --> 0:16:38.240 of England, Federal Reserve, they are I don't know what 0:16:38.400 --> 0:16:40.920 that I can say openly, but you know they are 0:16:41.120 --> 0:16:46.600 very really willingly adding money to the system to make 0:16:46.600 --> 0:17:00.560 sure that financial market doesn't become too tight. Mm hmm. 0:17:01.600 --> 0:17:06.320 Just in terms of the differences between how different countries 0:17:06.359 --> 0:17:11.719 are responding to the coronavirus outbreak and the economic damage 0:17:11.720 --> 0:17:15.159 that it's causing. You spoke a little bit about the US. 0:17:15.800 --> 0:17:17.920 I know you focused a lot of your time on 0:17:18.160 --> 0:17:22.040 Japan as well, but how are you viewing the crisis 0:17:22.080 --> 0:17:26.680 response in Europe in particular, because it seems like there 0:17:26.720 --> 0:17:31.240 we might have a problem of cohesion within the Eurozone block. 0:17:32.440 --> 0:17:35.920 Japan was very slow incoming at the beginning, but now 0:17:36.000 --> 0:17:41.159 they have reasonably good policies moving forward. Very little payment 0:17:41.160 --> 0:17:43.320 has been made to the to the households or or 0:17:43.359 --> 0:17:45.960 the companies yet, but at least I think the debate 0:17:46.040 --> 0:17:49.679 is moving in the right direction. In Europe. However, we 0:17:49.840 --> 0:17:55.480 discovered in two thousand and eight that national governments really 0:17:55.520 --> 0:17:59.680 don't have much room for fiscal policy. You know, in Europe. 0:18:00.040 --> 0:18:04.720 When they decided to join euro individual countries or the 0:18:04.800 --> 0:18:09.160 voters of individual countries were told that they're giving up 0:18:09.200 --> 0:18:12.520 their sovereignty amounty policy, but they still have sovereignty on 0:18:12.560 --> 0:18:17.040 fiscal policy. And that's how everybody agreed to join Europe. 0:18:17.720 --> 0:18:21.720 But once they're started and when into town a fiscal 0:18:21.720 --> 0:18:25.400 policy became necessary because of the balancy recession, they discovered 0:18:25.480 --> 0:18:29.040 that they don't have a sovereignty on fiscal policy for 0:18:29.119 --> 0:18:34.240 two reasons. One is that the Mastery Treaty which created 0:18:34.280 --> 0:18:37.639 the euro says individual governments can bor only three percent 0:18:37.720 --> 0:18:40.520 of GDP and if you go beyond that, you get punished. 0:18:41.560 --> 0:18:44.719 But if private sector only saves three percent of GDP, 0:18:44.800 --> 0:18:47.439 that'll be okay. But if the private sector, like in Spain, 0:18:47.600 --> 0:18:51.359 was saving seven percent of GDP after the umbursing of 0:18:51.440 --> 0:18:54.320 the bubble, but the government could only borrow three, then 0:18:54.359 --> 0:18:58.199 the remaining four percent becomes the deflationary gap, and Spain 0:18:58.280 --> 0:19:03.440 probably experienced you know, unemployment rate or or something at 0:19:03.480 --> 0:19:06.320 that point. If the Spanish government said, oh, we have, 0:19:06.760 --> 0:19:10.639 you know, plenty of savings seven GDP savings from the 0:19:10.680 --> 0:19:14.320 private sector. We just used a seven percent to fill 0:19:14.359 --> 0:19:20.840 the deflationary gap. Well, that didn't work because in the Eurozone, 0:19:20.920 --> 0:19:25.400 all these people, now, all these countries, the investors are 0:19:25.440 --> 0:19:31.600 faced with choice of eighteen government bond markets, all denominated 0:19:31.640 --> 0:19:36.280 in currency. And so if Spain seems to be ramping 0:19:36.359 --> 0:19:40.720 up a fiscal stimulus, all these investors, including those in Spain, 0:19:40.800 --> 0:19:44.200 were quick move money to Germany or someone else where. 0:19:44.560 --> 0:19:48.120 Deva said, it's not so large. And then even though 0:19:48.359 --> 0:19:52.639 Spain had seven percent private sector savings, government could not 0:19:52.760 --> 0:19:55.680 use the seven They could barely use maybe one or 0:19:55.720 --> 0:19:58.880 two because the money ran out. And that I think 0:19:59.080 --> 0:20:02.720 is one of the key problems of the Eurozone that 0:20:02.840 --> 0:20:06.359 all these government bonds are denominated in the same currency, 0:20:07.119 --> 0:20:10.840 whereas in the US it's u S traguries in dollars. 0:20:11.320 --> 0:20:13.720 Japan is in the end, so all these investors who 0:20:13.720 --> 0:20:17.919 cannot take a large foreign exchange risk are forced to 0:20:17.960 --> 0:20:21.440 hold government bonds when privacy actor is not borrowing money. 0:20:21.680 --> 0:20:26.080 But in the Eurozone there's this possibility of capital flight 0:20:26.359 --> 0:20:31.760 between government bond markets, and that effectively removed the fiscal 0:20:31.880 --> 0:20:35.120 room for all all these eighteens, well I should say 0:20:35.119 --> 0:20:38.240 seventeen countries. The eighteen one, the one that is doing 0:20:38.280 --> 0:20:41.680 the best, of course, gets the opposite effect. All these 0:20:41.680 --> 0:20:44.720 money will be coming into your company country. And that's 0:20:44.760 --> 0:20:48.239 where Germany is at the moment. So fiscal policy is 0:20:48.280 --> 0:20:51.560 not really available to very many countries in the Eurozone, 0:20:52.280 --> 0:20:55.320 and monetary policy, of course, they lost the sovereignty over it. 0:20:56.280 --> 0:20:58.240 So if you put yourself in the position of any 0:20:58.440 --> 0:21:04.439 Italian or and yet you have a devastated economy, so 0:21:04.560 --> 0:21:08.080 many people dying every day, and you cannot even use 0:21:08.080 --> 0:21:12.680 your monetary and fiscal policies to fight the economic depression. 0:21:13.960 --> 0:21:18.359 And I find this very very disturbing, and I hope 0:21:18.359 --> 0:21:20.480 they can come up with some sort of a compromise 0:21:20.880 --> 0:21:24.320 where even though Mastery Treaty says you cannot or more 0:21:24.359 --> 0:21:27.480 than three percenter GDP, they will somehow come up with 0:21:27.480 --> 0:21:31.119 the ways to help Italy and Spain and other countries 0:21:31.600 --> 0:21:35.520 that are very badly affected by this coronavirus UH and 0:21:35.760 --> 0:21:39.840 need fiscal stimulus very badly, especially the kind of fiscal 0:21:40.480 --> 0:21:47.440 spending that goes directly to the affected industries, households and companies. Yeah, 0:21:47.480 --> 0:21:51.800 I remember reading your this thesis, you set out about 0:21:51.800 --> 0:21:54.639 these sort of savings leakages from the periphery to German 0:21:54.640 --> 0:21:57.719 boon back during the last prices, and I thought it 0:21:57.760 --> 0:22:02.640 was fascinating only get back to sort of ideal government 0:22:02.720 --> 0:22:07.160 policies in the post crisis phase. So once the health 0:22:07.520 --> 0:22:10.919 aspect of the crisis begins to fade and people start 0:22:10.960 --> 0:22:14.480 in theory reopening up stores and coming back to work. 0:22:15.320 --> 0:22:18.280 We talked before about the searing effect that this will 0:22:18.320 --> 0:22:22.720 have in terms of people's inclination to save. Perhaps corporrates 0:22:22.760 --> 0:22:25.960 will remain much less levered, or they're going to be 0:22:26.080 --> 0:22:30.480 very slow to hire and expand kpex after seeing revenues 0:22:30.560 --> 0:22:34.760 disappear in an instant. Obviously, as you say, okay, central 0:22:34.760 --> 0:22:37.240 banks need to do their part to make maintain liquidity. 0:22:37.280 --> 0:22:40.240 Governments need to do their part to mean spending. But 0:22:40.359 --> 0:22:42.520 how do you get off the cycle? And I guess 0:22:42.520 --> 0:22:45.719 this goes back to your work looking in Japan. What 0:22:45.800 --> 0:22:50.680 did Japan fail to do in the post crisis period 0:22:50.960 --> 0:22:53.840 of its own crisis that it was never or that 0:22:53.920 --> 0:22:57.880 it was It had an extremely difficult time reviving the 0:22:57.960 --> 0:23:02.399 inclination to borrow and spend, so beyond just having the 0:23:02.400 --> 0:23:05.760 government run large deficits. What do they need to do 0:23:05.840 --> 0:23:10.280 policy wise to get the private sector back into a 0:23:10.359 --> 0:23:16.000 sort of aggressive stand. There's a lot of feeling outside 0:23:16.119 --> 0:23:20.840 Japan that Japan did a very poor job of post 0:23:21.240 --> 0:23:24.919 post bubble period, but you know, Japan actually managed to 0:23:25.000 --> 0:23:29.480 keep its GDP above the bubble peak. For the entire 0:23:29.560 --> 0:23:33.359 thirty years, Japanese GDP never fell below the peak of 0:23:33.359 --> 0:23:38.000 the bubble. And with that GDP was kept. GDP kept 0:23:38.080 --> 0:23:40.800 means private sector had the income to pay down debt, 0:23:41.560 --> 0:23:44.480 and they kept on paying down debt. They were already 0:23:44.520 --> 0:23:47.600 finished with their payments. The balance seats are probably the 0:23:47.640 --> 0:23:52.119 cleanest in the world. But because this experience lost it 0:23:52.240 --> 0:23:58.240 for so long, people became very averse to borrowing. And 0:23:58.520 --> 0:24:02.280 if you remember the Americans after the Great Depression, they 0:24:02.320 --> 0:24:05.439 went through the exactly the same experience, and many of 0:24:05.480 --> 0:24:08.920 these Americans never borrow money until they die, right because 0:24:08.920 --> 0:24:12.680 the experience was so bad. And we faced the same 0:24:12.720 --> 0:24:17.840 problem after when the Japanese bubble burst, and Japanese bubble 0:24:18.320 --> 0:24:23.120 was absolutely massive. You know, when the Imperial Palace gardens 0:24:23.119 --> 0:24:27.399 in the middle of Tokyo about five kilometers, this was 0:24:27.480 --> 0:24:30.480 the entire state of California. You know how bad the 0:24:30.480 --> 0:24:33.159 bubble was. True, I've heard that fact many times. That 0:24:33.320 --> 0:24:39.240 really is true. Well, if you kind of extrapolate from 0:24:39.359 --> 0:24:42.680 the surrounding areas and they keep on the extrapolating, then 0:24:42.720 --> 0:24:45.280 you get that result. But I mean, I know they 0:24:45.359 --> 0:24:48.080 never really put the palace on market. But that's right, 0:24:48.119 --> 0:24:52.120 that's so, this is all academic at all. So when 0:24:52.119 --> 0:24:55.480 the bubble burst, the amount of wealth Japanese loss just 0:24:55.640 --> 0:24:58.960 on stock market and real estate was like fifteen hundred 0:24:59.040 --> 0:25:04.520 trillion yen, which is three times Japan's GDP. The amount 0:25:04.520 --> 0:25:07.719 of wealth the American loss during the Great Depression was 0:25:07.760 --> 0:25:11.360 equivalent to one year's worth of nineteen twenty nine GDP. 0:25:11.520 --> 0:25:15.320 Japan was equivalent to three years of nineteen nine GDP. 0:25:16.320 --> 0:25:20.080 And because it took so long, people began very uh 0:25:20.440 --> 0:25:24.879 averse to borrowing. We could have used more policies to 0:25:25.040 --> 0:25:29.040 encourage people to borrow, like accelerate the depreciation allowances and 0:25:29.080 --> 0:25:32.399 so forth, and some of those were actually put in place, 0:25:33.000 --> 0:25:36.680 but those policies have to be super attractive to get 0:25:36.720 --> 0:25:42.080 these people off the trauma trauma of borrowing money, and 0:25:42.160 --> 0:25:44.960 the one that we did put in in Japan wasn't 0:25:45.040 --> 0:25:50.560 all that attractive. Too much paperwork, too many conditions, and 0:25:50.600 --> 0:25:55.000 so unfortunately they didn't create positive response as much as 0:25:55.000 --> 0:25:59.200 we expected. In the US case, after the two thousand 0:25:59.320 --> 0:26:03.320 eight firsting of the bubble, US actually did a fairly 0:26:03.320 --> 0:26:07.640 good job of keeping the economy from losing its bottom. 0:26:08.119 --> 0:26:10.320 And the US companies were never involved in the bubble 0:26:10.400 --> 0:26:14.000 to begin with. It was the household sector, and so 0:26:14.160 --> 0:26:18.040 US company could still borrow, and I think US was 0:26:18.080 --> 0:26:21.000 able to come out sooner than other countries, even the 0:26:21.080 --> 0:26:26.359 US was the epicenter of of that crisis. Now this one, 0:26:27.040 --> 0:26:30.679 it's the household, it's the company's both both sectors are involved, 0:26:31.320 --> 0:26:35.000 and those effected sectors I'm sure will take a long 0:26:35.080 --> 0:26:40.280 time to recover, and especially the psychological part. My guess 0:26:40.359 --> 0:26:43.600 is that once we get to that stage, government will 0:26:43.640 --> 0:26:48.480 probably tried to come out with incentives to get these 0:26:48.520 --> 0:26:51.440 guys off the trauma. You know, this is a psychological thing. 0:26:51.520 --> 0:26:57.320 So if you make the program super attractive, which is 0:26:57.320 --> 0:26:59.399 not what Japan did unfortunately, but if you come up 0:26:59.440 --> 0:27:03.040