Speaker 1: Hello, and welcome to another episode of the Odd Lots Podcast.
Speaker 1: I'm Joe Wisenthal and I'm Tracy Allaway. Tracy, I know
Speaker 1: it's sort of ghost to rag or say anything too
Speaker 1: positive these days, isn't it ghost to use the word ghost?
Speaker 1: It's probably ghost to use the word ghost too, But
Speaker 1: I kind of want to brag about something, just real quickly,
Speaker 1: or sort of you know, pat ourselves on the shoulder
Speaker 1: for a second. Okay, go on, what is it? Well?
Speaker 1: I'm happy about the fact that prior to this crisis,
Speaker 1: we had a lot of guests on the podcast whose
Speaker 1: expertise seems very relevant to the situation at hand. Now, yeah,
Speaker 1: i'd say that's right. I mean, I'm trying to think
Speaker 1: of some specific names, but the list is pretty long
Speaker 1: at this point. Now the list is pretty long. We
Speaker 1: don't have to go through specific names. But I feel like,
Speaker 1: on some level, the fact that we have gone back
Speaker 1: on the last several weeks, we've done so many episodes
Speaker 1: with repeat guests, I think it says a sort of
Speaker 1: good thing about our our episode selection leading up to this,
Speaker 1: when we didn't know that there would be an imminent
Speaker 1: global economic and financial crisis. Oh, absolutely, we have the
Speaker 1: right people on speed dial. I'd put it that way, alright, alright,
Speaker 1: that so that we can we can end end the bragging.
Speaker 1: Uh now. But obviously once again we will be speaking
Speaker 1: with someone who we talked to previously. Ah um, so
Speaker 1: I know who it is. This time it's Richard Coup
Speaker 1: from Nomura of balance sheet recession fame, and the last
Speaker 1: time he came on it was really really interesting discussion
Speaker 1: and I think it's going to be absolutely fascinating to
Speaker 1: see how much of that balance sheet recession idea, if
Speaker 1: anything at all, actually applies to our current situation. Right. So,
Speaker 1: a lot of people, myself included, really discovered Richard Cou's
Speaker 1: work during the last crisis. He wrote a fantastic book,
Speaker 1: The Holy Grail of Macroeconomics, Lessons from Japan's Great Recession.
Speaker 1: He's talked a lot about the need for fiscal policy
Speaker 1: as a tool to restore balance sheet health, and of
Speaker 1: course in this crisis, there's been this widespread consensus that
Speaker 1: monetary policy alone is clearly insufficient to address the scale
Speaker 1: and scope of the downturn, to replace all of the
Speaker 1: lost income from households and businesses. And although we have
Speaker 1: seen a lot of fiscal action around the world. There
Speaker 1: continues to be a lot of debate about whether the
Speaker 1: tools are right, and whether they're sufficient, and what kind
Speaker 1: of recovery we have. So um looking forward to talking
Speaker 1: to Richard now, Richard Coua, thank you very much for
Speaker 1: joining us. Oh, thank you for having me here again.
Speaker 1: So let's start big picture, or let's actually start in
Speaker 1: the US, we saw a fairly substantial fiscal action performance
Speaker 1: sort of passed at the end of March. Today is
Speaker 1: April twenty three, and we're expected to see another tranch
Speaker 1: of more grants being made available to businesses to keep
Speaker 1: workers on payeroll plus a few other things expected to
Speaker 1: pass this week. In your view, how sufficient or insufficient
Speaker 1: have the policy measures that you've seen put in place
Speaker 1: in the US so far been to address the size
Speaker 1: and scope of this downturn. Well, if we take a
Speaker 1: snapshot of g d P in all these countries United
Speaker 1: States included, they have probably down quite substantially from what
Speaker 1: we consider normal levels. But this is brought about by
Speaker 1: this external shock, which is this coronavirus, and so ordinary
Speaker 1: measures like uh riscal and MONELTI policies won't be a
Speaker 1: match held because just because we had a loose monety
Speaker 1: policy doesn't mean I will supply Jain problems or lockdown
Speaker 1: problems will go away. And so this time I think
Speaker 1: policies will have to be very specific to help those
Speaker 1: people who are affected by this coronavirus, which is airlines
Speaker 1: and traveling, the industry's restaurants, service sectors, and so forth.
Speaker 1: And I think US has done a very good job
Speaker 1: in coming up with these big policies very quickly. I
Speaker 1: understand that large number of people already receiving payments from
Speaker 1: the government, and once you see your bank accounts uh
Speaker 1: filled with some some money from the government, I think
Speaker 1: people will feel that all the government is really uh
Speaker 1: worrying about myself and the economy. And I think that
Speaker 1: has been very helpful in keeping people from becoming even
Speaker 1: more desperate or falling into despair, because if you compare
Speaker 1: that with what's happening in Japan, where I am, unusually
Speaker 1: I am, they talked about a lot, but very little
Speaker 1: payments have been made yet. And when you listen to
Speaker 1: the people there, they say, well, then pliticians are talking
Speaker 1: all these honesties, but we haven't seen anything yet. So
Speaker 1: compared to that, I think the United States Germany are
Speaker 1: doing a much better job. But whether that's sufficient or not,
Speaker 1: I think we need to know how long this thing
Speaker 1: is going to go on, when the vaccines would be
Speaker 1: developed or some other ways we can we are able
Speaker 1: to contain this this coronavirus, and that's a medical question unfortunately,
Speaker 1: not an economic question, And so I think we have
Speaker 1: to be ready to putting more at as it becomes necessary.
Speaker 1: Just to step back for the for a second. One
Speaker 1: of the things that I personally like about your balance
Speaker 1: sheet recession framework is that there's a big focus on
Speaker 1: the psychological impact of debt crises, and there's this notion
Speaker 1: that people are so sort of emotionally scarred by the
Speaker 1: experience that they're afraid to take on debt for years
Speaker 1: to come. How much of the balance sheet recession framework
Speaker 1: applies to the current economic crisis, because I can see
Speaker 1: maybe not debt being an issue here, but I could see,
Speaker 1: for instance, people increasing their savings for years to come
Speaker 1: after this shock, right right, You know, there are a
Speaker 1: lot of people out there who were worried that with
Speaker 1: so much money into the system by the Federal Reserve
Speaker 1: and the government also borrowing money, definitely inflation will be
Speaker 1: a huge problem once we come out of this recession.
Speaker 1: But when you think about it, those people who have savings,
Speaker 1: that it's companies and individuals, they probably quite well about me,
Speaker 1: sustained less damage than those people who didn't have much
Speaker 1: savings so didn't have much retained earnings. In the companies,
Speaker 1: I mean, if you didn't have much retained earnings, or
Speaker 1: you bought back your shells and so forth, and then
Speaker 1: suddenly your your revenue drives up or you're in a
Speaker 1: huge mess, and I'm sure they have to scramble to
Speaker 1: get the cash in place so that they can make
Speaker 1: the payments. That kind of shock can affect people for
Speaker 1: a very long time. And if you remember two US
Speaker 1: had a banking crisis also, and it was a credit crunch,
Speaker 1: and those businesses who suffered during that period almost never
Speaker 1: bought money for the the rest following ten years or so.
Speaker 1: If you remember that banking crisis, that was George Bush
Speaker 1: the father, and I think the same thing will happen
Speaker 1: this time again. With so many people talking about second wave,
Speaker 1: third wave of of this coronavirus. Even we come out
Speaker 1: of this one, the first wave, I'm sure people will
Speaker 1: say to themselves. We really have to have some savings
Speaker 1: for the rainy days. And if they go back to
Speaker 1: this savings mode, corporates and individuals, then all the money
Speaker 1: that was pumped into the system will be used to
Speaker 1: save money instead of going into consumption or investments, and
Speaker 1: that will keep inflation rates from picking up. And that's
Speaker 1: exactly what happened during the balancy recession. For balancy recession,
Speaker 1: people actually paying back debt because prior to the two
Speaker 1: or eight leaving crisis, people leveraging themselves up to invest
Speaker 1: in all sorts of assets. Then crisis happened as the
Speaker 1: prices collapse, liabilities remain, their balances under water, so people
Speaker 1: have to pay down debt, and that's what caused a
Speaker 1: balancy recession because in the national economy, if someone is
Speaker 1: saving money, including paying down debt, someone has to be
Speaker 1: borrowing money to keep the economy going. Luckily, the US
Speaker 1: did that, Japan did that, euro Zone didn't do that,
Speaker 1: and that's how we saw all these differences in macro
Speaker 1: performances this time around. Once we come out of this recession,
Speaker 1: people will be saving money. They won't be paying down
Speaker 1: debt perhaps, but they'll be saving money. But macro economically,
Speaker 1: saving money and paying down debt have almost exactly the
Speaker 1: same effect on the micro economy, and so I would
Speaker 1: think that inflation is not a big problem going forward,
Speaker 1: even after we come out of this this first way
Speaker 1: or it's a last way. But and if that's not
Speaker 1: the big worry, then the central bank, in the federal
Speaker 1: government shoe a few shook a few much more ease
Speaker 1: in putting additional policy major assess they become necessary. So
Speaker 1: this is really interesting because at least so far, you
Speaker 1: view the US fiscal responses having been fairly decent, at
Speaker 1: least compared to Japan and perhaps some other places in
Speaker 1: terms of how fast money is getting into bank accounts
Speaker 1: and so forth. But sort of what it sounds like is,
Speaker 1: you know, everyone, and it's kind of a cliche, is
Speaker 1: trying to figure out the so called shape of the
Speaker 1: recovery and U shape and W shape and V shape.
Speaker 1: I don't want to I don't think that's necessarily the
Speaker 1: most useful thing to talk about, but just this idea
Speaker 1: that this is going to leave a searing scar on
Speaker 1: corporate behavior, and so whether it's buy backed or actual
Speaker 1: capex or hiring, the experience that we're facing right now
Speaker 1: will alter corporate behavior and potentially household behavior for years
Speaker 1: to come. Yes, I believe so, just like this banking crisis,
Speaker 1: the credit crunch back in that period effect that corporate
Speaker 1: behavior for our for the following ten years. I think
Speaker 1: we're going to see something similar that people said, oh gods,
Speaker 1: we really have to have some savings, we cannot really
Speaker 1: run two lean and that will affect macroeconomic performances if
Speaker 1: so many people are increasing savings all at the same time.
Speaker 1: So what does that imply for the policy response? Because
Speaker 1: I guess when you have a balance sheet recession and
Speaker 1: the emphasis emphasis is on debt, then the ideal policy
Speaker 1: responses that governments sort of become the borrowers of last
Speaker 1: resort and do stimulusm in various ways along those lines.
Speaker 1: But if you have a crisis of sort of savings
Speaker 1: I guess, or or cash flow, what can governments or
Speaker 1: central banks actually do here? What what's the best thing
Speaker 1: for them to do? Well? During balance recession, we have
Speaker 1: a very special situation in which financial market and financial
Speaker 1: market alone, or financial sector alone, it is flooded with cash.
Speaker 1: Everyone else have no money. Uh, households are paying down
Speaker 1: that companies are paying down debt, but financial market, if
Speaker 1: you put yourself in the o position of the fund manager,
Speaker 1: and all these savings, newly generated savings on the household
Speaker 1: sectors coming to you, those corporate debt payments are coming
Speaker 1: back to you. In the central bank trying to meet
Speaker 1: the inflation targets also pumping money, which you have to
Speaker 1: manage at some point, so you're flooded with cash, and
Speaker 1: flooded in a sense that because everybody is paying down
Speaker 1: that no one's borrowing money, so you're kind of stuck
Speaker 1: with this cash. And if you're stuck with cash, there's
Speaker 1: only one borrow we left, which is the government. You
Speaker 1: end up buying government box. And that's the reason why
Speaker 1: during the balancy recession, government bond iselds in spite of
Speaker 1: a huge deficit, keeps on coming down. And we saw
Speaker 1: that in Japan first, and then people thought that was
Speaker 1: a bond market bubble, but it wasn't because government was
Speaker 1: the only bara left, so all the money had to
Speaker 1: go to the government, and then it happened after two
Speaker 1: thousand eight. Also, that part, the fact that financial market
Speaker 1: is flooded with cash, is one of the key characteristics
Speaker 1: of balancy recession. Now, in this recession or coronavirus recession,
Speaker 1: we have a different problem, and that is that everybody,
Speaker 1: at least for the moment until the economy recovers, they
Speaker 1: will be withdrawing money from the financial market, right because
Speaker 1: people have to rely on their savings to make pends meet.
Speaker 1: So households will be withdrawing savings, corporates will be withdrawing savings,
Speaker 1: and corporates, some of them who don't have enough savings,
Speaker 1: would be desperately borrowing money the distress, borrowing to make
Speaker 1: the ends meet. So instead of this problem of not
Speaker 1: having enough borrowers, which is the characteristics of balancing recession,
Speaker 1: at the moment, we have a situation where savers are
Speaker 1: disappearing because people are forced to dis save, whereas government
Speaker 1: would be coming in to borrow, and corporates who needs
Speaker 1: cash also are coming to borrow. And so financial market
Speaker 1: gets much tighter, very sharply tighter in this type of recession,
Speaker 1: and we already see that in credit spars in the
Speaker 1: corporate bond market, where corporates used to be able to
Speaker 1: borrow a very low rates until around the beginning of March,
Speaker 1: and then suddenly all these corporates with slightly less than
Speaker 1: the pristine credit ratings suddenly faced much higher borrowing rates.
Speaker 1: And that's the characteristics of this type of recession. I mean,
Speaker 1: this federal result brought rates down to zero, pump comes
Speaker 1: on money into the system, but corporate borrowing rates are
Speaker 1: significantly higher now than just two months ago. And a
Speaker 1: so called financial condition index, the one that Chicago Fed
Speaker 1: puts out, which shows how tight the financial market is,
Speaker 1: we see that it's much tighter now in spite of
Speaker 1: all the work by the Fed. So in this situation
Speaker 1: financial market flooded with cash, that characteristics and balancing recession
Speaker 1: doesn't apply. And if you have a very tight financial
Speaker 1: market as we do now, central bank will have to
Speaker 1: continuously pump money into the system to make sure that
Speaker 1: we really don't get into the kind of crisis we
Speaker 1: saw back into thousand and eight, and so this time around,
Speaker 1: I would say that central bank has a huge role
Speaker 1: to play, in addition to fiscal policy by the government,
Speaker 1: to make sure that financial market continues to operate in
Speaker 1: in halfway decent manner. When you look at the actions
Speaker 1: of the Federal Reserve or other central banks, do you
Speaker 1: feel good that they recognize this. I think I believe
Speaker 1: that they are doing a good job. And only central
Speaker 1: bank that I worry about is the ECB, because ECB
Speaker 1: cannot openly try to help individual governments, right that that's
Speaker 1: against the brandate. But everyone else Bank of Japan, Bank
Speaker 1: of England, Federal Reserve, they are I don't know what
Speaker 1: that I can say openly, but you know they are
Speaker 1: very really willingly adding money to the system to make
Speaker 1: sure that financial market doesn't become too tight. Mm hmm.
Speaker 1: Just in terms of the differences between how different countries
Speaker 1: are responding to the coronavirus outbreak and the economic damage
Speaker 1: that it's causing. You spoke a little bit about the US.
Speaker 1: I know you focused a lot of your time on
Speaker 1: Japan as well, but how are you viewing the crisis
Speaker 1: response in Europe in particular, because it seems like there
Speaker 1: we might have a problem of cohesion within the Eurozone block.
Speaker 1: Japan was very slow incoming at the beginning, but now
Speaker 1: they have reasonably good policies moving forward. Very little payment
Speaker 1: has been made to the to the households or or
Speaker 1: the companies yet, but at least I think the debate
Speaker 1: is moving in the right direction. In Europe. However, we
Speaker 1: discovered in two thousand and eight that national governments really
Speaker 1: don't have much room for fiscal policy. You know, in Europe.
Speaker 1: When they decided to join euro individual countries or the
Speaker 1: voters of individual countries were told that they're giving up
Speaker 1: their sovereignty amounty policy, but they still have sovereignty on
Speaker 1: fiscal policy. And that's how everybody agreed to join Europe.
Speaker 1: But once they're started and when into town a fiscal
Speaker 1: policy became necessary because of the balancy recession, they discovered
Speaker 1: that they don't have a sovereignty on fiscal policy for
Speaker 1: two reasons. One is that the Mastery Treaty which created
Speaker 1: the euro says individual governments can bor only three percent
Speaker 1: of GDP and if you go beyond that, you get punished.
Speaker 1: But if private sector only saves three percent of GDP,
Speaker 1: that'll be okay. But if the private sector, like in Spain,
Speaker 1: was saving seven percent of GDP after the umbursing of
Speaker 1: the bubble, but the government could only borrow three, then
Speaker 1: the remaining four percent becomes the deflationary gap, and Spain
Speaker 1: probably experienced you know, unemployment rate or or something at
Speaker 1: that point. If the Spanish government said, oh, we have,
Speaker 1: you know, plenty of savings seven GDP savings from the
Speaker 1: private sector. We just used a seven percent to fill
Speaker 1: the deflationary gap. Well, that didn't work because in the Eurozone,
Speaker 1: all these people, now, all these countries, the investors are
Speaker 1: faced with choice of eighteen government bond markets, all denominated
Speaker 1: in currency. And so if Spain seems to be ramping
Speaker 1: up a fiscal stimulus, all these investors, including those in Spain,
Speaker 1: were quick move money to Germany or someone else where.
Speaker 1: Deva said, it's not so large. And then even though
Speaker 1: Spain had seven percent private sector savings, government could not
Speaker 1: use the seven They could barely use maybe one or
Speaker 1: two because the money ran out. And that I think
Speaker 1: is one of the key problems of the Eurozone that
Speaker 1: all these government bonds are denominated in the same currency,
Speaker 1: whereas in the US it's u S traguries in dollars.
Speaker 1: Japan is in the end, so all these investors who
Speaker 1: cannot take a large foreign exchange risk are forced to
Speaker 1: hold government bonds when privacy actor is not borrowing money.
Speaker 1: But in the Eurozone there's this possibility of capital flight
Speaker 1: between government bond markets, and that effectively removed the fiscal
Speaker 1: room for all all these eighteens, well I should say
Speaker 1: seventeen countries. The eighteen one, the one that is doing
Speaker 1: the best, of course, gets the opposite effect. All these
Speaker 1: money will be coming into your company country. And that's
Speaker 1: where Germany is at the moment. So fiscal policy is
Speaker 1: not really available to very many countries in the Eurozone,
Speaker 1: and monetary policy, of course, they lost the sovereignty over it.
Speaker 1: So if you put yourself in the position of any
Speaker 1: Italian or and yet you have a devastated economy, so
Speaker 1: many people dying every day, and you cannot even use
Speaker 1: your monetary and fiscal policies to fight the economic depression.
Speaker 1: And I find this very very disturbing, and I hope
Speaker 1: they can come up with some sort of a compromise
Speaker 1: where even though Mastery Treaty says you cannot or more
Speaker 1: than three percenter GDP, they will somehow come up with
Speaker 1: the ways to help Italy and Spain and other countries
Speaker 1: that are very badly affected by this coronavirus UH and
Speaker 1: need fiscal stimulus very badly, especially the kind of fiscal
Speaker 1: spending that goes directly to the affected industries, households and companies. Yeah,
Speaker 1: I remember reading your this thesis, you set out about
Speaker 1: these sort of savings leakages from the periphery to German
Speaker 1: boon back during the last prices, and I thought it
Speaker 1: was fascinating only get back to sort of ideal government
Speaker 1: policies in the post crisis phase. So once the health
Speaker 1: aspect of the crisis begins to fade and people start
Speaker 1: in theory reopening up stores and coming back to work.
Speaker 1: We talked before about the searing effect that this will
Speaker 1: have in terms of people's inclination to save. Perhaps corporrates
Speaker 1: will remain much less levered, or they're going to be
Speaker 1: very slow to hire and expand kpex after seeing revenues
Speaker 1: disappear in an instant. Obviously, as you say, okay, central
Speaker 1: banks need to do their part to make maintain liquidity.
Speaker 1: Governments need to do their part to mean spending. But
Speaker 1: how do you get off the cycle? And I guess
Speaker 1: this goes back to your work looking in Japan. What
Speaker 1: did Japan fail to do in the post crisis period
Speaker 1: of its own crisis that it was never or that
Speaker 1: it was It had an extremely difficult time reviving the
Speaker 1: inclination to borrow and spend, so beyond just having the
Speaker 1: government run large deficits. What do they need to do
Speaker 1: policy wise to get the private sector back into a
Speaker 1: sort of aggressive stand. There's a lot of feeling outside
Speaker 1: Japan that Japan did a very poor job of post
Speaker 1: post bubble period, but you know, Japan actually managed to
Speaker 1: keep its GDP above the bubble peak. For the entire
Speaker 1: thirty years, Japanese GDP never fell below the peak of
Speaker 1: the bubble. And with that GDP was kept. GDP kept
Speaker 1: means private sector had the income to pay down debt,
Speaker 1: and they kept on paying down debt. They were already
Speaker 1: finished with their payments. The balance seats are probably the
Speaker 1: cleanest in the world. But because this experience lost it
Speaker 1: for so long, people became very averse to borrowing. And
Speaker 1: if you remember the Americans after the Great Depression, they
Speaker 1: went through the exactly the same experience, and many of
Speaker 1: these Americans never borrow money until they die, right because
Speaker 1: the experience was so bad. And we faced the same
Speaker 1: problem after when the Japanese bubble burst, and Japanese bubble
Speaker 1: was absolutely massive. You know, when the Imperial Palace gardens
Speaker 1: in the middle of Tokyo about five kilometers, this was
Speaker 1: the entire state of California. You know how bad the
Speaker 1: bubble was. True, I've heard that fact many times. That
Speaker 1: really is true. Well, if you kind of extrapolate from
Speaker 1: the surrounding areas and they keep on the extrapolating, then
Speaker 1: you get that result. But I mean, I know they
Speaker 1: never really put the palace on market. But that's right,
Speaker 1: that's so, this is all academic at all. So when
Speaker 1: the bubble burst, the amount of wealth Japanese loss just
Speaker 1: on stock market and real estate was like fifteen hundred
Speaker 1: trillion yen, which is three times Japan's GDP. The amount
Speaker 1: of wealth the American loss during the Great Depression was
Speaker 1: equivalent to one year's worth of nineteen twenty nine GDP.
Speaker 1: Japan was equivalent to three years of nineteen nine GDP.
Speaker 1: And because it took so long, people began very uh
Speaker 1: averse to borrowing. We could have used more policies to
Speaker 1: encourage people to borrow, like accelerate the depreciation allowances and
Speaker 1: so forth, and some of those were actually put in place,
Speaker 1: but those policies have to be super attractive to get
Speaker 1: these people off the trauma trauma of borrowing money, and
Speaker 1: the one that we did put in in Japan wasn't
Speaker 1: all that attractive. Too much paperwork, too many conditions, and
Speaker 1: so unfortunately they didn't create positive response as much as
Speaker 1: we expected. In the US case, after the two thousand
Speaker 1: eight firsting of the bubble, US actually did a fairly
Speaker 1: good job of keeping the economy from losing its bottom.
Speaker 1: And the US companies were never involved in the bubble
Speaker 1: to begin with. It was the household sector, and so
Speaker 1: US company could still borrow, and I think US was
Speaker 1: able to come out sooner than other countries, even the
Speaker 1: US was the epicenter of of that crisis. Now this one,
Speaker 1: it's the household, it's the company's both both sectors are involved,
Speaker 1: and those effected sectors I'm sure will take a long
Speaker 1: time to recover, and especially the psychological part. My guess
Speaker 1: is that once we get to that stage, government will
Speaker 1: probably tried to come out with incentives to get these
Speaker 1: guys off the trauma. You know, this is a psychological thing.
Speaker 1: So if you make the program super attractive, which is
Speaker 1: not what Japan did unfortunately, but if you come up
Speaker 1: with the various active policy and if people said, if
Speaker 1: it's that attracted, maybe I should try the bar at once,
Speaker 1: and if they borrow it and then they have a
Speaker 1: good result, then that trauma will be over and I
Speaker 1: hope that's how we will overcome this problem after this
Speaker 1: pandemic is behind us. Mhm. What do you think this
Speaker 1: means for the relationship between central banks and governments? Because
Speaker 1: I'm thinking clearly governments are going to have to borrow
Speaker 1: a lot of money in order to finance whatever fiscal
Speaker 1: stimulus they undertake, and I suspect that means that central
Speaker 1: banks are going to have to step in and help
Speaker 1: them in some way, either by you know, doing QWI
Speaker 1: type asset purchases. But a lot of people are also
Speaker 1: talking about sort of direct monetary financing by central banks
Speaker 1: of government debt at this point, do you see that
Speaker 1: kind of relationship happening, Well, I see probably noticed. I
Speaker 1: was the strongest opponent of the use of KILLY or
Speaker 1: use of helicopter money direct financing m m T during
Speaker 1: balancy recession, because my point was that the recession was
Speaker 1: caused by the exers savings in the private sector. Everybody's
Speaker 1: paying down debt. That means the money needed to finance
Speaker 1: the government deficit is all in the private sector. So
Speaker 1: let the private sector financial government debt instead of the
Speaker 1: central bank. That was my argument all along. That's where
Speaker 1: I crashed with people like Paul Paul Krugman, who said,
Speaker 1: what center man should also come into to help. But
Speaker 1: I argue from the people in the finance as a
Speaker 1: member of the financial sector, that financial sector is absolutely
Speaker 1: flooded with cash. If the private sector cannot even lead
Speaker 1: to the government, then the private sector will end up
Speaker 1: lending to in some funny places that could cause another bubble.
Speaker 1: So I was very much against quee helicopter money kind
Speaker 1: of arguments during that recession when financial market was flooded
Speaker 1: with cash. But this time I'm actually all for it.
Speaker 1: And that's because, for the reason I mentioned two earlier,
Speaker 1: people are this saving. Now financial market is not flooded
Speaker 1: with cash. It's actually seeing cash being withdrawn to make
Speaker 1: by all these people who are making ends meet. And
Speaker 1: so if the center bank doesn't come in two finance
Speaker 1: the deficit, at least in the short run, interest rates
Speaker 1: can go sky high and that will start causing another
Speaker 1: set of problems. And so I very much like to
Speaker 1: see central bank come in and um solve some of
Speaker 1: these government bonds through quee until we are out of
Speaker 1: this mess, until some medical solutions are found to this
Speaker 1: this crisis. Now, once that medical solution is found in
Speaker 1: we are out of this pandemic, then Central Bank should
Speaker 1: be withdrawing that liquidity that it put in during the crisis, because,
Speaker 1: as I mentioned earlier, by that time private sector should
Speaker 1: be increasing savings again. Instead of this saving, they will
Speaker 1: be rebuilding the savings that that they drew down during
Speaker 1: the pandemic. And when the private sector as a group
Speaker 1: is increasing savings, then inflation cannot happen. You know, if
Speaker 1: the private sector as a group is actually saving money,
Speaker 1: money multiplier turns negative at the margin, and that's the
Speaker 1: reason why in the last ten twelve years central bank
Speaker 1: could never get to their inflation target because if the
Speaker 1: money multiplies negative at the margin, you know, we can
Speaker 1: put all the money into the system, you multiply with
Speaker 1: the negative number, you go absolutely nowhere. And so once
Speaker 1: we return to that world, hopefully sooner than later, h
Speaker 1: at that point, central banks should be withdrawing money slowly
Speaker 1: at the beginning, so that at the end of the day,
Speaker 1: god knows how many years that is from now, access
Speaker 1: liquidity in the financial market is no longer a big issue,
Speaker 1: and so it has to It has to do tons
Speaker 1: of liquidity injections during the pandemic when the government needs
Speaker 1: the money, when the private sectors withdrawing money financial sector.
Speaker 1: But once this pandemic is over, when the private sector
Speaker 1: is now trying to increase savings, then that means there
Speaker 1: will be no inflation because money multiplies negative of the margin.
Speaker 1: Then you use that time when the private sector is
Speaker 1: still rebuilding savings for the central bank to remove some
Speaker 1: of the liquidity that was put into the system. I
Speaker 1: think has to go in that sequence. So we've been
Speaker 1: talking a lot obviously about corporate behavior post prices. What
Speaker 1: about in terms of household behavior? You mentioned incentives for corporates,
Speaker 1: like maybe some sort of tax incentives for capital investment,
Speaker 1: things like that. When will, of course, in the immediate
Speaker 1: wink of the crisis that you mentioned, households likely to
Speaker 1: start to rebuild the savings that they've drawn down to
Speaker 1: provide sustenance during times of no employment or no income.
Speaker 1: What does the so what do the scars of the
Speaker 1: past tell us about how households will behave in the years,
Speaker 1: in the years to in the years to come. Well,
Speaker 1: I think it comes in different phases here. Also during pandemic.
Speaker 1: Of course, household there are two kinds. Right, If you're
Speaker 1: still getting paid during this crisis, but you won't be
Speaker 1: able to spend the money because yeah, in a lockdown world,
Speaker 1: these people will be actually saving money. About for those
Speaker 1: people who are affected by the coronavirus and then their
Speaker 1: income has dried up, their savings have dried up. When
Speaker 1: the economy begins to do better, those people will be
Speaker 1: increasing savings. But for those people who still had income
Speaker 1: during this period, either by working from home and so forth,
Speaker 1: in the short run, they will be so happy to
Speaker 1: spend money. Right, So when the lockdown is over, pandemics
Speaker 1: here is behind us, it's normal fear of second wave
Speaker 1: of third wave. They will be spending a lot of money.
Speaker 1: So we're gonna have a very sharp V shaped recovery
Speaker 1: from those kinds of consumption behavior. But at the same time,
Speaker 1: this is a global pandemic. Global means that even though
Speaker 1: the country that came out of the crisis would be
Speaker 1: seeing some sharp pickup in consumption, that sharp increase I
Speaker 1: think will peter down as we go along because there
Speaker 1: are other countries that are still being affected, which means,
Speaker 1: for example, tourist industries will never really get back to
Speaker 1: where they will before as long as other countries are
Speaker 1: still being inaffected. Supply chains will still be affected, foreign
Speaker 1: demand will still be affected. And so what I envisioned
Speaker 1: is that once this pandemic is behind us, there will
Speaker 1: be a V shaped recovery for perhaps a couple of months,
Speaker 1: and then it begins to kind of slow down until
Speaker 1: other economies recovered. And this is different from the UH
Speaker 1: seventeen years ago when we had a source experience. Source
Speaker 1: actually only affected certain parts of Asia only, and so
Speaker 1: when that pandemic was behind or epidemic was contained, since
Speaker 1: other countries are all doing quite well, including Japan, those
Speaker 1: countries that are affected by Source could experience a real
Speaker 1: V shaped recovery. But this time the V shaped recovery
Speaker 1: will be m short lift, and I think it'd be
Speaker 1: a it would be a very slow recovery until the
Speaker 1: fear of this coronavirus is completely behind us, and that
Speaker 1: that's gonna take a long time, because you know, we
Speaker 1: have so many countries in the world and some of
Speaker 1: them are just beginning to feel this pandemic. Richard coop Uh,
Speaker 1: it was great to have you joined us. Really appreciate
Speaker 1: you coming back to apply some of your wisdom and
Speaker 1: theory to this current moment. And I hope you're well
Speaker 1: and looking forward to hopefully chatting with you again when
Speaker 1: we see more of what the ultimate recovery eventually looks like. Well,
Speaker 1: I'm looking forward to it. Thanks so much, Chure. That
Speaker 1: was great, Treacy. You know what I was thinking about
Speaker 1: during that um during that discussion is so his book
Speaker 1: about Richard's book about the aftermath of Japan's Great Recession
Speaker 1: is called the Holy Grill of Macroeconomics. But I feel like,
Speaker 1: just since then, there's been like all these other potential
Speaker 1: holy grills that have just illuminated so much. Like you
Speaker 1: think Japan is, like, Okay, this tells us so much,
Speaker 1: but now we have so many other extraordinary examples of
Speaker 1: crises intention since then that he could probably write like
Speaker 1: four or five sequels by that. Yeah, it's kind of like,
Speaker 1: maybe I'm carrying the analogy too far, But it's sort
Speaker 1: of like that scene from Indiana Jones where you have
Speaker 1: all the different cups right and to choose exactly the
Speaker 1: right one to fit a situation that you've never really
Speaker 1: been in before. Wow, Okay, I think I'm stretching that
Speaker 1: way too far. I think that really works because that
Speaker 1: was actually one of the things that was striking to
Speaker 1: be listening to him is how all of these crises
Speaker 1: are similar but just like a little bit different, And
Speaker 1: it's really important to appreciate the subtle differences, whether it's
Speaker 1: the corporate set there there was participating in the bubble,
Speaker 1: whether it's real estate, households, et cetera, to understand like
Speaker 1: sort of like which policy or responses are going to
Speaker 1: work back. Yeah, it's also really interesting to hear from
Speaker 1: someone who was against KIWI in the previous crisis really
Speaker 1: talk about the need for it here and even sort
Speaker 1: of hint at a layer of modern monetary theory or
Speaker 1: direct monetary financing or whatever you want to call it
Speaker 1: um sort of being necessary this time around. That's a
Speaker 1: big change, right, the idea of more explicit cooperation and
Speaker 1: coordination between the central Bank and the and the fiscal authorities.
Speaker 1: Actually just think like, and you brought it up at
Speaker 1: the beginning, the psychological component of recovery is going to
Speaker 1: be so huge because so many households in businesses have
Speaker 1: experienced the laws of income. That was that was fathom ale.
Speaker 1: I mean basically a dent losses in many cases in
Speaker 1: the span of a few weeks. Nobody really anticipates that
Speaker 1: kind of downturn. Plus the behavioral changes associated with the
Speaker 1: health emergency and the way all of our lives have
Speaker 1: just changed going on day to day living, it really
Speaker 1: feels like that's going to be such a big component
Speaker 1: obviously what any recovery looks like. Yeah, it sort of
Speaker 1: reminds me of those stories you hear about people who
Speaker 1: survived the Great Depression and then ended up, for instance,
Speaker 1: hoarding food for the rest of their lives. Like, I'm
Speaker 1: sure there are going to be those sorts of lingering
Speaker 1: emotional effects and we're all going to be hoarding toilet
Speaker 1: paper or something like that forever, or at least keeping
Speaker 1: more in the house than we used to. But on
Speaker 1: a on a serious note, the other thing that I
Speaker 1: think is really important was his point about the pace
Speaker 1: of the recovery, because it's certainly something we've experienced here
Speaker 1: in Hong Kong. Even if Hong Kong starts to recover
Speaker 1: and the number of new coronavirus cases starts to go down,
Speaker 1: when it picks up elsewhere in the world and we
Speaker 1: see economies elsewhere start to shut down. That's of has
Speaker 1: a ripple effect and comes back to hit Hong Kong.
Speaker 1: So even if one country recovers, if the rest of
Speaker 1: the world is in trouble, it's going to prolong the
Speaker 1: economic pain. Yeah. I really liked his point about there
Speaker 1: will be some people around the world, people who managed
Speaker 1: to hold onto their incomes and jobs during the duration
Speaker 1: of the crisis, who will probably go on some sort
Speaker 1: of big spending spree the moment they can going out
Speaker 1: shopping and restaurants, etcetera. And you might get the appearance
Speaker 1: of a V. But the sort of the widespread nous
Speaker 1: of the crisis and the unevenness of the page at
Speaker 1: which different parts of the economy opens up almost guarantees
Speaker 1: that that can't last very long. It will be very uneven.
Speaker 1: So even if we get a little V probably won't
Speaker 1: turn into a true V, lowercase V versus a big V.
Speaker 1: God another another letter to add to the to the
Speaker 1: to the right. That's good, all right, Um, should we
Speaker 1: leave with there? Let's leave with there? Okay. This has
Speaker 1: been another episode of the All Thoughts podcast. I'm Tracy Halloway.
Speaker 1: You can follow me on Twitter at Tracy Halloway and
Speaker 1: I'm Joe, Why Isn't All? You can follow me on
Speaker 1: Twitter at The Stalwart. Be sure to follow our producer
Speaker 1: Laura Carlson. She's at Laura M. Carlson. Follow the Bloomberg
Speaker 1: head of podcast, Francesco Levie at Francesca Today, as well
Speaker 1: as all of the Bloomberg podcasts under the handle at podcasts.
Speaker 1: Thanks for listening.