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Richard Koo Presentation

Richard Koo Presentation

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Nomura economist Richard Koo talking about balance sheet recessions.
Nomura economist Richard Koo talking about balance sheet recessions.

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The Age of Balance Sheet Recessions: What Post-2008 U.S.

, Europe and China Can Learn from Japan 1990-2005

Richard C. Koo Chief Economist Nomura Research Institute Tokyo March 2009

Exhibit 1. US Economy Is Deteriorating Rapidly
(%, Seasonally adjusted) 86 (%, Seasonally adjusted, inverted) 3.5 4.0 Unemployment Rate (right scale) 4.5 5.0 80 5.5 6.0 6.5 7.0 74 7.5 72 Capacity Utilization (left Scale) 8.0 8.5 98 99 00 01 02 03 04 05 06 07 08 09

84

82

78

76

70 Sources: US Department of Labor, FRB

1

Exhibit 2. EU Economic Sentiments Are Worsening
(Seasonally adjusted) 120 115 110 105 100 95 90 85 80 75 70 65 2000 Ifo Business Climate Euro Area Economic Sentiment

2001

2002

2003

2004

2005

2006

2007

2008

2009

Source: Ifo Business Survey, European Commission

2

Exhibit 3. Exports and House Prices Are Falling in China
(y/y%) 25 ($ bil., Seasonally Adjusted) 140

20

House price in Shenzhen (left scale) 120

15

10

100

5 80 0

-5

60

-10 40 -15 China's exports ($ bil., right scale) -20 03 04 05 06 07 08 09 Note: Seasonal adjustment by Nomura Research Institute. Sources: Nomura Research Institute, based on National Bureau of Statistics of China, National Development and Reform Commission (NDRC), People’s Republic of China, and Bloomberg. 20

3

Exhibit 4. Japan’s Industrial Production and Employments Are also Weakening
(Seasonally adjusted) 1.2 Industrial production (right scale) 1.1 forecast (Seasonally adjusted, 2005=100) 115 110 105 1.0 100 0.9 95 90 85 80 75 0.5 70 65 2001 2002 2003 2004 2005 2006 2007 2008 2009

0.8

0.7 Job offers to applicants ratio (left scale)

0.6

0.4 2000

Note: The forecasts are calculated from METI's survey on planned production. Sources: Ministry of Economy, Trade and Industry (METI), and Ministry of Health, Labour and Welfare

4

Exhibit 5. Low Interest Rates Have Failed to Revive Economies or Asset Prices
(%) 8 Australia 7 UK 6

5

4 EU US 2 Japan 1

3

0 2003 2004 2005 2006 2007 2008 2009

Sources: BOJ, FRB, ECB, BOE and RMB Australia. As of Mar. 18, 2009.

5

Exhibit 6. Features of Balance Sheet Recession

A balance sheet recession emerges after the bursting of a nationwide asset price bubble that leaves a large number of private-sector balance sheets with more liabilities than assets. In order to repair their balance sheets, private sector moves away from profit maximization to debt minimization. With the private sector de-leveraging, even at zero interest rates, newly generated savings and debt repayments enter the banking system but cannot leave the system due to the lack of borrowers. The sum of savings and debt repayments end up becoming the leakage to the income stream. The deflationary gap created by the above leakage will continue to push the economy toward a contractionary equilibrium until the private sector is too impoverished to save any money (=depression). In this type of recession, the economy will not enter selfsustaining growth until private sector balance sheets are repaired.

6

Exhibit 7. US Demand for Funds Is Falling Sharply
(D.I.) 30 housing bubble collapse

20

IT bubble collapse

small firms

10

0

-10 large and middle-market firms

-20

-30

stronger demand for funds

-40
weaker demand for funds

-50 1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Source: Nomura Research Institute, based on FRB, Senior Loan Officer Opinion Survey on Bank Lending Practices . Note: D.I. are calculated from the answers to the question, "Apart from normal seasonal variation, how has demand for C&I loans changed over the past three months?" D.I. = ("Substantially stronger" + "Moderately stronger"×0.5) - ("Moderately weaker"×0.5 + "Substantially weaker")

7

Exhibit 8. US Housing Price Futures Moving Closer to the Japanese Experience
(US: Jan. 2000=100, Japan: Dec. 1985=100)

Futures
Composite Index Futures (as of Sep. 19, 2007)

260 240 220 200 180 160 140 120 100 80 60 40 92 77 93 78 94 79 95 80 96 81 97 82 98 83 99 84 00 85 01 86 02 87 03 88 04 89 05 90 06 91 07 92 08 93 09 94 10 95 11 96 12 97 13 98 Japan: Osaka Area Condo Price 2 (per m , 5 months moving average)
Composite Index Futures (as of Mar. 18, 2009)

US: 10 Cities Composite Home Price Index Japan: Tokyo Area Condo Price 2 (per m , 5 months moving average)

A fall in actual prices to the bottom for future prices would bring house prices back to level of Dec. 2002 US Japan

Sources: Bloomberg, Real Estate Economic Institute, Japan, S&P "S&P/Case-Shiller® Home Price Indices", as of Mar. 18, 2009.

8

Exhibit 9. House Prices and Rents Diverged substantially during Housing Bubble
(91/1Q=100, Seasonally Adjusted) 250

200

House prices

?

21%

150

100 Rents

50

A 21% decline would bring house prices back to level of 2003 Q4

0 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Note: Seasonal adjustment by Nomura Research Institute. Source: Nomura Research Institute, based on Office of Federal Housing Enterprise Oversight (OFHEO) house price index and US Department of Labor CPI.

9

Exhibit 10. Americans Spent $1.5trn that Should Have Been Saved
Savings shortfall = $1,544bn
($bn, seasonally adjusted) (%)

120 Saving rate (right scale) 100 80 60 40 20 0 -20 -40 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Note: Average savings rate for US households in1997-98. Source: Nomura Research Institute, based on US Department of Commerce data.

6 5 4

Amount needed to lift savings to 4%* (left scale)

4.5
3 years at

this rate
2 Actual savings (left scale) 1 0 -1 -2

10

Exhibit 11. Japan’s GDP Grew even after Massive Loss of Wealth and Private Sector Rushing to Pay Down Debt
(Mar. 2000=100) 800 700 500 600 500 400 300 200 100 0 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 Sources: Cabinet Office, Japan Real Estate Institute Land Price Index in Six Major Cities (Commercial, Right Scale) Last seen in 1973 Real GDP (Right Scale) 450 400 350 down 87% 300 250 200 Nominal GDP (Right Scale) (Tril.yen, Seasonally Adjusted) 600 550

11

Exhibit 12. Cumulative Capital Losses on Shares and Land since 1990 Reached $15 Trillion or 3 Years Worth of Japan’s GDP
400 (Tril. yen) (Capital Gain)

Land
0

Shares

-400

-800

¥1,500 trillion

Equivalent to $45 trillion loss in the US

-1200

Land and Shares Combined
-1600 90 91 92 93 94 95 96 97

(Capital Loss) 98 99 00 01 02 03 04 05 06 07

Source: Cabinet Office, Japan "National Accounts"

12

Exhibit 13. Balance Sheet Problems Forced Japanese Businesses to Pay Down Debt even with Zero Interest Rates
Funds Raised by Non-Financial Corporate Sector
(% Nominal GDP, 4Q Moving Average) 25 (%) 10

CD 3M rate (right scale)
20 8

Borrowings from Financial Institutions (left scale)
15 6

Funds raised in Securities Markets (left scale)
10 4

5

2

0

0

-5

-2

-10 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 Sources: Bank of Japan, Cabinet Office, Japan

-4

13

Exhibit 14. Japanese Government Borrowed and Spent the Excess Savings of the Private Sector to Sustain GDP
(Tril. yen) 100 Government Spending 90

80

70

total additional deficit 90-05 ¥315 trillion

60

50

40 Bubble Collapse Tax revenue

30

20 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 Source: Ministry of Finance, Japan Note: FY 2008 includes supplementary budget, and FY 2009 is just initial budget.

14

Exhibit 15. With Government Borrowing and Spending the Increase in Private Sector Savings*, Large Deficit Does Not Mean Higher Interest Rates
(% of GDP) 180 (%) 9

Balance Sheet Recession
160 Japanese Government Debt as Percentage of GDP (left scale) 140 Yields on 10year JGB (right scale) 120 6 7 8

100

5

80

4

60

3

40

2

20

1

0 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

0

* Household savings plus corporate debt repayment Sources: Cabinet Office, Japan, Japan Bond Trading Co., Japan Securities Dealers Association

15

Exhibit 16. Japanese Companies Made Huge Progress in Reducing Debt Overhang
(Yen tril., Seasonally Adjusted) 450 400 350 300 250 (as a ratio to nominal GDP, %)

90
Credit Extended by the Banks to 85/4Q Corporate Sector as a Ratio to Nominal GDP (Right Scale)

80

70
200 150 100 50 0 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08
Sources : Bank of Japan, "Loans and Discounts Outstanding by Sector" "Loans to Individuals", Cabinet Office, Japan "National Accounts" Notes: 1. 'Credit Extened by the Banks to Corporation' is extended to 1970 by NRI after adjustment for discontinuities in statistics in 1993 and again in 1975.     2. As a percentage of nominal GDP. For GDP statistics before 1979, 68 SNA is used.

Credit Extended by the Banks to Corporate Sector (Left Scale)

60
last seen in 1956

50

16

Exhibit 17. Japanese Corporate Leverage Came Down Sharply
(Times) 7

6

Japan

5

4

3 US 2

1

0 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

Sources: Ministry of Finance, Japan, US Depertment of Commerce

17

Exhibit 18. Premature Fiscal Reforms in 1997 and 2001 Weakened Economy, Reduced Tax Revenue and Increased Deficit
70
(Yen tril.) (Yen tril.)

Tax Revenue 60 Budget Deficit

Hashimoto Obuchi-Mori fiscal fiscal reform stimulus

Koizumi fiscal reform

70

(initial budget)* (with supplemental budget)*

60

50

50

40

40

30

unnecessary deficit: 30 ¥97.6 tril.
20

20

10

10

0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09
Source: Ministry of Finance, Japan *: estimated by MOF (FY)

0

18

Exhibit 19. Four Kinds of Banking Crises and Their Remedies
Yang
Normal demand for funds (I) Quick NPL disposal Pursue accountability (II) Slow NPL disposal Fat spread

Yin
Weak or non-existent demand for funds (III) Normal NPL disposal Pursue accountability (IV) Slow NPL disposal Capital injection

Localized Banking Crisis Systemic

Type (I): 1989 S&L crisis Type (II): 1982 Latin America debt crisis, nationwide credit crunch in the US between 1991 and 1993, and the Nordic banking crisis in the early 1990s Type (III): Japan prior to 1995 (for example, problems at two credit cooperatives) Type (IV): Japan since 1996, Taiwan since 2000, the US Great Depression of the 1930s, and US and UK subprime crisis since 2007
Source: Richard Koo, The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession, John Wiley & Sons, Singapore, 2008

19

Exhibit 20. Two Capital Injections Ended the Credit Crunch in Japan
Bankers' Willingness to Lend as Seen by the Borrowers, and the Actual Credit Extended by the Banks
('Accommodative' minus 'Restrictive', %points ) 60 Bubble Burst 40 Miyazawa Proposal Large Enterprises (Left Scale) (Y/Y% ) 33

Global Financial Crisis

30 27 24

20 Accommodative 0

21 18

-20 -40

Restrictive

Credit Crunch "Takenaka Shock" (rushed NPL disposal)
(¥7.5 tril.) Small Enterprises (Left Scale)

15 12 9 6 3 0 -3

1st Capital Injection
-60 (¥1.8 tril.)

2nd Capital Injection

-80

-100

Credit Extended by the Banks (right scale) 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08

-6 -9

-120 (Shaded areas indicate periods of BOJ monetary tightening ) Sources : "Tankan", "Loans and Discounts Outstanding by Sector", BOJ

20

Exhibit 21. Percentage of House Purchases that May Lead to “Return the Key”
For Houses Bought before January 2009
(millions)

50 45 88.0% (1) 40 35 70.4% (1) 30 25 20 41.1% 15 10 5 0 At Present (Mar. 2009) Home Prices [-30.2%] Lowest Price in Futures Market (Nov. 2010) [-37.3%] 40% below the Peak 28.7% (2)
(2)

82.9% (1)

46.3% (2)

Source: Nomura Research Institute estimates from the data of US Department of Commerce, National Association of Realtors, S&P "S&P/Case-Shiller® Home Price Indices", and Bloomberg (as of Mar. 18, 2009). Notes: (1) Maximum share of underwater mortgages assuming that the total number of mortgages is 53 million. (2) As (1), but with a 10% downpayment.

21

Exhibit 22. Summary of US Policy Options Based on Japan’s Experience
Fiscal Policy Monetary Policy
Economic Stimulus Capital Injection Monetary easing largely ineffective except
Benefit: • Help financial institutions deleverage • May help unclog some markets if the Fed's presence is viewed as permanent • Government spending more effective than tax cuts • Must be fast acting and seamless for the duration of recession • Effective in ending debilitating credit crunch • Politically unpopular but sooner and bigger the better

Credit Easing
(Asset Purchases)
Risk: May saddle Fed's balance sheet with distressed assets and lead to a serious loss of trust in the Fed and the dollar Keeps financial institutions operating Benefit: Exports encouraged, Imports discouraged

Liquidity Injection

Weaker Dollar

Risks: • May trigger foreign capital outflow leading to higher interest rates • Accelerate imported inflation

Source: Nomura Research Institute

22

Exhibit 23. US Trade Deficit Is Still Enormous
($ mil., SA)

50000 40000 30000 20000 10000 0 -10000 -20000 -30000 -40000 -50000 -60000 -70000 -80000
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09

China's trade balance

Japan's trade surplus

US trade deficit with Japan US trade deficit (Census Basis) US Running Federal Budget Surpluses

US trade deficit with China

Sources: US Department of Commerce, US Department of Treasury, Ministry of Finance Japan National Bureau of Statistics of China These data are seasonally adjusted by Nomura Research Institute.

23

Exhibit 24. Monetary Aggregates Behave Totally Differently under Balance Sheet Recession
Quantitative Easing

(1990/1Q=100, Seasonally adjusted) 300 High-powered Money (Average Balance) Money Supply (M2+CD, Average Balance) 250 Credit Extended to the Private Sector

200

150

Textbook Economics (monetary policy effective)

Balance Sheet Recession (monetary policy NOT effective)

Down 37%

100

50

1990/1Q

0 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 Note: Private sector borrowings seasonally adjusted by Nomura, adjustments made for discontinuities in line with BOJ's "Monetary Survey" Source: Bank of Japan

24

Exhibit 25. Japan’s Money Supply Has Been Kept Up by Government Borrowings (I)
16 14 12 10 8 6 4 2 0 -2 -4 -6 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 Sources: Bank of Japan "Monetary Survey", "Changes in Money Stock (M2+CD), and Credit Statistics" Notes: "Credit extended to others"= (1) public sector + (2) foreign assets (net) + (3) others. (1) Public Sector = credit to the government (net) + credit to regional public sector bodies + credit to public corporations (3) Others= (money + quasi-money + CD) - (foreign assets (net) + domestic credit). Therefore, increase or decrease in "Credit extended to others" will include impact of increase/decrease in public sector debt, increase/decrease in bank debentures issued by private sector banks and deposits of financial institutions, and errors in data.
(Y/Y%)

Credit Extended to Others (Mostly Government) Credit Extended to the Private Sector Money Supply (M2+CD)

Quantitative Easing

25

Exhibit 26. Japan’s Money Supply Has Been Kept Up by Government Borrowings (II)
Balance Sheets of Banks in Japan
December 1998
Assets Liabilities

December 2007
Assets Liabilities

Credit Extended to the Private Sector

Money Supply (M2+CD)

Credit Extended to the Private Sector

¥621.5 tril.

¥501.8 tril. (-99.8)

Money Supply (M2+CD)

¥601.6 tril.

¥744.4 tril. (+122.9)

Credit Extended to the Public Sector

Credit Extended to the Public Sector

¥140.4 tril.
Foreign Assets (net)

Other Liabilities (net)

¥247.2 tril. (+106.8)
Foreign assets (net) Other Liabilities (net)

¥153.2 tril.

¥32.7 tril.

¥74.1 tril. (+41.4)

Total Assets ¥774.7 tril.
Source: Bank of Japan "Monetary Survey"

Total Assets ¥823.1 tril. (+48.4)

¥78.7 tril. (-74.5)

26

Exhibit 27. US Money Supply Growth after 1933 Was also Made Possible by Government Borrowings
Balance Sheets of All Member Banks
June 1929
Assets Liabilities

June 1936
Assets Liabilities

Credit Extended to the Private Sector $29.63 bil.

Deposits $32.18 bil. Credit Extended to the Private Sector $15.80 bil. (-13.83) Credit Extended to the Public Sector Other $8.63 bil. Liabilities (+3.18) $6.93 bil. Other Assets $6.37 bil. (-1.65) Capital Reserves $6.35 bil. $2.24 bil. (-0.12)

June 1933
Assets Liabilities

Credit Extended to the Public Sector $5.45 bil. Other Assets $8.02 bil.

Deposits $23.36 bil. (-8.82) Credit Extended to the Public Sector $16.30 bil. (+7.67)

Credit Extended to the Private Sector $15.71 bil. (-0.09)

Deposits $34.10 bil. (+10.74) (= Money Supply)

Other Other Assets Liabilities $8.91 bil. $4.84 bil. (+2.54) (-2.09) Reserves Capital $5.61 bil. $4.84 bil. (+3.37) (-1.51)

Other Liabilities $7.19 bil. (+2.35) Capital

Reserves $2.36 bil.

$5.24 bil. (+0.40)

Total Assets $45.46 bil.

Total Assets $33.04 bil. (-12.42)

Total Assets $46.53 bil. (+13.49)

Source: Board of Governors of the Federal Reserve System (1976) Banking and Monetary Statistics 1914-1941 pp.72-79

27

Exhibit 28. New Deal policies doubled fiscal expenditures without increasing the budget deficit
($ mn, June) 14000 New Deal policies 12000 10000 8000 6000 4000 2000 0 -2000 -4000 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 Budget deficit as % of GNP (right scale) Revenue (left scale) Unemployment rate (right scale) Expenditures (left scale) 20 16 12 8 4 0 -4 -8 24 (%) 28

Source: Board of Governors of the Federal Reserve System (1976), Vol. 1, p. 513; US Bureau of the Census (1975), p. 229.

28

Exhibit 29. German fiscal stimulus reduced unemployment dramatically
(DM bn) 35 30 25 20 15 10 5 0 N.A. -5 -10 1930 1931 1932 1933 1934 1935 1936 1937 1938 N.A. -5 -10 Fiscal deficit as % of GDP (right scale) Government revenue (left scale) Unemployment rate (right scale) Nazis come to power Government expenditure (left scale) % ( ) 35 30 25 20 15 10 5 0

Source: Mitchell (1975), p. 170; Flora et al. (1987), p. 350; Deutsche Bundesbank (1976).

29

Exhibit 30. Debt Rejection Syndrome Can Last a Long Time: US Interest Rates Took 30 Years to Return to Their 1920s Level
(%)
9 8 US government bond yields Prime BA, 90days US government bond yields 1920-29 average (4.09%, June 1959) Prime BA, 90days 1920-29 average (4.13%, September 1959)

7 6 5
Oct '29 NY Stock Market Crash '33~ New Deal Dec '41 Pearl Harbor Attack Jun '50 Korean War

4 3 2

1 0 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
Source: FRB, Banking and Monetary Statistics 1914-1970 Vol.1, pp.450-451 and 468-471, Vol.2, pp.674-676 and 720-727

30

Exhibit 31. The Anatomy of Balance Sheet Recession and Its Cure
Private Sector Bought Assets with Borrowed Funds Original Money Flow Private Sector Savings

The Problem The Solution

Fall in Asset Prices Vicious Cycle Balance Sheet Problems Develop Government Procures Funds at Low Rates due to the Lack of Private Sector Borrowers Allow Private Sector to Pay down Debt Breaking the Vicious Cycle Private Sector Paying Down Debt Fall in Aggregate Demand Keep Aggregate Demand from Falling

Repair Balance Sheets

Private Sector Moves away from Profit Maximization to Debt Minimization

No Demand for Funds

Weaker Economy and Deflation

Fiscal Stimulus

Central Bank Panics and Dramatically Eases Monetary Policy

More Defaults

Further Fall in Asset Prices

More Non-Performing Loans at Banks Nothing Happens because Private Sector Is Minimizing Debt "Liquidity Trap"

Government Borrowings Help Maintain Money Supply in the Absence of Private Sector Borrowers

Source: Richard Koo, Balance Sheet Recession: Japan's Struggle with Uncharted Economics and its Global Implications , John Wiley & Sons, Singapore 2003

31

Exhibit 32. Yin Yang Cycle of Bubbles and Balance Sheet Recessions

China

Yin (=Shadow)

Bubble

Yang (=Light)

(1) Monetary policy is tightened, leading the bubble to collapse.

(9) Overconfident private sector triggers a bubble.

US Spain UK

(2) Collapse in asset prices leaves private sector with excess liabilities, forcing it into debt minimization mode. The economy falls into a balance sheet recession. (3) With everybody paying down debt, monetary policy stops working. Fiscal policy becomes the main economic tool to maintain demand. (4) Eventually private sector finishes its debt repayments, ending the balance sheet recession. But it still has a phobia about borrowing which keeps interest rates low, and the economy less than fully vibrant. Economy prone to mini-bubbles.

(8) With the economy healthy, the private sector regains its vigour, and confidence returns.

India

(7) Monetary policy becomes the main economic tool, while deficit reduction becomes the top fiscal priority.

Germany Japan

(6) Private sector fund demand recovers, and monetary policy starts working again. Fiscal policy begins to crowd out private investment.

(5) Private sector phobia towards borrowing gradually disappears, and it takes a more bullish stance towards fund raising.
Source: Richard Koo, The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession , John Wiley & Sons, Singapore, April 2008 p.160.

32

Exhibit 33. Contrast Between Yin and Yang Phases of a Cycle

Yang
1) Phenomenon 2) Fundamental driver 3) Corporate financial condition 4) Behavioral principle 5) Outcome 6) Monetary policy 7) Fiscal policy 8) Prices 9) Interest rates 10) Savings 11) Remedy for Banking Crisis a) Localized b) Systemic
Textbook economy Adam Smith's "invisible hand" Assets > Liabilities Profit maximization Greatest good for greatest number Effective Counterproductive (crowding-out) Inflation Normal Virtue Quick NPL disposal Pursue accountability Slow NPL disposal Fat spread

Yin
Balance sheet recession Fallacy of composition Assets < Liabilities Debt minimization Depression if left unattended Ineffective (liquidity trap) Effective Deflation Very low Vice (paradox of thrift) Normal NPL disposal Pursue accountability Slow NPL disposal Capital injection

Source: Richard Koo, The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession , John Wiley & Sons, Singapore, 2008

33

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