The United States runs the risk of repeating the mistakes of Japan and diving into a lost decade like the Japanese economy did in the 1990’s.
This is the warning of Richard Koo, Chief Economist of Nomura Research Institute and a leading specialist in something called “balance sheet recessions,” where consumers and businesses need to go through a process of debt-reduction.
Koo will come to Brazil in next week with a lecture about “What the United States Must Learn from the Japanese Recession.”
Folha: Sir, do you see a risk that the American economy is once again in a state of entering a recession?
Richard Koo: The American economy is losing steam gradually. The 2009 recuperation was basically due to the fiscal stimulus promoted by the government. Now, these stimuli are stopping, but there is no replacement yet in demand by the private sector. The private sector still is in the process of debt-reduction and will not begin to consume until this process stops. Recently, the government’s support to the economy was monitory with increased liquidity, which was of no use. What is necessary is fiscal stimulus. The United States is in exactly the same situation as Japan.
Folha: Did you say that the United States is in a “balance sheet” recession?
Koo: Yes, it is the same problem that Japan had. It is not a normal recession, it is a different illness. It is a recession that appears just once every 70 years. A balance sheet recession occurs after an an explosion of an asset bubble financed with debt. The private sector is reducing its debts contracted in the period of euphoria, so injecting liquidity and reducing interest are of no use because consumers want to reduce their debt, not take out loans. What we need now is a continuation of the fiscal stimulus program, where the government borrows and spends on works, for example, to substitute for the demand that is not coming from the private sector.
Folha: Do you think the United States is falling into the same trap as Japan?
Koo: Yes, It will be very difficult to convince the Republicans that the government needs to continue to spend on programs of fiscal stimulus because they want to start to cut expenses and reduce the deficit now. But if the conservatives manage to stop the fiscal stimuli now, when the private sector is still trying to reduce its debts, the economy will return to deceleration. It took 15 years for them (the Japanese) to leave the “balance sheet recession” in the 1990’s because they prematurely retracted the necessary remedy.
Fohla: Do you believe the Unites States is suffering from a structural unemployment and that even when the economy heats up, interest rates won’t fall much?
Koo: No, this is a problem of demand. When the demand returns, so will the jobs. For this reason, it is important to not stop the fiscal stimulus program prematurely.