"Austerity" measures have a lot of fans who view national accounts as one big overgrown household budget, but against the backdrop you describe, the risk of triggering a "balance sheet recession" is very real https://en.wikipedia.org/wiki/Balance_sheet_recession
"Corporate investment, a key demand component of GDP, fell enormously (22% of GDP) between 1990 and its peak decline in 2003. Japanese firms overall became net savers after 1998, as opposed to borrowers. Koo argues that it was massive fiscal stimulus (borrowing and spending by the government) that offset this decline and enabled Japan to maintain its level of GDP. In his view, this avoided a U.S. type Great Depression, in which U.S. GDP fell by 46%. He argued that monetary policy (e.g., central banks lowering key interest rates) was ineffective because there was limited demand for funds while firms paid down their liabilities, even at near-zero interest rates. In a balance sheet recession, GDP declines by the amount of debt repayment and un-borrowed individual savings, leaving government stimulus spending as the primary remedy."
thanks, but not quite...i meant that there was no inflation in japan, there had to be a deep recession first, followed by a balance sheet recession. You expect a similar story in the USA...so the USA would also have to go into a deep recession and thus affect the stock markets (bearmarket) so that a long phase without inflation could follow...or is it possible without a recession (bearmarket)..merci dir!
I think in the US what will likely be different is that there is no deep recession or a total destruction of inflation necessary. I think we will live this year with disinflation but overall inflation will remain in the normal range of 2-2.5%.
Yes a recession will need to happen to get inflation to these levels but not a deep recession.
In essence I expect the US to follow in Japan’s footsteps but not at zero interest rates but more at 2% inflation with similar levels of interest rates.
In my mind I think of it all as Hapan shifted upward by 2% if that makes sense.
The US debt future is the same as Japan's debt history. I hope so. It's interesting to me that Japan has been able to do this while keeping inflation very low. I'm not sure the US will manage the same low inflation rate if it use yield control on rates.
Hello Joachim, many thanks for this very interesting post!
I'd have a question.
Frankly I do not understand the correlation between the low-yield environment and a self-perpetuating wealth effect:
"Second, the artificially low yields on long-term government bonds mean that there is a redistribution of wealth towards owners of assets with long duration. These tend to be older and wealthier households who own homes and have larger investment portfolios. Younger and poorer households, on the other hand often must borrow at high interest rates with short maturities or have no investment portfolios and thus only earn short-term interest rates on their bank accounts."
Isn't it always the case, whatever the yield environment, that wealthy households get better borrowing conditions (longer maturities, lower interest rates) than poorer, hence for the borrower riskier households?
Yes, you are right. Welathiee households face lower borrowing costs, but the wealth transfer becomes faster at lower interest rate levels. That is because poorer households do not hold equities and real estate. Their savings are almost entirely in bank deposits. So with low interest rates, their savings grow at a much lower speed than richer households who have disproportionately large savings in stocks and real estate. The middle class is somewhere in between with their homes being their biggest asset and that appreciates. But I) the rest of their savings tend not to be in stocks but in bonds and bank deposits, and ii) the problem with getting into the housing ladder becomes harder and harder with every generation the more expensive houses get because they simply can’t save the capital needed to buy their first home. The last one is already a major problem in the UK where housing supply is more restricted than in the US.
I'd be interested to see an analysis which included Japan's trade surplus and government expenditure
"Austerity" measures have a lot of fans who view national accounts as one big overgrown household budget, but against the backdrop you describe, the risk of triggering a "balance sheet recession" is very real https://en.wikipedia.org/wiki/Balance_sheet_recession
"Corporate investment, a key demand component of GDP, fell enormously (22% of GDP) between 1990 and its peak decline in 2003. Japanese firms overall became net savers after 1998, as opposed to borrowers. Koo argues that it was massive fiscal stimulus (borrowing and spending by the government) that offset this decline and enabled Japan to maintain its level of GDP. In his view, this avoided a U.S. type Great Depression, in which U.S. GDP fell by 46%. He argued that monetary policy (e.g., central banks lowering key interest rates) was ineffective because there was limited demand for funds while firms paid down their liabilities, even at near-zero interest rates. In a balance sheet recession, GDP declines by the amount of debt repayment and un-borrowed individual savings, leaving government stimulus spending as the primary remedy."
but so that there is no inflation, it only works in a balance sheet recession...then you expect a negative equity phase first? thanks
Do you mean negative equity for the Bank of Japan? Possibly, but that is completely irrelevant, because a central bank cannot go bankrupt.
thanks, but not quite...i meant that there was no inflation in japan, there had to be a deep recession first, followed by a balance sheet recession. You expect a similar story in the USA...so the USA would also have to go into a deep recession and thus affect the stock markets (bearmarket) so that a long phase without inflation could follow...or is it possible without a recession (bearmarket)..merci dir!
Ah sorry I misunderstood.
I think in the US what will likely be different is that there is no deep recession or a total destruction of inflation necessary. I think we will live this year with disinflation but overall inflation will remain in the normal range of 2-2.5%.
Yes a recession will need to happen to get inflation to these levels but not a deep recession.
In essence I expect the US to follow in Japan’s footsteps but not at zero interest rates but more at 2% inflation with similar levels of interest rates.
In my mind I think of it all as Hapan shifted upward by 2% if that makes sense.
Cheers
Joachim
The US debt future is the same as Japan's debt history. I hope so. It's interesting to me that Japan has been able to do this while keeping inflation very low. I'm not sure the US will manage the same low inflation rate if it use yield control on rates.
See my answer to the previous comment in the inflation outlook, please.
Hello Joachim, many thanks for this very interesting post!
I'd have a question.
Frankly I do not understand the correlation between the low-yield environment and a self-perpetuating wealth effect:
"Second, the artificially low yields on long-term government bonds mean that there is a redistribution of wealth towards owners of assets with long duration. These tend to be older and wealthier households who own homes and have larger investment portfolios. Younger and poorer households, on the other hand often must borrow at high interest rates with short maturities or have no investment portfolios and thus only earn short-term interest rates on their bank accounts."
Isn't it always the case, whatever the yield environment, that wealthy households get better borrowing conditions (longer maturities, lower interest rates) than poorer, hence for the borrower riskier households?
Yes, you are right. Welathiee households face lower borrowing costs, but the wealth transfer becomes faster at lower interest rate levels. That is because poorer households do not hold equities and real estate. Their savings are almost entirely in bank deposits. So with low interest rates, their savings grow at a much lower speed than richer households who have disproportionately large savings in stocks and real estate. The middle class is somewhere in between with their homes being their biggest asset and that appreciates. But I) the rest of their savings tend not to be in stocks but in bonds and bank deposits, and ii) the problem with getting into the housing ladder becomes harder and harder with every generation the more expensive houses get because they simply can’t save the capital needed to buy their first home. The last one is already a major problem in the UK where housing supply is more restricted than in the US.
Got it, thanks for explaining!