Despite record-low interest rates, private sectors in the US and across the eurozone refuse to borrow, contributing to a sluggish economy, an economist said yesterday, adding that China and other countries can avoid this predicament by adopting more fiscal stimulus to boost growth.
Richard Koo (辜朝明), chief economist of Nomura Research Institute who is known for his balance sheet recession theory, also suggested European countries restrict their citizens to holding domestic government bonds to curb cash flights and stabilize financial markets.
“Private sectors have increased savings after the household bubbles in the 2008, leaving liquidity injections with minimal effect,” Koo said in a speech in Taipei entitled What the West Can Learn from Japan’s Lesson.
Sustained deleveraging by both government and private sectors accounts for balance sheet recessions that are plaguing debt-ridden European countries and slowing recovery in the US, said Koo, who worked as an economic adviser for the US Federal Reserve before joining Nomura.
Balance sheet recessions occur when private sectors are using cash flows to pay down debts rather than spend and invest, thereby causing massive wealth losses as Japan did between 1990 and 2005 following a debt-financed bubble, Koo said.
As of the first quarter, US private sector savings was 7.33 percent of GDP, while the eurozone had 4.06 percent of aggregate GDP, the economist said.
Ireland had 9.97 percent of GDP, Spain 5.55 percent and Portugal 4.03 percent, he added.
The figures show those countries are not suffering from overspending, but high savings, said Koo, who is pushing for an expansion of fiscal spending to battle the shortage in demand.
Koo, who was ranked the best economist covering Japan for several years, said Greece was not a victim of balance sheet recession because the country “screwed up.”
As such, it made no sense for European countries to count on belt-tightening to lift them out of the current downturn, he said.
The government should step in and borrow more to stimulate economic growth if private sectors are afraid of doing so, he said, adding that fiscal stimulus is more effective than monetary easing to spur demand.
Koo said the eurozone has two structural deficiencies — including the treaty that limits the ratio of the annual government deficit to 3 percent of GDP — because it fails to factor in the risk of balance sheet recessions.
In addition, it has no solutions to destabilizing capital flows between government bond markets among member countries, he said.
“One way to address the [latter] problem is to restrict citizens to holding home government bonds,” Koo said. “Enforcement is an issue among other hurdles, but it can be done.”