Stephen Roach has written an Op-Ed in today’s Financial Times that is worth reading. He outlines his version of Richard Koo’s Balance Sheet Recession theorem, opining that “the global economy is being hobbled by a new generation of zombies – the economic walking dead.”
His main points are:
American consumers are retrenching. In the 3 1/4 years since 2008 began, real consumption growth has averaged 0.5% on an annualised basis, the lowest since World War II. That data point certainly rhymes with the consumer deleveraging of Koo’s balance sheet recession.
Zombie companies remain on life support. Roach says the antecedent to this is Japan where Japanese banks extended credit to effectively insolvent companies, postponing a full recovery for two decades. Roach calls this the “Japan disease”. This data point is at odds with Richard Koo’s prescriptions.
Washington policymakers are doing everything they can to forestall rational economic adjustments. The Federal Reserve has conducted two rounds of quantitative easing in an effort to get consumers to start spending the wealth effects of a policy-induced rebound in equities. Congress and the White House have embraced home-foreclosure containment programmes and other forms of debt forgiveness.
The aim is to get zombie consumers to ignore their festering problems and start spending again – irrespective of the wrenching balance sheet damage they suffered in the “great recession”. The subtext is Washington condones a revival of reckless behaviour.
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