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News Link • Economy - Economics USA

RICHARD KOO: If History Is Any Guide, Hitting The Fiscal Cliff Will Lead To 'Economic Meltdown

• http://www.businessinsider.com, Joe Weisenthal
 ...I think the CBO estimates of a 0.5% contraction in output and a 9.1% unemployment rate are overly optimistic. Under current conditions it is extremely unrealistic to assume that a tax hike equal to 3% of GDP will only depress GDP by 0.5%.

In Japan, the Hashimoto administration undertook a fiscal consolidation program equal to 3% of GDP in 1997. The result was an economic meltdown, with data at the time indicating five straight quarters of contraction. GDP shrank by 3.0% in real terms and 4.0% in nominal terms. The resulting double dip sparked major bad loan problems in the banking sector, and the fiscal deficit, originally projected to decline by ¥15trn, increased by ¥16trn instead.

Japanese real estate prices at the time had finally dropped back to the pre-bubble levels of 1985, attracting many so-called asset strippers from New York along with a large number of overseas Chinese investors and lending support to the apparent bottom in prices. Moreover, the private sector was a net saver to the tune of 6% of GDP in spite of nearly zero interest rates, mirroring the situation in the US today.

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