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Generational Dynamics Web Log for 24-Dec-2008
The effects of massive fiscal stimulus.

Web Log - December, 2008

The effects of massive fiscal stimulus.

A study comparing Japan's deflationary spiral with ours shows the way.


Nikkei 225 Index -- Tokyo Stock Exchange -- 1984-2007 and 1914-2007.
Nikkei 225 Index -- Tokyo Stock Exchange -- 1984-2007 and 1914-2007.

Japan seems to run 10-20 years ahead of the United States, at least in the area of stock market crashes.

Japan had a major stock market crash in 1919, leading to a new bubble 65 years later, beginning in 1984, and a new stock market crash in 1990.

The US had a major stock market crash in 1929, leading to a new bubble 66 years later, beginning in 1995, and a major financial crisis beginning in 2007, probably with a new stock market crash to come soon.

Related Articles

Fiscal stimulus
The current stock market bubble correlates with bailouts and stimulus: This is another refutation of Richard Koo's stimulus theories.... (14-Oct-2009)
Fiscal stimulus programs in 1930s and today: Did Hitler really do everything right?... (1-Apr-2009)
The effects of massive fiscal stimulus - Part II: President-elect Barack Obama is turning apocalyptic in his speeches.... (12-Jan-2009)
The economic outlook for 2009 : How we got to where we are today, who's to blame, and where we're going in 2009. (5-Jan-2009)
The effects of massive fiscal stimulus.: A study comparing Japan's deflationary spiral with ours shows the way.... (24-Dec-2008)
One, Two, Three ... Infinity: Watching the world spin out of control.... (25-Nov-2008)

Thus, for people trying to understand what's coming, we have two big examples to look at: America in the 1930s, and Japan in the 1990s.

Now, an October presentation by Richard C. Koo, Chief Economist at Nomura Research Institute, compares Japan's 1990s deflationary spiral with America's in the 1930s and today. (The web site has links to the presentation slides (PDF) and to a video of the 1 hour presentation.)

Koo says that what has happened in Japan -- a "balance sheet recession" -- is not in any economics textbook, and he now sees the same thing happening not only in the US, but in Europe, in Asia, and around the world.

I watched the entire 1 hour presentation, and I was transfixed. This comparison of Japan with the US provides a great deal of insight into where the American and world economies are going.

A "balance sheet recession" occurs as follows (this is my way of formulating Koo's description):

Koo points out that this violates much of mainstream macroeconomic theory, which assumes that people and businesses will want to borrow money when interest rates are nearly zero. But monetary policy simply stops working.

Since monetary policy stops working, a government has to resort to fiscal policy -- a huge fiscal stimulus package. The purpose of this is to keep the GDP from falling. The government does the opposite of what the private sector is doing. The private sector is paying down debt, refusing to borrow and spend. The government borrows and spends huge amounts of money.


Richard Koo's presentation, exhibit 6, shows Japan's GDP kept growing during the 1990s.
Richard Koo's presentation, exhibit 6, shows Japan's GDP kept growing during the 1990s.

Koo addressed several issues that arise:

Koo notes that Europe needs to do a similar massive fiscal stimulus, but won't be able to because individual countries are prevented by the 1992 Maastricht treaty from spending more than 3% of GDP on fiscal stimulus.

As long-time readers of this web site know, I've been saying since 2002 that we're headed for a 1930s style Great Depression. I've read and commented on millions of words of stuff by people like Ben Bernanke, Paul Krugman, and other mainstream economists, and, as I've said many times, it's all crap. (In fact, during the course of his presentation, Koo also said that Bernanke, Krugman and mainstream macroeconomists were wrong.)

Koo's presentation is the first thing I've heard in years that's causing me to reassess some conclusions. I'm going to have to think about this for a few days or weeks, but these are my first thoughts:

I have a feeling that I'm going to be commenting on these concepts quite a bit in the next few weeks and months. For now, everyone who's into economics is urged to invest 1 hours in watching the video of Koo's presentation.

(Comments: For reader comments, questions and discussion, as well as more frequent updates on this subject, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (24-Dec-2008) Permanent Link
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