The global economy will collapse again if governments around the world read too much into recent signs of “green shoots” and pull the plug on stimulus measures before demand for loans picks up or corporate balance sheets recover, Richard Koo (辜朝明), chief economist at Nomura Research Institute (野村證券研究所), the research arm of Nomura Securities in Tokyo, told a business gathering in Taipei yesterday.
“We’re not out of the woods yet,” he said, adding that another economic collapse would deal a much more serious blow to business and public confidence.
Koo said continued expansionary fiscal spending was the only thing governments could do to bolster GDP in the face of the unprecedented and highly unusual recession, which he called a “balance sheet recession.”
“In this special type of recession, the economy will not enter self-sustained growth until the private sector’s balance sheet has repaired itself and begins to borrow loans to maximize profits,” Koo said.
He said the US, Europe, China and Taiwan should learn from Japan’s experience and lessons from the 1990s and allow a five to 10-year government stimulus spending plan to put their economies back on track.
Despite a burst of asset bubbles in 1990, Japan’s GDP continued to grow, which Koo said was the result of government spending rather than the central bank’s monetary policies and slashing interest rates.
During that period, he said, businesses refrained from borrowing to minimize debts after asset values dropped by an all-time high of 87 percent observed in 2005.
Between 1990 and 2005, the Japanese government incurred an additional deficit of ¥315 trillion (US$3.298 trillion), but created an estimated ¥2,000 trillion growth during the same period, Koo said.
“These were good budget deficits,” he said.
Koo, once a doctoral fellow at the US Federal Reserve System’s board of governors, expressed concern over US President Barack Obama’s vow to cut the US deficit by half in four years, which he feared could make the US’ momentum-losing economy look even less appealing.
US property prices are still falling and might only rebound next May, he said.
The chief economist, who is also an adviser to many governments, lauded the Chinese government’s stimulus efforts to support the economy.
He said that during a closed-door meeting with President Ma Ying-jeou (馬英九) yesterday morning, Ma promised that his administration would maintain its medium-term fiscal stimulus plan if the global economy continued to suffer.
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