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Richard Koo: It's not too late to learn from Japan


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Guest Bronco

I don't know who this joker is, but I could care less.

 

There needs to be a major shift in thinking in the US.  It hasn't taken place.

 

The US government is way too big.  You could easily cut government and not cut benefits (SS, Medicare). But we need to do both.

 

These 2 programs are funny.  Nobody wants to cut them but my bet is that everyone would opt out if they were under 40 given the choice.  They are horrible by anyone's imagination. 

 

Let's me a deal - give me $500,000 or more over your liftetime and when you turn 70 (if you make it that long) I'll pay you something back.  Huh?  WTF thinks that is a good idea.  I'll tell you who - someone without good ideas.

 

 

 

 

 

 

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Richard Koo's ideas are good ones -- his analysis is sound, in my opinion.  Balance sheet recession, and the fix will be eventual balance sheet repair.  I don't think the political winds are in the direction of being able to have rational discussion of alternatives.  Too many points to be gained from bashing.  But -- recognizing "large-scale" drift towards rocks, does not impede one from making "smaller" investment decisions.  The familiar think globally, act locally dichotomy.  Can always help people with ideas, foster next generation, etc ... many alternatives for ways to build up social infrastructure.

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I keep hearing so much about the government "investing in the future", I thought for a second I was living in the United States of Berkshire Hathaway, and our President and Vice President was Buffett and Munger!! Imagine what they could have done with all of THAT FLOAT (tax revenues)!

Except we all KNOW (I think) that our government is more MADOFF than Buffett/Munger/Graham!

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Hi Bronco aka Coal Grill !  Balance sheet recession is a different sort of phenomenon from your usual recession, which might be called a business cycle slowdown recession.  In balance sheet recession, excessive debt, have to repair balance sheets.  Koo has various metrics which allow one to model and understand the process.  His book is worthwhile reading.  There's also an online presentation, audio + slides, and there is a link to it somewhere in the archives of this site.  A search for old posts "Koo" should turn up some helpful links.  The online presentation doesn't do justice to his thinking -- he had only an hour, and had to leave a great deal out, skim over other points.  But it's a starting place.  All I can say, is Koo's models are pretty impressive.  Does not matter what political persuasion one may have.  We are all sort of Mungerites here, right?  Looking for a variety of mental models to understand various aspects of economic / investing context.  Won't get into a political debate ... this is not the site ... if you're seriously interested, Koo's book or presentation is the place to look.

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I don't know who this joker is, but I could care less.

 

There needs to be a major shift in thinking in the US.  It hasn't taken place.

 

The US government is way too big.  You could easily cut government and not cut benefits (SS, Medicare). But we need to do both.

 

These 2 programs are funny.  Nobody wants to cut them but my bet is that everyone would opt out if they were under 40 given the choice.  They are horrible by anyone's imagination.  

 

Let's me a deal - give me $500,000 or more over your liftetime and when you turn 70 (if you make it that long) I'll pay you something back.  Huh?  WTF thinks that is a good idea.  I'll tell you who - someone without good ideas.

 

Bronco I think this sort of thinking is what caused the great depression. Ideology is nice, but we have a country to run. Koo has my vote as a man who understands the issue. In a chat this weekend he said Bernanke read, and understood his book.

 

 

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John when you really think about it Japan really didnt have much of a lost decade or 2 considering that they maintained their quality of life despite having a huge bubble. Also I think Koo really argues that one shouldnt break stimulus. He says breaking stimulus twice (I think it was twice) really set the Japanese government back a ways.

 

The US has it easy inmo. 1, consumers in the US will spend when they can (unlike Japanese consumers or corporations). 2, we have several value added projects available (considering our inadequate infrastructure and energy needs). We have worse politicians though (on both sides), and an illiterate unconcerned electorate.

 

http://feedproxy.google.com/~r/EconomistsView/~3/auhoOgECEWE/video-richard-koo.html

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Guest Bronco

Its really the poor that will be victims as the dollar gets thrashed.  I don't see the government really doing anything right these days.  I could come up with 10 - 20 ideas that are better than what this nut job has to say.

 

 

Richard Koo Koo - he's not for me.

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Its really the poor that will be victims as the dollar gets thrashed.  I don't see the government really doing anything right these days.  I could come up with 10 - 20 ideas that are better than what this nut job has to say.

 

Richard Koo Koo - he's not for me.

 

Perhaps, but you havent even considered his arguments. For a hammer every problem is a nail. For a man with Ideology he has his answers regardless of the questions.

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Perhaps, but you havent even considered his arguments. For a hammer every problem is a nail. For a man with Ideology he has his answers regardless of the questions.

 

I have no knowledge of Koo (he's on my reading list) beyond what is on this board, but this quote reminded me of something very (VERY) dumb I said once to someone who was trying to convince of something (correctly).

 

"Don't bother me with the facts, I have the truth."

 

I really said that, and I wasn't that young when I did so... here's to us all looking at more facts, especially me!!

 

Ben

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Benhacker thats funny. I will right that down one day and use it lol. It sucks that he was right.

Another I like is Munger's - You will come around and agree with me, because I am right and you are smart.

 

Honestly though my goal is to avoid these sort of arguments. So little time in life and few people are open to learning or at least hearing a new idea out.

 

I watched Inside Job last night, so I am a bit jaded (didnt realize how cop-able academia was). I do feel that Munger and Koo have a point, the Chinese just do what works, they arent wedded to an Ideology. I feel like its one of the few things that will bring America down one day.

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Am I missing something?  How does borrowing more money for stimulus help the problem of overindebtiness?  As far as I can see Japan is still not of its balance sheet recession, so why would you want to take this advice until it is shown to work.  As far as I can see, the reason Japan has not collapsed is internal investors have funded deficit spending in exchange for small returns (in essence the gov't has consumed the savers savings).  An interesting point will occur when Japan can no longer rely on internal savings to fund this spending.  I suppose a default will occur as has always occured to lighten the debt load and the savings will be gone.  If someone can show me where I seem to have missed something that would great.

 

Packer 

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Am I missing something?

 

No Packer you are not missing anything. Our politicians and the Fed think that they can encourage a credit bubble of enormous proportions by printing money and micro-managing the economy, and then get out of it by printing even more money, further debasing the $ and creating artificial asset/commodity inflation. Not to mention the elimination of moral hazard which is the foundation of the next Bubble. Printing money down thru history has ultimately always failed.  When a system screws up like ours did it is absolutely necessary for everyone to suffer. And to suffer to such an extent that the rediculous risk-taking will not occur again, or at least for a long time. Clean the system out and start over. No money printing or bailouts.

 

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Am I missing something?  How does borrowing more money for stimulus help the problem of overindebtiness?  As far as I can see Japan is still not of its balance sheet recession, so why would you want to take this advice until it is shown to work.  As far as I can see, the reason Japan has not collapsed is internal investors have funded deficit spending in exchange for small returns (in essence the gov't has consumed the savers savings).  An interesting point will occur when Japan can no longer rely on internal savings to fund this spending.  I suppose a default will occur as has always occured to lighten the debt load and the savings will be gone.  If someone can show me where I seem to have missed something that would great.

 

Packer  

 

Well what every smart economist is saying - (I know thats a bad way to start a sentence), Is you put in solutions to long term deficits and debt issues, but you dont cut back now. Europe is cutting back and its not working, the UK has slowed. Martin Wolf (a great economist) and Sumners (I have little respect for him) discussed this in an interview.

 

Basically putting together a plan which address our long term budget deficit and debt (Entitlement cuts, Military spending cuts (giving up our empire), tax raises, solving our long term health cost issues, or all of the above) and making it law would do the trick. That would put our fiscal house in order, while allowing us to continue supporting the economy now.

 

Paul Ryan's plan is more geared towards cutting taxes for the wealthy and doesnt balance the budget till 2050. As far as I can tell Obama has no real plan though one will be released in a few days. Bronco is right Washington sucks, but Koo is on to something inmo. Packer his advice is the best of a bad lot. The alternatives are as follows from what I can see.

 

liquidate, liquidate, liquidate - (Basically refer to the prior post) We all know how that went in the 30s. Its easy to sound logical as an Austrian Economist but it doesnt aspire much hope, and sounds just as bad as just printing money. Basically let everything fail, sounds great in theory, but I wouldnt want to be around when that ideological science experiment went down). Give me inflation anyday.

 

Cut Spending to Balance the Budget - Being tried in the UK and Europe. So far not working, was tried in Japan. Tax revenues fail from economic weakness which required more cuts, and blah blah blah.

 

The best advice is to avoid the problem, but we are here. Spend on value added problems, implement solutions to long term debt in whatever way makes sense, and hope she heals. Its what I would do.

 

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If you watch the video you will see Koo makes sense. Not in a sound bite how do you solve a debt problem with more debt, or Americans are tightening up so we should too kinda way. But in a damn that guy is smart as hell and has a PHD kinda way. I would go with the PHD (specifically this PHD, not the Greenspan variety), vs the witty one liner when solving problems that involve trillions, but what the hell do I know.

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These are nice ways to deal with the problem in the short/intermediate term but what is Koos end game and are the actions getting any closer to that result.  I would think the goal would be to balance supply and demand, however, with the gov't pumping demand how does it ever get into balance? Maybe in Japan it is to increase consumer demand but is gov't deficit spending the way to do it or does it just dig a deeper hole that has to paid for with tax increases further lowering demand?  Could Japan be going in a spiral the wrong way?  Increasing debt and decreasing future demand via higher taxes or default?  Default may be a way to break this downward spiral and provide money to create demand. 

 

One contrary thought is that the prescription for Japan/China and the US today may be different due to savings habits and that may also be why the stimulus worked in China and in the US in the 1930s but not here today.  Given the propensity to save in China and Japan, the gov't acts contrary by forcing spending via projects (which in China's case added value versus Japan's which added less value).  If there is propensity to spend in the US shouldn't we provide incentive to go against the wind and save?  Just a few thoughts.

 

Packer

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I think the Japense are unique. You will have a hard time convincing the Corporate sector to spend money there. Its the biggest value trap known to man, because the executives just build cash.

 

We wont have that problem with our consumers. Americans want to consume. Also Krugman and Stiglitz touched on the fact that we have similar benefits. During economic weakness, everyone wants Greenbacks at very low rates. I dont know how true this is and with QE its tough to sell. Should be interesting to see how those auctions go when the fed pulls back. It makes sense though. Currently we have excess capital available which is not being spent. Where else is it going to go? If they start spending it (as Bernanke is almost forcing folks to) then the Gov / Fed can pullback.

 

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My question for you, is what are the alternatives, which are viable? Its tough for guys like you and I to think like this. We dont get into truly awful situations (I am assuming here). Japan had what was one of the biggest bubbles in modern history and has done rather fine all things considered. Watch the video, Koo is quite convincing. A huge drop in RE, and a huge drop in Stock market value. China has copied them.

 

The hand sucks, but you have to play it. What would you do? What makes sense? I am beginning to think Economics is managed chaos. There is no end goal, you go from crisis to crisis, unless you get it right from a long time ago like Canada, Australia, or Singapore.

 

 

You have to look at all the alternatives and pick the least bad one. Shutting down the government and fighting over a 1.4 billion dollar deficit vs. a 1.5 billion dollar deficit is retarded, but thats what happens in Washington. I also dont think the deficit is really simulating anything (what are we getting out of it). I would run the same amount, but we would get massive infrastructure and other gains. I would put together a plan that ran a deficit until 2015, and then ran surpluses - there would be plenty of pain to go around  ;D (health rationing for the poor, tax raises for the rich, severe military cuts, full entitlement changes, raising retirement ages).

 

Suffice to say I would never get elected.

 

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I dont have all or really any answers. I just have thought about this alot based on info from the top economists from most persuasions. I think whats going on makes sense, given the shitty shitty hand. I dont worry about the Economists, I worry about the Politicians.

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Guest Bronco

Things we can do....

 

Stop ridiculous housing subsidies that drive up prices for first time home owners and the poor

Stop burning food

Stop defending the world for free

Stop subsidizing the world with pharmaceuticals

Stop trapping capital a and jobs overseas

Stop taxing the crap out of the "rich" making 250,000 and develop a real AMT that taxes those earning over 10 million a flat 35 percent

Stop the ridiculous sarbanes oxley

Stop education subsidies for college that drive up prices

Stop any government employee from retiring at 40 with an 80,000 annual pension

Stop social security because it is ineffective and inefficient

Stop Medicare as it will ruin the country

Start focusing on freedom and responsibility

Start Importing sugar from Brazil

Start an energy policy with nat gas at the core

Start subsidizing 6'4" blonde males with cash

Start a balanced budget amendment beginning soon (2014).  You can only spend what you raised the year before.  No exceptions.

Start Putting Fannie Mae and barbie frank in runoff ( yes barbie frank)

 

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Guest Bronco

Myth - let me guess, you didn't like the subsidy to 6'4" blonde males with 2 kids living in NJ?

 

We all need a break in life.

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I agree that they have bad options but if they don't have a long term goal (lets say debt level to GDP or some other type of mesaure) then you wander for years frittering away your savings.  Look at Japan.  It has huge trade surpluses (giant importations of wealth) and a large savings rate (2 great wealth building characteristics) and still has racked huge amounts of debt trying to stimulate an unsustainable level of demand for its country.  With population declines, demand/GDP should go down at least relatively.  This artifical demand (created by polititians) will eventually eat away at real demand as the money borrowed has to be paid back.  I think Japan's best option to get out of this spiral is a partial default.  Iceland provides the best example of how this actally works versus Japan is an example of how not to deal with debt.  BTW, that may be our only option in the US if we cannot correct this problem soon.

 

This is my issue with many of these economists is that they appear to think that demand can be created out of thin air by the gov't by borrowing.  All you are doing is borrowing from tommorows demand to pay for todays growth.  This apparent demand can be like a narcotic hooking a country until it becomes too late to do anything but default.  I think a Japanese default would be a good lesson to show that governments will not continue to crush its citizens with taxes to pay for debt they should not have incurred in the first place.

 

Packer 

 

 

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Stop ridiculous housing subsidies that drive up prices for first time home owners and the poor

Stop burning food

Stop defending the world for free

Stop subsidizing the world with pharmaceuticals

Stop trapping capital a and jobs overseas

Stop taxing the crap out of the "rich" making 250,000 and develop a real AMT that taxes those earning over 10 million a flat 35 percent

 

Sorry, 250k is rich.  If it's not rich where you are, that's a choice.  The government isn't responsible for your spending choices.  The AMT needs real reform.  Flat taxes are not the answer.  We have computers now--a completely continuous function is the way to do graduated income taxes.

 

Stop the ridiculous sarbanes oxley

 

Reform, not repeal.  We also need glass-steagall back.

 

Stop education subsidies for college that drive up prices

 

Yes and no.  It's not like universities are rolling in dough.  Salaries for stellar administrators often just meet industry averages, and sometimes not even then.

 

Stop any government employee from retiring at 40 with an 80,000 annual pension

Stop social security because it is ineffective and inefficient

Stop Medicare as it will ruin the country

 

Not having universal healthcare is a huge burden on business in this country.  Dealing with a variety of different insurance companies is a complete pain in the ass.  Most people are satisfied with their healthcare in this country either because they don't use it or they don't know any better.  People here cry about "waitlists", but when you have to wait 3+ months to see a specialist, I don't see much of a difference.

 

Start focusing on freedom and responsibility

 

Sure.  What does this mean, though?  It's easy to put out platitudes.

 

Start Importing sugar from Brazil

Start an energy policy with nat gas at the core

Start subsidizing 6'4" blonde males with cash

 

I'd prefer a slightly different selection here...

 

Start a balanced budget amendment beginning soon (2014).  You can only spend what you raised the year before.  No exceptions.

Start Putting Fannie Mae and barbie frank in runoff ( yes barbie frank)

 

A completely balanced budget is too primitive.  There are legitimate times when you need to spend somewhat more; these times need to be balanced by running surpluses at other times.  Now, how do you legislate that?

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Guest Bronco

I'll address your last point - you can Al Gore the MF'er and lockbox your surpluses from a certain starting point.  After that starting point, you can only run a deficit to the extent of the prior surplus.

 

Not hard to legislate.

 

However, it will never happen.  Not enough people are serious about the issues.  

 

And defining $250k as rich is a ridiculous statement.  You lose a lot of street cred with me on that.  If I made 250k one year out of 10 but spent it all, does that mean I am rich?

 

Increase freedom and responsibility.  I think we all know what that means.  I could love my life just fine with much more limited government services.  Here is what I see as necessary - police, fire dept, infrastructure, military to protect borders, courts, food water and air regulators.  

 

I know this doesn't capture everything but the government wants their hand in your pocket for everything and provides little in return.  As a second generation American I see all the money my family and I have paid in and what is returned and it is downright disgusting.  

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And defining $250k as rich is a ridiculous statement.  You lose a lot of street cred with me on that.  If I made 250k one year out of 10 but spent it all, does that mean I am rich?

 

It is true that the tax system is biased on the calendar year adjustment.  I could envision better systems, but it's what we have for now.  Now, I wouldn't say that 250k should be taxed the same as 1M.  That is the opposite of what I said.  However, I think it is obvious that I am making the assumption most people do:  250k/yr as a *regular* amount. I was responding to your soundbite with a soundbite.

 

Increase freedom and responsibility.  I think we all know what that means.  I could love my life just fine with much more limited government services.  Here is what I see as necessary - police, fire dept, infrastructure, military to protect borders, courts, food water and air regulators.  

 

I actually do agree with this point in the abstract., but I think it actually gets more complicated to actually define a system, let alone roll something out.

 

I know this doesn't capture everything but the government wants their hand in your pocket for everything and provides little in return.  As a second generation American I see all the money my family and I have paid in and what is returned and it is downright disgusting.  

 

Personally I'm in generation 1.5, and I look around and see some of the opposite.  I also want to see more money spent on infrastructure. I don't see having clean running water, safe food, restaurants, roads everywhere (even if they are beat up) as "little".  The reason for any sort of redistribution of wealth scheme is based on randomness.  First, make the assumption that you could be born anywhere in the country, as anyone.  Now, design a tax system and a government.

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I agree that they have bad options but if they don't have a long term goal (lets say debt level to GDP or some other type of mesaure) then you wander for years frittering away your savings.  Look at Japan.  It has huge trade surpluses (giant importations of wealth) and a large savings rate (2 great wealth building characteristics) and still has racked huge amounts of debt trying to stimulate an unsustainable level of demand for its country.  With population declines, demand/GDP should go down at least relatively.  This artifical demand (created by polititians) will eventually eat away at real demand as the money borrowed has to be paid back.  I think Japan's best option to get out of this spiral is a partial default.  Iceland provides the best example of how this actally works versus Japan is an example of how not to deal with debt.  BTW, that may be our only option in the US if we cannot correct this problem soon.

 

This is my issue with many of these economists is that they appear to think that demand can be created out of thin air by the gov't by borrowing.  All you are doing is borrowing from tommorows demand to pay for todays growth.  This apparent demand can be like a narcotic hooking a country until it becomes too late to do anything but default.  I think a Japanese default would be a good lesson to show that governments will not continue to crush its citizens with taxes to pay for debt they should not have incurred in the first place.

 

Packer  

 

 

 

I actually agree with you but find it politically unworkable. I think this is the best solution for Europe. Default and restructure. I dont know how it would work for the US, but also see that we have a printing press, and politicians dont have to make hard decisions with that in place.

 

Ireland would have been better off if they had followed Iceland and let the banking system go, vs. years of crushing debt repayment.

 

John - Your analogy sucks because everyone (Buffett, pretty much all Economist, pretty much anyone involved) said we were facing depression 2.0. Its like if some guy with a screwed up mustache invaded Poland and was marching across Europe from Germany. Comparisons at that point would be fair. It was a very similar. The Great Depression is the only time the "liquidate cleanse the system" model has been tried and its results are well documented. I will use the comparison / historical reference because it works and is useful. Its like telling someone talking about genocide they cant use Hitler or Stalin in their discussion.

 

Japan, Wiemar Germany, and the Great Depression will always be discussed / brought up in any economic conversation. Keynes, Friedman, and Hayek may also come up as well.

 

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Here is the UK which is trying painful cuts to appear serious.

 

http://www.gurufocus.com/news.php?id=128657

 

U.K. Retail Sales Plunge By Largest Amount Since 95 As Austerity And Inflation Combine Forces

 

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Again I am not wedded to an idea, but when something doesnt appear to be working or didnt work in the past, then that says alot.

 

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