Balance Sheet Recessions

Alchemist · #1 12th January 2012, 06:26 PM

I found this interesting article on "Balance Sheet Recessions".

It tries to explain why sometimes increasing the monetary base doesn't lead to inflation.

The Problem - NYTimes.com

Check the first link in the above article for the actual article by Richard Koo.

I have linked to Krugman's blog as it has some interesting comments too.

Alchemist · #2 1st April 2012, 07:47 PM

US consumer spending may be picking up, but it is too early to celebrate.

A closer look at consumer data reveals that the increase in spending has happened because of reduction in savings.

Incomes haven't gone up and there no sign of consumers re-leveraging again.

People are not saving because they have no incentive to save.

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The stock market and the real estate markets are scary for many people. Fixed income markets now have material interest rate risk. Money market funds are worthless. Most people just keep money at their bank in savings or bank money markets accounts.

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With inflation rate pushing 2%, the consumer knows that leaving cash at the bank means losing money.

Sober Look: US consumers dipping into savings

vinvest · #3 2nd April 2012, 07:16 PM

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Originally Posted by Alchemist

I have linked to Krugman's blog as it has some interesting comments too.

Krugman though a very smart economist is rather partisan. He is a left winger & he is a strong supporter of the Democratic Party. So quite obviously he would not be interested in reducing the deficit. And NewYorkTimes readers are also predominantly left wing.

Alchemist · #4 8th April 2012, 08:23 PM

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Originally Posted by vinvest

So quite obviously he would not be interested in reducing the deficit.

Krugman's observations are correct and the data proves it.

At the same time, I don't think Krugman's suggested solution is correct.

Austerity is killing the economies in the Eurozone, but increased government spending is unlikely to solve the problem.

Alchemist · #5 8th April 2012, 08:34 PM

There is no better example of a balance sheet recession than Greece.

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But the Greek central bank's balance sheet by itself is now almost €200 billion.

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One would expect at least some impact on the monetary aggregates from such a dramatic expansion. Yet the money supply measures, both narrow and broad have collapsed.

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How can the ECB claim any control over the monetary policy when a 50% increase in the Greek central bank's balance sheet results in a 16% decline in M1 and nearly a 20% decline in M3 money stock?

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In such an environment there is absolutely no hope for any growth, let alone fiscal consolidation. It seems the only possible solution for Greece may be to take control of its own monetary policy, which would require abandoning the euro. An ugly outcome, but given the ECB's inability to stabilize Greece's rapidly shrinking money supply, there may be little choice.

Sober Look: The ECB has completely lost control over the monetary policy for Greece

The charts in the above article sum up the whole problem.