Balance Sheet Recession

A “balance sheet recession” is the slowing of business activity after the bursting of an asset bubble (or bubbles). Economist A. Gary Shilling said in December 1990, “This is a balance sheet recession and has been for at least a year.” In a balance sheet recession, businesses are more concerned with eliminating debt that in expanding and maximizing profit. The economy cannot grow until these balance sheets are repaired.
 
The term “balance sheet recession” is most often associated with economist Richard Koo, who wrote the paper The Japanese Economy in Balance Sheet Recession (2001) and the book Balance Sheet Recession: Japan’s struggle with uncharted economics and it’s global implications (2003).
   
 
Wikipedia: Recession
Balance sheet recession
The bursting of a real estate or financial asset price bubble can cause a recession. For example, economist Richard Koo wrote that Japan’s “Great Recession” that began in 1990 was a “balance sheet recession.” It was triggered by a collapse in land and stock prices, which caused Japanese firms to have negative equity, meaning their assets were worth less than their liabilities. Despite zero interest rates and expansion of the money supply to encourage borrowing, Japanese corporations in aggregate opted to pay down their debts from their own business earnings rather than borrow to invest as firms typically do. Corporate investment, a key demand component of GDP, fell enormously (22% of GDP) between 1990 and its peak decline in 2003. Japanese firms overall became net savers after 1998, as opposed to borrowers. Koo argues that it was massive fiscal stimulus (borrowing and spending by the government) that offset this decline and enabled Japan to maintain its level of GDP. In his view, this avoided a U.S. type Great Depression, in which U.S. GDP fell by 46%. He argued that monetary policy was ineffective because there was limited demand for funds while firms paid down their liabilities. In a balance sheet recession, GDP declines by the amount of debt repayment and un-borrowed individual savings, leaving government stimulus spending as the primary remedy.
 
Wikipedia: Gary Shilling
A. Gary Shilling is an American financial analyst and commentator who appears on a regular basis in publications such as Forbes Magazine, The New York Times and The Wall Street Journal. He is President of A. Gary Shilling & Co., Inc., editor of A. Gary Shilling’s Insight, and member of The Nihon Keizai Shimbun Board of Economists. He is featured frequently on business shows on radio and television, and as a recognised orator, addresses conventions of global business groups like the Young Presidents’ Organization.
 
Wikipedia: Richard Koo
Richard C. Koo (Japanese: リチャード・クー, IPA: [ɽit͡ɕaːdu͍ ku͍ː]; Chinese: 辜朝明; pinyin: Gū Cháomíng; born 1954) is a Taiwanese-American economist residing in Japan specializing in balance sheet recessions. He is Chief Economist at the Nomura Research Institute.
 
1 December 1990, Salina Journal, “Economist says growth inspired by debt is over” by Harris News Service, pg. 22, col. 6:
HUTCHINSON—If economist A. Gary Shilling is right, the days when economic growth is spurred by debt are over. In the 1990s, economic life is going to slow down for most Americans.
(...) (Col. 7—ed.)
The present “balance sheet” recession was precipitated by several factors in the 1980s, Shilling said. Those include the rash of leveraged buyouts, the savings and loan crisis, increased consumer borrowing and undercollateralized loans.
 
6 December 1990, The Times (Trenton, NJ), “Shilling propounds recession theory” by Carla Anderson, pg. C1, col. 4:
LAWRENCE—Hard times are not only here for sure, but they’re spreading around the globe.
 
“The whole major English-speaking world is in a recession” said A. Gary Shilling, a noted economist and columnist whose early forecasts of a recession earned him the nickname “Dr. Doom.”
(...) (Col. 5—ed.)
“This is a balance sheet recession and has been for at least a year,” he said, pointing to the heavy debt and a bleak outlook for getting it paid off. “The last time this country showed all these signs was in the early 1930s.”
 
New York (NY) Times
The Fed’s Rate Cut Prospects
By STEVEN GREENHOUSE
Published: February 17, 1992
(...)
But the current downturn is a “balance sheet recession.” The economy drooped because consumers and businesses were weighed down by debt and banks by bad loans.
 
Google Books
The Art of Monetary Policy
Edited by Richard V. Adams, David C. Colander and James Dewey Daane
Armonk, NY: M. E. Sharpe, Inc.
1994
Pg. 93:
In the early 1990s we had a financial or balance sheet recession. It was essentially a conflict between an overleveraged economy clashing with banks that were unusually reluctant to make new loans.
   
OCLC WorldCat record
The Japanese Economy in Balance Sheet Recession
Author: R C Koo
Edition/Format: Article : English
Publication: BUSINESS ECONOMICS, 36, Part 2 (2001): 15-23
Database: British Library Serials
Other Databases: ArticleFirst
 
OCLC WorldCat record 
Balance sheet recession : Japan’s struggle with uncharted economics and it’s global implications
Author: Richard C Koo
Publisher: New Jersey : John Wiley & Sons, 2003.
Edition/Format: Book : English
 
Zero Hedge
A Primer On Balance Sheet Recessions
Submitted by Tyler Durden on 11/24/2009 11:46 -0400
(...)
As Koo frames them, the key features of a balance sheet recession are the following:
 
. A balance sheet recession emerges after the bursting of a nationwide asset price bubble that leaves a large number of private-sector balance sheets with more liabilities than assets.
. In order to repair their balance sheets, private sector moves away from profit maximization to debt minimization.
. With the private sector de-leveraging, even at zero interest rates, newly generated savings and debt repayments enter the banking system but cannot leave the system due to the lack of borrowers.
. The sum of savings and debt repayments end up becoming the leakage to the income stream.
. The deflationary gap created by the above leakage will continue to push the economy toward a contractionary equilibrium until the private sector is too impoverished to save any money (=depression).
. In this type of recession, the economy will not enter self-sustaining growth until private sector balance sheets are repaired.
   
OCLC WorldCat record
Central banking in a balance sheet recession
Author: Caruana J.
Edition/Format: Article : English
Publication: International Journal of Central Banking, v9 nSUPPL.1 (2013 01 01): 367-372
Database: Copyright 2013 Elsevier B.V. All rights reserved
   
Bloomberg.com
Why We Underestimate Risk by Omitting Time as a Factor
By Mark Buchanan Jul 7, 2013 6:20 PM ET
(...)
Such behavior is in fact sensible in this “balance-sheet recession”—the term coined by Nomura Research Institute Chief Economist Richard Koo to describe what happens after big asset bubbles burst, leaving companies mired in debt, their assets worth less than their liabilities. Low interest rates won’t encourage borrowing—even to finance positive-return investments—because companies need to pay down their debts, and fear going bust altogether.