The Economist 词汇解析(13)【Summary】The Escape from Balance Sheet Recession and the QE Trap: Chapter 1

本期原文选自The Economist 2016-9-24底Leaders板块The low-rate
world,释义来自牛津高阶七版、搜狗百科等资源。如果你为在就学The Economist,欢迎订阅我之文集The


The low-rate world

They do not naturally crave the limelight【1】. But for the past
decade the attention on central bankers has been
unblinking【2】—and increasingly hostile. During the financial
crisis the Federal Reserve and other central banks were hailed for
their actions: by slashing rates and printing money to buy bonds, they
stopped a shock from becoming a depression. Now their signature
policy, of keeping interest rates low or even negative, is at the
centre of the biggest macroeconomic debate in a generation.

【1】limelight 公众瞩目的中坚,本意是石灰光(灯)

Book Title: The Escape from Balance Sheet Recession and the QE

Author: Richard C. Koo
Year of Publish: 2015

【2】unblinking 目不转睛地;blink 眨眼,闪烁

Chapter 1: Balance Sheet Recession Theory —- Basic Concepts

In the first chapter of The Escape from Balance Sheet Recession and the
QE Trap
, Koo introduces the concept of Balance Sheet Recession
, and proposes a remedy for the recession: Fiscal Stimulus.
In this article, I would like to summarize the concept and potential
solution for BSR discussed in the chapter.

The central bankers say that ultra-loose monetary policy【3】
remains essential to prop up still-weak economies and hit their
inflation targets. The Bank of Japan (BoJ) this week promised to keep
ten-year government bond【4】 yields around zero. On September
21st the Federal Reserve put off a rate rise yet again. In the wake
the Brexit vote, the Bank of England has cut its main
policy rate【6】 to 0.25%, the lowest in its 300-year history.

1. What is a Balance Sheet Recession (BSR)?

【3】ultra-loose monetary policy 超宽松货币政策

i. Traditional Financial Crisis

One will grasp the concept of Balance Sheet Recession easily when it is
compared with the traditional textbook financial crisis. While sometimes
both referred to as “financial crisis”, the underlying causes for the
two types of crises are completely different. The cause of a textbook
financial crisis is insufficient supply of funds, while the main
driver of a BSR is insufficient demand for funds.

A traditional financial crisis happens after a huge and sudden decline
of asset prices. During normal times, when depositors deposit or
withdrawal cash from their bank accounts, banks receive or provide funds
based on their clients’ need, and it is hard for individual bank to
accurately estimate how much it would receive or pay. As a result, an
interbank money market is formed, where banks can either lend excess
funds out or borrow funds if needed. However, when asset prices plunge,
the value of assets owned or held as collateral declines, leaving banks
large inventories of bad loans. When this is the case for most financial
institutions, banks will become reluctant to lend in the interbank money
market because they may not get the money back. As a result, a bank-run
in the interbank market can happen, drying the liquidity up, and
forceing banks that fail to meet cash withdrawals to go bankrupt.
Fortunately, this textbook financial crisis can be easily resolved by
monetary policy: central banks can provide liquidity (money) for solvent
but illiquid banks, thereby solving the problem of insufficient supply
of funds.

【4】government bond 政府债券,政府公债

ii. Balance Sheet Recession

Similar to that of a traditional financial crisis, BSR also happens
because of severe decline in asset prices. However, while almost every
burst of bubble can cause a textbook financial crisis, BSR only happens
when the bust bubble is financed by debt. The problem in a BSR is
contrasted with a textbook type financial crisis: in BSR, banks are
willing to lend money out, but private sectors (firms and consumers)
refuse to borrow no matter how low interest rates are. Let’s take an
example to understand why that is the case. Suppose a firm borrowed $1
billion to buy a land to establish a new factory, and by the time the
firm buys, the value of the land was $1 billion. However, asset bubble
bursts after the firm’s purchase, and the value of the land falls by 50%
to $500 million. Unfortunately, notional values of loans do not adjust
with that of assets. As a result, the firm technically holds an asset of
$500 million while bears a debt of $1 billion after the bubble bursts,
making it technically insolvent (asset < liability).

Under such a circumstance, there are two options left for the firm:
1. Declare bankruptcy; 2. Hide the insolvency and pay down debt
using cash flows (as soon as possible). As long as a company’s core
business operates healthily, the most rational and responsible decision
the firm can make is to hide the insolvency and pay down debt secretely:
this option protects its employees and prevents further instability that
may rise if the firm collapses. Therefore, when a debt-financed bubble
bursts, firms will switch from maximizing profits to minizing debts,
which means no matter how low the interest rate is, it is unlikely for
them to carry out new debts before solving the technical insolvency
problem. This is a reasonable decision: who would seek profit if he/she
is technically insolvent? Fortunately, as long as a firm generates
consistent cash flows (which is especially true for Japanese firms in
the 1980s), debt can always be payed down someday. So far, everything
sounds manageable, if one forgets about the collective impact of firms
not conducting new borrowing.

Let’s recall what traditional economics say about national income and
expenditure. Suppose person A receives $1000 as income of the year, and
he spends $900 while saves $100 at his bank. Person A’s bank then lend
the $100 to individual B, who invests using the borrowed $100. As a
result, the total expenditure of the year would be $900 (consumption of
A) + $100 (Investment of B) = $1000. Nonetheless, as described in the
previous paragraph, firms and individuals will not conduct new borrowing
before they pay down existing debts (i.e. There will be no individual B
to borrow and invest the $100) when a debt-financed bubble bursts. As a
result, the total expenditure will only be $900 instead of $1000,
creating an unborrowed saving (which is also a deflationary gap) of
$100. What’s more, let’s say individual C who receives the $900 (spent
by individual A) as income only spends $810 and saves $90, without any
borrower, the expenditure will become $810, and then $729, $656… The
consequence is clear: when firms and individuals save collectively
leaving no one as a borrower, the economy contracts and falls into a
deflationary spiral.

So, can monetary policy solve this problem? Unfortunately, the answer is
no. To understand why this is the case, one needs to recall how monetary
policy works. Textbooks tell us when a central bank conducts an
expansionary monetary policy, it lowers interest rate, making it easier
for firms and households to borrow. As firms and households borrow to
conduct new consumptions or investments, total expenditure increases,
and the economy recovers. This mechanism relies on the assumption that
firms and individuals increase borrowing when interest rates are
reduced. However, as elaborated in previous paragraphs, this assumption
is hardly true when private sector faces balance sheet issues. As a
result, after the burst of a debt-financed bubble, banks find it hard to
lend out money despite exceptionally-low interest rates, and traditional
monetary policy fails to stimulate economy. As the author shows using
the flow of funds data, starting from 1991, when the burst of the
Japanese asset bubble became evident, corporate sector started to cut
their borrowing. In addition, from 1998 to 2014 (the time when the
author wrote), the corporate sector has even become a net saver: that
is, firms save instead of borrow, a phenomenon against traditional

【5】in the wake of 在……之后

2. The Solution for BSR: Fiscal Stimulus

【6】policy rate 政策利率

i. The “Borrower of Last Resort”

As elaborated in the previous section, after the burst of a
debt-financed bubble, the private sector faces a serious solvency
problem which discourages it to borrow regardless of interest rates. A
contraction in private sector borrowing means less investment, which
deteriorates total expenditure. As a result, countries after such a
burst of bubble can easily fall into deflationary spirals and suffer
from serious recessions. Is there anyway to mitigate the problem? Koo
believes the answer is yes, and the solution is fiscal stimulus.

The argument that Koo provides is straightforward: the unborrowed $100
needs to be borrowed by someone to fill the gap and push total
expenditure back to $1000. When the private sector is down, the only one
left would be the public sector, the government. In addition, Koo argues
that government needs not only to fill the gap of unborrowed savings,
but also to continue to do so until private sector solves all
banalance-sheet problesms
. The reasoning goes as follows: when private
sector becomes net saver, there always exists an unborrowed saving (the
$100 deflationary gap) if the public sector does not borrow. Therefore,
as long as the private sector continues to fix their technical
insolvencies, the public sector should fill the gap by borrowing and
spending the $100, or the economy will fall into a deflationary spiral,
making it even harder for the private sector to pay down its debt. That
is, the public sector is the last borrower the economy can count on.
While Koo did not create such a term for the public sector, I believe
one can call the government the “Borrower of Last Resort” in
contrast with the central bank, who is the “Lender of Last Resort“.

Come Yellen and high water

But a growing chorus of critics frets about【7】 the effects of
the low-rate world—a topsy-turvy【8】 place where savers are
charged a fee, where the yields on a large fraction of rich-world
government debt come with a minus sign, and where central banks matter
more than markets in deciding how capital is allocated. Politicians
have waded in【9】. Donald Trump, the Republican presidential
nominee, has accused Janet Yellen, the Fed’s chairman, of keeping
rates low for political reasons. Wolfgang Schäuble, Germany’s finance
minister, blames the European Central Bank for the rise of Alternative
for Germany, a right-wing party.

ii. What about Fiscal Deficit?

Whenever one mentions fiscal stimulus, everyone concerns the fiscal
deficit immediately. Koo, in contrast with traditional economists,
believes the question of reasonable fiscal deficit levels should be
viewed based on relative measures rather than absolute ones.
Specifically, he believes opinion leaders have ignored an important
factor when considering the level of fiscal deficit: the level of
(net) private saving. Traditionally, economists would view a fiscal
deficit of 10% of GDP relatively high, and some would call for fiscal
consolidation. However, Koo argues that if the country is running a
fiscal deficit of 10% of GDP, while the (net) private saving is 15% of
GDP, the counrtry should in fact increase fiscal spending. This is
because when the private sector is saving 15% of GDP but the government
is only borrowing 10%, there remains a 5% of GDP unborrowed savings. If
the 5% is left unborrowed, it will put deflationary pressure on the
economy and contracts total expenditure. Therefore, Koo believes high
levels of fiscal deficits are warranted as long as they are relatively
the same levels as the (net) private saving.

In addition, Koo believes that financing fiscal stimulus in a Balance
Sheet Recession is relatively easy. The reason also goes back to the
fact that private sector becomes a net saver during a Balance Sheet
Recession. When the private sector saves, excess saving needs to go
somewhere. For instance, when banks receive new savings, they need to
lend the new money they received. However, as banks will find it
difficult to lend when the private sector deleverages (i.e. Paying down
debts), they are left with another choice: lend to the government (buy
government bonds). As a result, there will be substantial funds
available for the government to borrow, which enables the yields on
government bonds to decline even when the public sector spends more.
When the private sector finishes fixing its balance sheet problems,
savings will leave the government bond market and move to private
sector, raising the yields on government bonds. This signals the
government that now is the time to conduct fiscal consolidation. Then,
during the process of fiscal consolidation, monetary policy should serve
as the key tool to smooth cyclical fluctuations out. Koo calls this
process the “self-corrective mechanism” for economies under Balance
Sheet Recessions.

【7】fret about 担忧,焦虑

3. Recovery after BSR: Why is it So Slow?

【8】topsy-turvy 颠倒混乱

i. Unstable Fiscal Stimulus

Another question in debates of Balance Sheet Recession is: why is the
recovery so slow after such a crisis? While he did not provide a
comprehensive explanation for the question, Koo sheds light on one of
the possible reasons: unstable fiscal stimulus may be one of the main
reasons why economies stagnate after BSR.

As discussed in the previous section, Koo believes that media and some
economists are setting the level of “healthy fiscal deficit” too low
because they fail to recognize how large net private saving is. As a
result, when the level of fiscal deficit goes “too high”, advocators for
fiscal consolidation stand out and call for spending cuts. When an
economy is still recovering from a Balance Sheet Recession (i.e. Private
sector still saving), a reduction in fiscal spending equals an increment
of unborrowed saving (and a wider deflationary gap). As a result,
economies without sustained government spending will fall into
recessions, making the recovery process even longer. Koo cites the
recovery of US in contrast with that of Europe and Japan as an example.
Immediately after the Great Recession, most developed countries agreed
to carry out fiscal stimulus in 2009. However, only a year after, the
G20 leaders decided to halve fiscal deficits in three years despite the
fact that private sectors are still facing balance sheet problems. On
the other hand, United States, thanks to the advice of the former Fed
chairman Ben Bernanke, decided to be the first country to renege on the
agreement. This effort made the US the only country in the developed
world to post consistent and moderate growth after 2009, while Japan and
Europe fell again into recession after 2010.

Interestingly, Koo believes that democratic countries are especially
vulnerable to secular stagnation during the recovery from a balance
sheet recession. This is because politicians need to convince the
majority of the population that a fiscal spending is warranted, while
autoritarian countries do not. When a economy seems to be recovering
(thanks to previous fiscal stimulus), it is hard for voters to realize
that the government needs to conduct fiscal stimulus continuously. As a
result, fiscal spending is likely to be cut, which pulls the economy
back again into recession.

【9】wade in/wade in sth 强行与;wade涉水

This is a debate on which both sides get a lot wrong. It is too simple
to say that central bankers are causing the low-rate world; they are
also reacting to it. Real long-term interest rates have been declining
for decades, driven by fundamental factors such as ageing populations
and the integration of savings-rich China into the world economy (see
article). Nor have they been reckless【10】. In most of the rich
world inflation is below the official target. Indeed, in some ways
central banks have not been bold enough. Only now, for example, has
the BoJ explicitly pledged to overshoot【11】 its 2% inflation
target. The Fed still seems anxious to push up rates as soon as it

【10】reckless 鲁莽的,无所顾忌的

【11】overshoot 超过,突破

Yet the evidence is mounting that the distortions caused by the
low-rate world are growing even as the gains are diminishing. The
pension-plan deficits of companies and local governments have
ballooned【12】 because it costs more to honour【13】
future pension promises when interest rates fall (see article). Banks,
which normally make money from the difference between short-term and
long-term rates, struggle when rates are flat or negative. That
impairs their ability to make loans even to the creditworthy.
Unendingly low rates have skewed financial markets, ensuring a big
sell-off【14】 if rates were suddenly to rise. The longer this
goes on, the greater the perils that accumulate.

【12】balloon 激增,膨胀;名词本意是气球

【13】honour 信守(承诺)

【14】sell-off 抛售

To live safely in a low-rate world, it is time to move beyond a
reliance on central banks. Structural reforms to increase underlying
growth rates have a vital role. But their effects materialise only
slowly and economies need succour now. The most urgent priority is to
enlist【15】 fiscal policy. The main tool for fighting
recessions has to shift from central banks to governments.

【15】enlist sth (in sth) 谋取(帮助)

To anyone who remembers the 1960s and 1970s, that idea will seem both
familiar and worrying. Back then governments took it for granted that
it was their responsibility to pep up【16】 demand. The problem
was that politicians were good at cutting taxes and increasing
spending to boost the economy, but hopeless at reversing course when
such a boost was no longer needed. Fiscal stimulus became synonymous
with an ever-bigger state. The task today is to find a form of fiscal
policy that can revive the economy in the bad times without
entrenching government in the good.

【16】pep up demand 提振需求

That means going beyond the standard response to calls for more public
spending: namely, infrastructure investment. To be clear, spending on
productive infrastructure is a good thing. Much of the rich world
could do with new toll roads, railways and airports, and it will never
be cheaper to build them. To manage the risk of
white-elephant【17】 projects, private-sector partners should be
involved from the start. Pension and insurance funds are desperate for
long-lasting assets that will generate the steady income they have
promised to retirees. Specialist pension funds can advise on a
project’s merits, with one eye on【18】 eventually buying the
assets in question.


【18】with one eye on sth;have one eye/half eye on sth

But infrastructure spending is not the best way to prop up weak
demand. Ambitious capital projects cannot be turned on and off to
fine-tune the economy. They are a nightmare to plan, take ages to
deliver and risk becoming bogged down【19】 in politics. To be
effective as a countercyclical tool, fiscal policy must mimic the best
features of modern-day monetary policy, whereby independent central
banks can act immediately to loosen or tighten as circumstances

【19】bog sth/sb down (in sth) 使陷入烂泥,阻碍

Small-government Keynesianism【20】

Politicians will not—and should not—hand over big budget decisions to
technocrats. Yet there are ways to make fiscal policy less politicised
and more responsive. Independent fiscal councils, like Britain’s
Office for Budget Responsibility, can help depoliticise
public-spending decisions, but they do nothing to speed up fiscal
action. For that, more automaticity is needed, binding some spending
to changes in the economic cycle. The duration and generosity of
unemployment benefits could be linked to the overall joblessness rate
in the economy, for example. Sales taxes, income-tax deductions or
tax-free allowances on saving could similarly vary in line with the
state of the economy, using the unemployment rate as the


【21】lodestar 北极星,指导标准

All this may seem unlikely to happen. Central banks have had to take
on so much responsibility since the financial crisis because
politicians have so far failed to shoulder theirs. But each new twist
on ultra-loose monetary policy has less power and more drawbacks. When
the next downturn【22】 comes, this kind of fiscal ammunition will be
desperately needed. Only a small share of public spending needs to be
affected for fiscal policy to be an effective recession-fighting
weapon. Rather than blaming central bankers for the low-rate world, it
is time for governments to help them.

【22】downturn 衰退


attention on central bankers has been
up still-weak economies),仍需利用过宽松货币政策(ultra-loose monetary
policy)。日本银行本周答应以十年期朝公债收益率(government bond
yields)保持以零左右。英国脱欧公投之后(in the wake
of critics)担心(fret
future pension
up demand)。政治家们擅长通过减税和搭开支的方式提振经济(boost the
one eye
taxes)、所得税减免(income-tax deductions)或存款免税额(tax-free
allowances on
central bankers for),而应协助他们。



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