If you want a warning about the risks the government is embarked on, you could do well to study the lessons of Japan. Here’s Richard Koo’s interview on Newsnight, which is very good on the subject…
RICHARD KOO, ECONOMIST AT NOMURA INSTITUTE IN JAPAN
Newsnight
Wednesday, 23 June 2010
Speakers Jeremy Paxman
Richard Koo
JP: You’ve looked at this budget in some detail I gather over there in Tokyo, do you conclude that this switch to an export base to our economy is achievable in three years?
RK: Well, I don’t know how many export competitive industries you have in UK at the moment but the budget itself I think is rather poorly timed given our own experience in Japan. And that is that what we figure, what we found out through our own experience over the last 20 years is that you never want to cut budget deficit when the private sector is deleveraging. And I see UK private sector deleveraging very very strongly. Both companies and households are paying down debt or increasing savings, even with these very low interest rates. When that is happening the private sector is worried about their balance sheets, their financial health and when private sector deleverage, even with these very low interest rates, and if government also pulls the plug then I’m afraid economy could fall into a tailspin as we experienced in Japan in 1997.
JP: So what do you say to the government’s argument here that this Budget, these cuts were unavoidable, that was the word they used, unavoidable because of the crisis we’re in?
RK: Well if it’s unavoidable I don’t think British government bonds will be yielding less than 4%. I mean less than 4% means bond prices are very high which means there are a lot of people in the market who want to buy British bonds. That’s why the bond yield is so low and bond prices are so high. There is a reason behind this and that is that with private sector deleveraging to the degree we see in UK today there is lots of funds available to purchase government bonds and that’s why the bond yield is so low and the danger that I want to talk about is that, you know in an ordinary economy where money is moving correctly right thing to do is to cut the budget deficit is healthy. So if I have $1,000 income and I spend $900 myself and decide to save $100 dollars, $900 is already someone else’s income, the $100 goes through the financial sector and lend to someone who can make good of that money so $900 plus $100 equals the original income of $1000, the economy moves forward. But the world we are in now and Japan was experiencing for the last 15 years was that even though this person spends $900 and saves $100, this $100 is not borrowed by the private sector because private sector people are all deleveraging. And when that happens only $900 is spent. When that $900 becomes someone else’s income, that person must give 10%, $800 is spent, $90 dollars comes into the banking system, they get stuck. And then economy can contract very very quickly.
JP: The difficulty is the whole fiscal stimulus policy seems to have failed then?
RK: No it didn’t fail. In the Japanese case we kept our GDP going for the last 20 years even though we experienced a bursting of the bubble that was huge. I mean our commercial real estate prices fell 87% from the peak nationwide and just imagine with the London prices down 87%, Manchester down 87%, Edinburgh down 87%. What kind of economy do you think you’d have left in the UK? We managed to keep our GDP at above the peak for 20 years allowing private sector to have the income to pay down debt and we are coming out of this, we came out in about 15 years. But it didn’t have to take 15, it could have been much shorter if we didn’t make a mistake in 1997 of cutting our budget deficit prematurely because then we enter a very steep economic decline and it took us about 10 years to pull ourselves out of that.
JP: Thank you very much for enlightening us there, thank you.
-ends-
Liam is the MP for Birmingham Hodge Hill, and Labour's Shadow Chief Secretary. 
