Richard Koo (Kobe, Japan, 70 years old) is one of those economists who should be taken into account when the specter of a crisis haunts the neighborhood. Theirs are “balance sheet recessions”, a monster that feeds on the wounds left by the puncture of a bubble, when the textbook economy explodes, and things begin to go from bad to worse because everyone , from families to companies, is trying to reduce their debts at the same time: no one borrows, demand collapses, prices fall, and this in turn makes it more difficult to pay debts. The system implodes in a spiral that, according to Koo, chief economist at the Nomura investment bank and advisor to several Japanese governments, can only be stopped with an Executive that borrows money and endorses an injection of fiscal stimulus.
The economist illuminated his thesis after seeing the long and spectacular digestion of the crisis that broke out in Japan in 1990. He was heard (but little) in the EU during the Great Recession. And that’s how it turned out: some countries, like Spain, “suffered enormously unnecessarily,” he said last Tuesday in an online interview. He was given a little more attention in the United States — the president of the Federal Reserve, Ben Bernanke, “luckily,” he says, read his theories —. These days he is being followed closely in China. The second largest economy on the planet is being choked by a real estate bubble of colossal proportions. Its internal demand, after the pandemic, has not yet started. And what Beijing does to get out of the quagmire could affect the rest of the planet: if it relies on exports, as Japan tried to do in the 1990s, it will find a world in a phase of protectionist retreat, this economist warns.
Ask. Is China in the situation of Japan in the nineties?
Answer. The same thing may happen because a huge real estate bubble has burst. People are no longer borrowing money, they are trying to repair their balance sheets. Prices plummet, liabilities remain high. My fear is that if the government does not borrow enough, the Chinese economy could fall into a balance sheet recession.
Q. Can we say then that the Chinese real estate bubble has burst?
R. It is very difficult to know what is really happening in China. The Government is discouraging people from selling houses at so-called market prices, so the statistics indicate that these are still relatively high, but when you go on the ground and talk to the bankers and the people involved, they tell you that they have already gone down. 20% or 30%, even 40%. The damage to the balance sheet is already there.
Q. You can see blocks of unfinished buildings, the decline in purchases, but it is difficult to observe the symptoms of a crisis like the one that hit Spain.
R. The pessimism that many people in China feel today is very different from what was said two or three years ago, especially among young people. Although on the surface it may not seem like things are as bad as in Spain after 2008, where youth unemployment reached almost 50%, it is probably close in China. [la cifra oficial es del 14,7%; tras superar el 21% el verano pasado, Pekín suspendió su publicación, que solo reactivó tras cambiar los criterios]. I was talking to a professor at Peking University the other day and he said that even graduates of his university have a hard time finding good jobs. You can imagine what the rest will be like.
Q. Do you see possible contagion to the global economy?
R. Domestic demand in China is very weak, people are so scared that they do not want to spend money or use it to pay off debt, which pushes Chinese manufacturers to look for a way out through exports. The Government seems to be encouraging it too. This leads many outside China, including Europeans, to worry about being inundated with cheap Chinese imports, which would add to their unemployment and slow economic growth. That is why many countries are talking about raising tariffs. Japan faced the same problem in 1990 and tried to find a way out through exports. My feeling is that in a couple of months or a couple of quarters, the Europeans, the Americans and many others will start to say, “Hey, wait a minute, we can’t accept all this.” Tariffs on Chinese products will rise, China will find itself trapped, and will have to use fiscal stimulus to get out of the recession on balance.
Q. Beijing is directing public investment towards sectors such as technology, manufacturing and the military. Are they the correct steps?
R. If the Government borrows and spends the money, there is no reason for GDP to plummet. The Chinese Government is aware of this and is trying to do some fiscal stimulus. But how the money is spent has indirect consequences, whether on national security issues or the so-called overcapacity problem. I have recommended to the Chinese government to complete all apartment buildings started. That should be the first defense against the balance sheet recession, and it is moving in this direction. I am concerned about whether the amount is adequate, given the size of the Chinese economy and the magnitude of the problem.
Q. European and American leaders have been warning of this overcapacity for months.
R. The excess capacity is due to weak Chinese domestic demand. If this recovers and returns to normal, I am sure that the export impulse of Chinese manufacturers will be much less. No one will talk about overcapacity once the Chinese economy stabilizes. But this can take many years, Japan took more than 20. Even if it takes 5 to 7 years it can put the world economy in a very difficult situation.
Q. Washington has already imposed 100% tariffs on Chinese electric cars, and Brussels is expected to do something similar [anunció tasas de hasta un 48% un día después de esta entrevista]. A new sign of deglobalization. What direction is the world economy taking?
R. I am seriously concerned that the United States, supposedly the leader of free trade, so easily raises tariffs. And if Donald Trump is re-elected, that guy can do horrible things to free trade. This is not a Chinese problem, but rather the United States, which has had a trade deficit for the last 45 years. In economics college, we were taught that free trade creates winners and losers in the same country. But the gains of the winners are greater than the losses of the losers, so the economy, as a whole, wins. The professors never told us one thing: for this conclusion to hold, trade must be in balance or in surplus. If you have deficits year after year after year, the number of people who consider themselves losers from free trade continues to grow.
Q. And it has consequences at the polls.
R. After about 40 years, that group in the United States was large enough to send Donald Trump to the White House, because he was openly in favor of protectionism. Once expelled, when Joe Biden entered in 2020, he also realized that this large group exists, and that is why he refused to rejoin the Trans-Pacific Partnership, maintained all of Trump’s tariffs, and is now posing a large number of them.
Q. Do you see any solution?
R. The United States has failed to address the issue because it allowed the dollar to stay too high, and there was no way for American manufacturers to compete with the Japanese and then the Taiwanese, Koreans and Chinese. Unless something is done with the dollar, the only way they can protect themselves is through tariffs. The US and some others are going in this direction. I find it very worrying. They should come together and lower the dollar to stop this implosion of free trade.
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