Comparisons are often made between the current crisis and the bursting of the bubble in Japan in 1990, from which it is yet to recover. The point often made is that the stance of US authorities, with the central bank throwing everything including the kitchen sink at the problem, is very different from the dithering of Japanese officials.
At the same time, there are several unfavourable comparisons as well. For instance, the Japanese had a growing world economy to export to. This time, demand has slumped across the globe. And further, the Japanese had lots of savings, unlike the US consumer.
Richard C. Koo, chief economist with the Nomura Research Institute in Tokyo, in a recent presentation—The Age of Balance Sheet Recessions: What Post-2008 Europe, US and China Can Learn from Japan 1990-2005—says the economy enters a liquidity trap during such recessions because banks deleverage and demand for funds evaporates. The solution is for the government to borrow and spend to support gross domestic product (GDP).
Koo says the government is able to borrow at low rates during these periods and must use the funds to provide a fiscal stimulus and that state borrowing helps maintain money supply in the absence of private sector borrowers.
Here are some rather startling facts that show the extent to which deleveraging occurs. In December 1998, credit extended to the Japanese private sector was 601.6 trillion yen (Rs287 trillion now); in December 2007, it was 501.8 trillion yen.
During the Great Depression in the US, credit extended to the private sector was $29.63 billion (Rs1.4 trillion now); by June 1933, that had fallen to $15.80 billion. By June 1936, three years after the economy had started to grow again, credit to the private sector was $15.71 billion, even lower than in 1933—the slack was taken up by the public sector.
China seems to have taken these lessons to heart, with the announcement of a massive fiscal stimulus package, equivalent to almost one-fifth of its GDP, spread over two years. In India, however, with a consolidated fiscal deficit estimated at around 8.5% of GDP, the scope for further easing is limited.
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