Richard Koo: How Excessive Corporate Debt Could Thwart Future Economic Growth

Published on
February 5th, 2021
57 minutes

Marc Cohodes: “The Stock Market is Not A Game”

Richard Koo: How Excessive Corporate Debt Could Thwart Future Economic Growth

The Interview ·
Featuring Richard Koo and Ed Harrison

Published on: February 5th, 2021 • Duration: 57 minutes

Richard Koo, chief economist at Nomura Research Institute, returns to Real Vision to update his framework on how key economic variables such cash, liquidity, savings, and debt have been impacted by the global recession. In this interview with Real Vision managing editor Ed Harrison, Koo applies to the current situation his noted theory of a “balance sheet recession” in which liquidity is ample, but the private sector nevertheless remains focused on paying down debt. Koo and Harrison analyze the interplay between the economic shutdown and economic growth. Lastly, Koo shares his views about quantitative easing, negative interest rates, central bank digital currencies, and ongoing efforts by central banks to stem the damage wreaked by the pandemic. Filmed on January 29, 2021.

Key learnings: Koo thinks that the unprecedented interventions of central banks were necessary to meet the once-in-a-lifetime crisis of COVID-19. Like many, Koo expects that economic growth will pick up once pent-up demand is unleashed. However, after this spurt of economic activity, Koo thinks that the overhang of debt could cause a significant balance sheet recession that is contractionary and deflationary.



  • np
    nick p.
    11 February 2021 @ 04:53
    fantastic interview!! double thumbs up
  • SC
    Sam C.
    10 February 2021 @ 08:32
    Love this guy, do go out and read his book: The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession. Europe totally missed the ball and wasted about a decade.
  • SS
    Simeon S.
    6 February 2021 @ 12:23
    No borrowers? I wonder based on which data? Bond issuance, CLOs, credit cards, student loans, margins, all at all time highs.
    • LS
      Lemony S.
      10 February 2021 @ 02:07
      No current borrowers. No lending. No spread. It's true. No money creation as a result = no velocity and QE being a voodoo reserve trick that doesn't actually "create" money in the real economy.
  • AM
    Alonso M.
    6 February 2021 @ 17:36
    Very interesting with solid economic explanations for potential outcomes. Koo admits up front that a lot of what happens going forward depends on the outcome of Covid. This makes a lot of sense to me. For example, consider an environment where certain countries are declared Covid free zones while others still struggle through it. In this environment, how does Government policy impact trade and travel between the Covid free nations and the other nations? What will this mean for global growth and/or inflation? I disagree with the part close to the end where Koo suggests that when all central banks are engaging in QE activities, the situation becomes less risky. I agree that the perception of risk goes down, and I think this will embolden central banks to all continue down the same path. I assume this is the wrong path, and eventually they will have dug themselves a massive hole that they cannot climb out of. One of the rules about holes is if you find yourself in one, you have to first stop digging. Central banks are all bringing in bigger shovels, and this is riskier. Not less risky.
    • LS
      Lemony S.
      10 February 2021 @ 02:06
      The best outcome would be honest governments who realize both that covid is a minimal disease AND that more people were harmed and killed due to policy and other diseases co-opted by the covid narrative/plan.
  • PV
    Pietro V.
    8 February 2021 @ 07:17
    With all due respect I am afraid Mr Koo does not fully understand what CBDCs are. They are not simply "digital" money. They are "programmable" money. CBDCs enable the fusion of monetary and fiscal policies. They and narrow casting policy to a level today is not even thinkable. Sales tax or VAT, typically a regressive tax, can be turned into a progressive one as the rate deployed is linked to the income or wealth of the taxpayer. Hence there is little question that CBDC will be launched in all major economies within the decade as they will be crucial to managing of debt and leverage behavioral economics for policy purposes. I have no doubt on Mr Koo's good faith but here's another example of how the future ahead will not look at all like the past.
    • DS
      David S.
      9 February 2021 @ 11:42
      The transparency and implementation are important. Otherwise, it could easily go Orwellian. DLS
    • LS
      Lemony S.
      10 February 2021 @ 02:03
      We are already there, David. "Could"? LOL, you have to be purposely ignoring things to not know how this turns out - since I know you aren't stupid.
  • SS
    Stephen S.
    8 February 2021 @ 17:59
    I’m just not sure the US is capable of the same policies as Taiwan. It’s an unruly country with a lack of trust in most of it’s Institutions. Seems this virus hit us at a particularly vulnerable time when we were already in the midst of a kinda “cold civil war”.
    • LS
      Lemony S.
      10 February 2021 @ 02:02
      Yes, that was also by design.
  • ZY
    ZHENG Y.
    8 February 2021 @ 01:00
    Taiwan make a good decision that to strictly test on high risk suspected case only. Two week quarantine no symptoms is good to go. Just look at the number of test they done during 2020 monthly. Great country.
    • DS
      David S.
      9 February 2021 @ 11:45
      In the western countries people are not as compliant. This is an advantage in some areas. Certainly not in controlling a pandemic. DLS
  • PP
    Patrick P.
    6 February 2021 @ 02:39
    Since 1971 we have been spending public money trying to control the economy artificially. The idea is that no one can ever be allowed to suffer financially. We have spent ourselves into a total mess.... one bail out after another. We set the example for the rest of the world and now most every country of any meaning is also a mess. Richard Koo sits in front of the camera acting like everything is somewhat okay and we are on our way to fat city... just push a few buttons and nothing more to see here. Richard should really be saying that we are in the middle of a shit storm and nothing short of wild inflation and or a default will work. And a shit load of people are going to suffer. Quote: "I hope I'm wrong and the economy gets better" .....Richard Koo ......(What a waste of time.)
    • AA
      Anon A.
      6 February 2021 @ 03:27
      Finally someone calling it out.
    • DS
      David S.
      6 February 2021 @ 03:58
      Mr. Koo is responding to a pandemic not a recession recovery. He was for QE-1, but not thereafter for US, I believe. He only wants the government to step in when there is no private investment in productive assets. DLS
    • LJ
      Lynn J.
      6 February 2021 @ 04:30
    • TN
      Tim N.
      7 February 2021 @ 08:33
      I think we often vilify Nixon's decision to drop the gold standard and Reagan/Thatcher's decision to deregulate the financial markets. However these policies gave the West the necessary economic boost required to win the Cold War and preserve our democracies.
    • DS
      David S.
      8 February 2021 @ 00:30
      Tim N. I agree, but much harder to control. DLS
    • MC
      Michael C.
      9 February 2021 @ 03:13
      @Tim N Nixon closed the gold window because he wanted to continue LBJ's guns/butter/Great Society programs and fight the Vietnam war. The Allies realized the dollar was headed south and they wanted gold. The Bretton Woods agreement forged during WW 2 was effectively over. Now it looks the world is fighting over what reserve currency there will be or baskets of currencies or digital currencies. TBD.
  • NI
    Nate I.
    8 February 2021 @ 06:30
    Who are these supposed savers? Forbes reported that 63% of Americans don't have enough savings to cover a $500 emergency. CNBC reported that 41% of Americans don't have $1000 saved to cover an unexpected emergency. We can quibble over $500 versus $1000 and 63% versus 41%, but the bottom line is that US household savings is nearly non-existent no matter who you ask. $500 barely covers a trip to Costco for a family of four so I don't think it will fund the elephantine war machine in Washington, DC.
  • EL
    Eric L.
    6 February 2021 @ 05:17
    There are two things that left an impression on me after listening through this interview - (1) Political Will - Richard spoke about the money printing of central banks as the solution being inevitable, but we've been here before since the dot com days and one thing that keeps popping up in my mind is the lack of political will to do the right thing and kicking the can down the road is the only option. It is not inevitable, it is an option that we make ourselves believe that it is the best option. (2) Ed's view on Digital Currency - I was surprise to hear Ed's view on digital currency in terms of its "ability to be used to apply very granular, personalized" monetary policy. Personally, I don't know how can we do this better or we should just embrace this as part of the solution ? But at that point - one thought that pops up in my mind is "Big Tech" - Is this any different from Google or Facebook deciding which ads to feed to your screen based on all your browsing preferences in the past 3-month? We're down a path that is going to be strange, volatile and at times filled with contracting views - I am just hoping to listen, learn and broaden my spectrum so that I can sharpen my critical thinking because I do believe that no one will care more about your own well beings besides yourself !!!
    • AK
      Andrew K.
      6 February 2021 @ 19:34
      to point (1), Lacy Hunt addresses this by saying that lags between policy and impacts are why we keep kicking the can on actually printing money
    • EH
      Edward H. | Real Vision
      8 February 2021 @ 05:10
      That’s NOT my view on digital currencies. It was my question, yes. But not my view at all.
  • MH
    Martin H.
    8 February 2021 @ 03:03
    You can't judge the outcome in Australia yet. In a year or two we will understand what damage has been done here, for now we are running on funny money and that has a cost. Also to compare outcomes in NZ and Aus with the more densely populated regions of the world is to compare apples and oranges. Out major cites are small on a global scale, generally speaking it is an easier task to control things here and more so in NZ than it is else where. You really need to compare countries that are similar in order to judge the strategies effectiveness. You should be talking more about this in 12 to 24 months. We have some pain coming.
  • DC
    David C.
    7 February 2021 @ 03:37
    Richard Koo is definitely one of my favourite person to listen to! So much to learn from him as always
    • IN
      I N.
      7 February 2021 @ 21:22
      And I hope that RV staff, including Ed, convey our gratitude to Richard Koo!
  • HR
    Humberto R.
    6 February 2021 @ 15:04
    A lot of theoretical "should"s here. He talks about Central Banks (minute 25:30) being able to unwind the easing after covid vaccines are rolled out, people are back to spending, etc... come on... CBs couldn't even unwind what they did between 2008-2016 and that was trying to unwind without a world wide flu shutdown.
  • TE
    Tom E.
    6 February 2021 @ 12:49
    Great content. Richard Koo speaks in a digestible way and stimulates thinking (regardless of whether one agrees with him or not). His interviews are always great learning material.
  • JK
    Jens K.
    6 February 2021 @ 09:58
    So nice to hear a real Economist speak about this in a vocabulary that anybody can understand.
  • DS
    David S.
    6 February 2021 @ 01:13
    Mr. Koo is very practical on the use of government digital currency. We do not need it. DLS
    • JL
      J L.
      6 February 2021 @ 02:10
      The alternative view is that we very much do need them, and we'll get them, because the alternative is increasingly severe dislocation from one-size-fits-all monetary policy applied to a variable speed economy. The more that the service economy splits off from the knowledge economy, for example, the more that the United States has an internal version of Europe's old problem, which could be described as a stove with multiple pots and one burner setting. Flexibility and variable policy controls -- being able to fine tune, or set different temperatures for different areas -- is an increasingly necessary feature that, eventually, might be required simply to keep democracy functional (the alternative economic dislocation and inequality divergence to the point of permanent civil unrest).
    • DS
      David S.
      6 February 2021 @ 04:04
      Mr. Koo feels that a two-week reaction time is good enough. With either method it must go to the folks who need it to make it through the pandemic. IMO it is the program formulation and administration that counts. DLS
    • BA
      Bruce A.
      6 February 2021 @ 07:40
      J.L and DLS, I think you are both correct. J.L is correct that if CB's are going to be trusted with aggressive monetary policy intervention, then they better fine tune their tools (i.e. mulitple burners for multiple pots) and CBDC may have a role to play with differential settings. DLS is correct that if CB's are merely assisting Treasury with getting checks out to people then current mechanisms are probably adequate.
  • AK
    Andrew K.
    6 February 2021 @ 02:57
    I must be misunderstanding something here. Koo seems to think that the only thing the private sector can do with savings is to buy treasuries?
  • JL
    J L.
    6 February 2021 @ 02:07
    A weird thing about the assumption of negative nominal interest rates is that, with CBDC functionality and a creative interplay between the central bank and Treasury — which is an implicit assumption of CBDC usage anyway — negative nominal interest rates would probably be completely unnecessary. In every conceivable situation where you might want nominal negative interest rates, with CBDCs and policy flexiblity you could just use targeted yield differentials and negative real rates instead. Imagine if the Federal Reserve had the ability to program variable rates into CBDCs based on who is holding them. Some account classes get a higher yield, others get a lower one. Then imagine the Fed could change the yield, the same way they impact bank decisions by adjusting IOER (interest on excess reserves), in coordination with Treasury targeted spending that balances out hot and cold regions of the eocnomy. In a world like this, just to give an example, the Fed could give higher yields specifically to consumers and lower yields to corporate accounts. Or they could differentiate between industries — the manufacturing sector gets higher yields, the overheated mortgage lending sector gets lower ones, and so on. The Fed could also then spot-target yield adjustments alongside inflation e.g. — inflation running at 4% — the Fed drops the nominal corporate yield to 1% — the real yield for corporate accounts is now negative 3% — corporations are induced to spend on capex — but the nominal yield for domestic savers stays at 6% — so consumers are building real savings even at 4% inflation Long story short, CBDCs could allow the Fed and Treasury to deliver variable yields to hot and cold areas of the economy, or to differentiate between consumers and corporations, or between low income versus high income savers. In a backdrop like that, the government could create generalized inflation more easily (via micro-targeted spending and velocity targeting), and negative real yields could be created as needed while always keeping nominal yields positive. Then, too, at the same time, yields on domestic consumer savings accounts could always be kept positive — to allow for real savings — whereas other yields could be moved up or down as needed (e.g. making real yields negative for the private sector to induce capex spending and investment). TL;DR the creative possibilities inherent in CBDC yield differentials, coupled with greater ability for the government to create inflation through targeted velocity measures, could completely remove the need for negative nominal yields.
  • RH
    Ron H.
    6 February 2021 @ 01:45
    For me, pound for pound, Richard Koo's economic insights are the most valuable. He's someone who was willing to develop theories and models to fit the reality the entire developed world now finds itself in, as opposed to trying to shoehorn old dogmatic theories from an older regime to fit a distinctly different one. It's a stretch to expect politicians to understand him, change, and fully adopt the ideas, but he helps show the way out of this debt-deflation trap in a way nearly all other economists simply do not. His voice ought to be amplified exponentially. Thank you for the interview. I look forward to hearing from him again soon.
  • BD
    Ben D.
    5 February 2021 @ 12:40
    Always articulate in his points. As with each time. Thank you to the RV team for arranging this interview and Ed for being a good interviewer that let's Mr. Koo share his thoughts. While I agree with the points on private sectors borrowing or spending and the governments need to be a counter weight to that. I don't agree with Mr. Koo's argument on the need for central bank digital currency. More specifically how he says that he doesn't see a need for a faster method of payment to citizens because 1-2 weeks is fast enough. You could view the same argument in a more historical context with mail traveling by train, horse and boats. Why would you need to have airplanes or the telegraph when there was so much capital and effort put into previous means of distribution? I hope that Mr. Koo would come back to RV because his thoughts and opinions are appreciated by many.
    • DS
      David S.
      6 February 2021 @ 01:18
      There would be a huge cost to set up, protect and mine a US digital currency. It will probably happen sometime. Let's let China do it first and see how it goes. In addition, I am not sure I want the government to easily give away lots of money. DLS
  • GT
    Gabriel T.
    5 February 2021 @ 22:03
  • PU
    Peter U.
    5 February 2021 @ 17:47
    I was so looking forward to this interview. Unfortunately, Ed let me down (doesn't happen often). Ed did not follow up with any second order thinking / questioning. Richard makes a number of somewhat revealing statements / proclamations and Ed doesn't follow up with additional questions which would have led to a much more informative discussion. Ed, feel free to contact me and I will provide ample examples of how you didn't follow up at key points, especially since you just finished interviews with Rosy and Luke. How could you not integrate and contrast their thesis on inflation / deflation with Richards. Shame.
    • EH
      Edward H. | Real Vision
      5 February 2021 @ 20:15
      Koo was taped first. And his ideas informed my conversations with Rosenberg and Gromen. So that’s a large part of it. Also, I spoke to him in 2020. So this builds on that, There is some pushback there that I did not incorporate here.
    • PU
      Peter U.
      5 February 2021 @ 20:30
      Ed, thank you for the follow up. That makes sense to me. I retract my earlier comment.
  • DS
    David S.
    5 February 2021 @ 18:05
    Mr. Koo is the voice of reason in perilous times. Correct policy changes are hard to implement because of political stakeholders in many countries. Thanks for a great interview. DLS
  • DC
    David C.
    5 February 2021 @ 17:55
    Have to agree with the others...I love listening to Mr. Koo. Brilliant, articulate.
  • JS
    John S.
    5 February 2021 @ 15:31
    Let’s talk again soon I agree. Top interview. Thanks Ed for your questions too. Great interview. In my opinion, your best interview so far and there are tremendous ones.
  • JF
    Joao F.
    5 February 2021 @ 13:45
    Always great to listening to Richard Koo. Very sober approach.