Richard Koo and Greece, Crisis of EU Proportions

What Richard Koo says is simple: the crisis EU and US currently facing is a totally different kind of crisis from what you read in the textbooks. Japan spent more that 15 years into this shit hole but made it. Maybe it’s now up to the rest of the world to learn from Japan’s recent financial turmoil and solution and try to fix the EU and US economy or maybe not.

What Richard Koo suggests is that cutting budget deficit is the worst thing you can do. Instead, GDP has to grow. Money has to go back into the economy and keep the beast happy until private sector balances are good.

What happened in Japan and what is happening in EU and US is this:

1. Bubble burst
2. Assets lost huge amounts of value
3. Interested rates fall to record lows or zero
4. Private sector paying back debt and cut spending
5. Banks accumulating money from private sector debt payments
6. Cash stay in banks because private sector pays back its dues, doesn’t borrow to spend
7. Interest rates still in record low or 0 but the economy keeps dying

What Japan did was this: the government decided to take all the frozen money from the banks (no5 and no6) and throw them back to the economy to keep the GDP grow.

What EU does is cutting budget deficit, sucking money from the economy rather than pouring cash with stimulus packages. GDP goes south, budget deficit increases etc.

Greece is a special case in the circle of EU for two reasons:

1. The country provided wrong numbers so nobody really-really knows what was going on
2. Greek private sector is messed up for various reasons

In other words Greece consists of a special case of its own crappy proportions, yet the pill given or enforced to taken is absolutely wrong one. Reducing budget deficit is a guarantee of a deep shit solution as is all the structural problems the Greek public and private sector has.

Greece will either fail miserable and default or experience a death spiral of many years to come while losing dignity, property and who knows what else. Before raising your finger and blaming others, remember who participated and supported the Greek democracy and re-elected each and every party the last few decades, maintaining this burning platform.

First video of Richard Koo: Macroeconomic Management After a Crisis is 18min long with great sound but not a very details one.

The second video following is an hour long, with crappy sound quality but detailed explanation of what happened in Japan, what is happening now in the world and how this can be possibly fixed faster and more efficiently. It also includes great bits of information such as why Germany was forced and had to buy Greek bonds (not what you think).