Hello, and welcome to another episode of the All Thoughts Podcast. I'm Tracy Alloway.

Hello, and welcome to another episode of the All Thoughts Podcast. I'm Tracy Alloway.

And I'm Joe Wysn't thal Joe.

And I'm Joe Wysn't thal Joe.

Do you remember at the beginning of the year there was so much excitement about China reopening.

Do you remember at the beginning of the year there was so much excitement about China reopening.

Yes. Absolutely.

Yes. Absolutely.

You know.

You know.

It is interesting because I think if you go back to last fall, there was all this talking's like, why is it China giving up on COVID zero? When is China going to give up on COVID zero? And then and they're like, oh, it's not going to happen anytime soon. And then one day it just happened, and everyone's like, Okay, here comes China, Here comes all the demand from China.

It is interesting because I think if you go back to last fall, there was all this talking's like, why is it China giving up on COVID zero? When is China going to give up on COVID zero? And then and they're like, oh, it's not going to happen anytime soon. And then one day it just happened, and everyone's like, Okay, here comes China, Here comes all the demand from China.

It's on, that's right.

It's on, that's right.

And so a big plank or portion of the Boll thesis for twenty twenty three was that because China was reopening its economy after basically being shut for three years, you were going to get all this additional economic activity. And while we have seen markets rally, it is not it is definitely not because of China. In fact, China really seems to be struggling here. So we have you know, Chinese manufacturing is still at or nearer contraction. I think exports are flagging. Inflation is basically around zero, which might sound great to a number of other countries right now, but of course it means that in China growth is subpar.

And so a big plank or portion of the Boll thesis for twenty twenty three was that because China was reopening its economy after basically being shut for three years, you were going to get all this additional economic activity. And while we have seen markets rally, it is not it is definitely not because of China. In fact, China really seems to be struggling here. So we have you know, Chinese manufacturing is still at or nearer contraction. I think exports are flagging. Inflation is basically around zero, which might sound great to a number of other countries right now, but of course it means that in China growth is subpar.

Yeah, I mean, I think it also.

Yeah, I mean, I think it also.

The big story for the world too has been oil demand, and there's a lot of expectation that's like, Okay, commodity prices are kind of soft, but China's going to reopen. Oil demand is going to surge, and that was expected to contribute to like further inflationary pressures throughout the world oil, copper, et cetera. And so yeah, that's that totally caught that market by surprise and changed a lot of the sort of macro dynamics globally that people were expecting.

The big story for the world too has been oil demand, and there's a lot of expectation that's like, Okay, commodity prices are kind of soft, but China's going to reopen. Oil demand is going to surge, and that was expected to contribute to like further inflationary pressures throughout the world oil, copper, et cetera. And so yeah, that's that totally caught that market by surprise and changed a lot of the sort of macro dynamics globally that people were expecting.

Yep.

Yep.

So now is the perfect time to dig into what is going on with the Chinese economy, and you know, to some degree, the weakness this year sort of highlights these longer term concerns around China. How is it actually transitioning or developing its economy. Is it going to be able to achieve the ultra high levels of growth that we've seen in the past, or is it going to fall into something like a middle income trap what's going on with Chinese local government debt that's been in the headlines quite a bit recently, and all of that put together has given rise to this idea of Japanification risk for China. So the notion that you might have ultra high levels of debt that weigh on future growth because everyone has to spend their money basically paying down their debt rather than investing in new and exciting things.

So now is the perfect time to dig into what is going on with the Chinese economy, and you know, to some degree, the weakness this year sort of highlights these longer term concerns around China. How is it actually transitioning or developing its economy. Is it going to be able to achieve the ultra high levels of growth that we've seen in the past, or is it going to fall into something like a middle income trap what's going on with Chinese local government debt that's been in the headlines quite a bit recently, and all of that put together has given rise to this idea of Japanification risk for China. So the notion that you might have ultra high levels of debt that weigh on future growth because everyone has to spend their money basically paying down their debt rather than investing in new and exciting things.

Yeah, it's weird because I feel like there's like, now, there's two conflicting themes that I think about with China. So one is exactly as you said that there is this sort of sluggish growth, over capacity, debt, indebted cities and so forth, lack of domestic consumption. And then the other one is this sort of awe that the world has that like the booming electric vehicle exports, that they finally got the first flight of their domestic wide body aviation that first planned the COMAC that we talked about with Brad Setser, and of course all the anxiety about the chip progress that the country has made, which is why the Biden administration has cut off access to various high tech, cutting edge semiconductor equipment. So there's these two things. There's this like sort of like shokunawe at the success they're having in batteries, cars and so forth. At the same time, like the macro numbers do not look good.

Yeah, it's weird because I feel like there's like, now, there's two conflicting themes that I think about with China. So one is exactly as you said that there is this sort of sluggish growth, over capacity, debt, indebted cities and so forth, lack of domestic consumption. And then the other one is this sort of awe that the world has that like the booming electric vehicle exports, that they finally got the first flight of their domestic wide body aviation that first planned the COMAC that we talked about with Brad Setser, and of course all the anxiety about the chip progress that the country has made, which is why the Biden administration has cut off access to various high tech, cutting edge semiconductor equipment. So there's these two things. There's this like sort of like shokunawe at the success they're having in batteries, cars and so forth. At the same time, like the macro numbers do not look good.

It's true China is always like a giant waiting in the wings to take over everyone else's economy. And also simultaneously, this bundle of vulnerabilities that people are worried is going to tip into a massive financial crisis. That's always the case. But okay, I have to say, we really do have the perfect guest to discuss all of this. We're going to be speaking with Richard Ku, chief economist at the Nomora Research Institute, which is the research arm of Japan's biggest brokerage to Moora. And of course he is also the man who basically wrote the book on balance sheet recession. So Richard, thank you so much for coming back on all thoughts.

It's true China is always like a giant waiting in the wings to take over everyone else's economy. And also simultaneously, this bundle of vulnerabilities that people are worried is going to tip into a massive financial crisis. That's always the case. But okay, I have to say, we really do have the perfect guest to discuss all of this. We're going to be speaking with Richard Ku, chief economist at the Nomora Research Institute, which is the research arm of Japan's biggest brokerage to Moora. And of course he is also the man who basically wrote the book on balance sheet recession. So Richard, thank you so much for coming back on all thoughts.

Well, thank you for having me.

Well, thank you for having me.

Yeah, really appreciate it. Maybe just to begin with, I know you've been talking and writing about this theme of a potential balance sheet recession in China. You also have a book that came out I think it was just last year called Pursued Economy, where you talk quite a lot about the trajectory of China's economy, but talk to us about what you're seeing now that suggests there may be signs of a Japan style balance sheet recession in China.

Yeah, really appreciate it. Maybe just to begin with, I know you've been talking and writing about this theme of a potential balance sheet recession in China. You also have a book that came out I think it was just last year called Pursued Economy, where you talk quite a lot about the trajectory of China's economy, but talk to us about what you're seeing now that suggests there may be signs of a Japan style balance sheet recession in China.

Well, a lot of Chinese journalists economists are being contacted me on this issue also, that are we going to be Japan soon or are we already on that path?

Well, a lot of Chinese journalists economists are being contacted me on this issue also, that are we going to be Japan soon or are we already on that path?

And my answer to that is that.

And my answer to that is that.

A lot of similarities between what happened to Japan thirty years ago and what's happening to China today, but they are also important differences. And what the Chinese economists worried about is that China may be following fall into what I call balance recession. And balance recession is triggered by this whole notion that people feel uncomfortable with their balance sheets, suppose that the debt is too large relative to their assets, and that typically happens after the bursting of a bubble. If the bubble is financed with debt, and as the prices collapse but the liabilities remain, people realize that their balance is underwater. And if the balance is underwater, you have to fix it, or how do you fix it? You pay down debt. Well, that's the right thing to do at the individual level, but when everybody does this all at the same time, we got into a fallacy of composition problems in that in the national economy, if someone is saving money or paying down debt, you need someone else to borrow and spend those money to keep the economy going. And in the usual economy, you bring you give too few borrowers, you bring interest rates down. Too many borrowers, you push interest rates higher, and then that's how you keep the economy is going. But when the big bubble burst and as the prices collapse, everyone will be paying down there no one will be borrowing money even at zero interest rates, because if your balance is underwater, you're not going to borrow money even if interust rates come down to zero. And that's the prospect that Chinese are worried about. And China got this huge bubble, especially in the residential real estate, and the amount of price increase that China observed on the residential real estate is almost same as what happened to Japan thirty years ago in Tokyo and Osaka. And so when the real estate bubbles start collapsing last year, all these Chinese economists begin to worry about japan like situation where so many people are paying down there all at the same time, and economy could then fall into a deflationary spiral. I think that is actually already happening in China. A lot of people are saying very few people borrowing, so many people are paying down debt even with these low interest rates, and that's a very bad sign macroeconomically. Individually they might be doing the right things, but collectively they may be killing the economy. But there's also a big difference between the Chinese situation and the Japanese one, and that is that Chinese are already very much aware of this risk called balance recession. And thirty some years ago, when this thing was happening in Japan, no one in Japan, including myself, had any idea about this balance recession because it was not taught in economic books. I mean certainly not when I was going through. And so when the economy began to lose forward momentums and Bank of Japan brought rays down to very low levels, nothing happens. Structural reform, nothing happens. Fiscal stimulus, well, fiscal stimulus always worked, but that was cut short because they thought every time the economy showed even the slightest sign of growth, they say, ah, we don't need physical stimulus anymore. Economy is improving. And then the economy tanked a game, and it tanked a game because people were still repairing balance sheets and when a large bubble burst, and as the prices collapsed badly, it's going to take five ten years easily to repair those balance sheets. And in the Japanese case, it was bubble was led by the commercial real estate. The commercial real estate prices fell eighty seven percent nationwide, not just in the little corner of Tokyo, but the entire country. And so the balance sheet challenge that Japanese companies face was absolutely massive. They all start paying down that all at the same time, and that's how we got into this very slow growth. But the government did not know how to handle this type of recessions because in economics we will never talk to look at balance sheets, and so Japanese responses were very inconsistent, I should say, whereas in the Chinese case, they are fully aware of this recession called balance recession. That's why they have been calling me very frequently these days. I was told I don't know, I have no way to prove this, but one Chinese professor told me that about half of the PhD dissertations written on economics in China today based on my work on balance sheet recession. Now I don't know whether it was just making that number up, but what that suggests to me is that now the Chinese government know that there is this disease called balance recession, and they should know how to handle it. Also because once you know that this is a recession which is produced by lack of borrowers, and the borrowers are not coming into borrow money because they have balanceing problems, So the private sector themselves cannot change their behavior. After they are doing the right things trying to repair their balance sheets, then the government has to come in and borrow and put that money back into the income stream, which means fiscal stimulus is absolutely essential once you're in balance recession. And so my guess is that Chinese government will put in the fiscal stimulus, which they are actually quite good at, and that will keep the recession from turning into a depression or something. So that's the key difference between the Japanese situation. Thirty years ago, and what the Chinese resent, what the Chinese may be faced with today, that they already know what disease they are dealing with, and they are probably they are not going to waste any money, waste any time trying monetary easy or structural reform policies. My guess is that they'll go straight into the fiscal stimulus to keep the economy from losing its power.

A lot of similarities between what happened to Japan thirty years ago and what's happening to China today, but they are also important differences. And what the Chinese economists worried about is that China may be following fall into what I call balance recession. And balance recession is triggered by this whole notion that people feel uncomfortable with their balance sheets, suppose that the debt is too large relative to their assets, and that typically happens after the bursting of a bubble. If the bubble is financed with debt, and as the prices collapse but the liabilities remain, people realize that their balance is underwater. And if the balance is underwater, you have to fix it, or how do you fix it? You pay down debt. Well, that's the right thing to do at the individual level, but when everybody does this all at the same time, we got into a fallacy of composition problems in that in the national economy, if someone is saving money or paying down debt, you need someone else to borrow and spend those money to keep the economy going. And in the usual economy, you bring you give too few borrowers, you bring interest rates down. Too many borrowers, you push interest rates higher, and then that's how you keep the economy is going. But when the big bubble burst and as the prices collapse, everyone will be paying down there no one will be borrowing money even at zero interest rates, because if your balance is underwater, you're not going to borrow money even if interust rates come down to zero. And that's the prospect that Chinese are worried about. And China got this huge bubble, especially in the residential real estate, and the amount of price increase that China observed on the residential real estate is almost same as what happened to Japan thirty years ago in Tokyo and Osaka. And so when the real estate bubbles start collapsing last year, all these Chinese economists begin to worry about japan like situation where so many people are paying down there all at the same time, and economy could then fall into a deflationary spiral. I think that is actually already happening in China. A lot of people are saying very few people borrowing, so many people are paying down debt even with these low interest rates, and that's a very bad sign macroeconomically. Individually they might be doing the right things, but collectively they may be killing the economy. But there's also a big difference between the Chinese situation and the Japanese one, and that is that Chinese are already very much aware of this risk called balance recession. And thirty some years ago, when this thing was happening in Japan, no one in Japan, including myself, had any idea about this balance recession because it was not taught in economic books. I mean certainly not when I was going through. And so when the economy began to lose forward momentums and Bank of Japan brought rays down to very low levels, nothing happens. Structural reform, nothing happens. Fiscal stimulus, well, fiscal stimulus always worked, but that was cut short because they thought every time the economy showed even the slightest sign of growth, they say, ah, we don't need physical stimulus anymore. Economy is improving. And then the economy tanked a game, and it tanked a game because people were still repairing balance sheets and when a large bubble burst, and as the prices collapsed badly, it's going to take five ten years easily to repair those balance sheets. And in the Japanese case, it was bubble was led by the commercial real estate. The commercial real estate prices fell eighty seven percent nationwide, not just in the little corner of Tokyo, but the entire country. And so the balance sheet challenge that Japanese companies face was absolutely massive. They all start paying down that all at the same time, and that's how we got into this very slow growth. But the government did not know how to handle this type of recessions because in economics we will never talk to look at balance sheets, and so Japanese responses were very inconsistent, I should say, whereas in the Chinese case, they are fully aware of this recession called balance recession. That's why they have been calling me very frequently these days. I was told I don't know, I have no way to prove this, but one Chinese professor told me that about half of the PhD dissertations written on economics in China today based on my work on balance sheet recession. Now I don't know whether it was just making that number up, but what that suggests to me is that now the Chinese government know that there is this disease called balance recession, and they should know how to handle it. Also because once you know that this is a recession which is produced by lack of borrowers, and the borrowers are not coming into borrow money because they have balanceing problems, So the private sector themselves cannot change their behavior. After they are doing the right things trying to repair their balance sheets, then the government has to come in and borrow and put that money back into the income stream, which means fiscal stimulus is absolutely essential once you're in balance recession. And so my guess is that Chinese government will put in the fiscal stimulus, which they are actually quite good at, and that will keep the recession from turning into a depression or something. So that's the key difference between the Japanese situation. Thirty years ago, and what the Chinese resent, what the Chinese may be faced with today, that they already know what disease they are dealing with, and they are probably they are not going to waste any money, waste any time trying monetary easy or structural reform policies. My guess is that they'll go straight into the fiscal stimulus to keep the economy from losing its power.

So you mentioned that one advantage perhaps that China has is having seen the experience of Japan. Incidentally, the US also had that advantage when we had the two thousand and eight two thousand and nine financial crisis. You wrote a whole book on it, the Holy Grail of Macroeconomics. Of course, US policymakers didn't exactly listen or heed the warnings of that book, and we had this pretty awful decade for growth.

So you mentioned that one advantage perhaps that China has is having seen the experience of Japan. Incidentally, the US also had that advantage when we had the two thousand and eight two thousand and nine financial crisis. You wrote a whole book on it, the Holy Grail of Macroeconomics. Of course, US policymakers didn't exactly listen or heed the warnings of that book, and we had this pretty awful decade for growth.

You know, I'm.

You know, I'm.

Curious though, just in terms of balance sheets diving in, like, how do you see the distribution of debt in China? So the federal government doesn't have much debt, we know that is it? How much is it corporates versus real estate developers, versus households versus local cities and municipalities, like what does the distribution of debt in China look like?

Curious though, just in terms of balance sheets diving in, like, how do you see the distribution of debt in China? So the federal government doesn't have much debt, we know that is it? How much is it corporates versus real estate developers, versus households versus local cities and municipalities, like what does the distribution of debt in China look like?

Well?

Well?

Can I first comment on your first comment about the US. Sure, Well, when I was trying to explain to my formal colleagues at the Federal Reserve that we were suffering from balance saing session in Japan and therefore we need fiscal stimulus, not structural reform. And as a formal recipient of doctoral fellowship from the Board of Goldness, I have been, you know, going back to the FED to give seminars on this issue throughout the nineties, and as you mentioned just now, they did not take any of my warnings. I was bashed every step of the way, with the FED economist saying, come on, just Bank of Japan printing the money and then everything be fine. But I would try to explain that that doesn't work when they are now borrowers. Well, once two thousand and eight Lehman crisis happened, someone I don't know who brought my book to the attention of Jimmer Benenki and he read it the Holy Gramach Economics, the book you mentioned, and he told so many other people in the Federal Reserve to read it as well. And if you notice that at the beginning he was arguing that yes, monetary policy can handle it, as he was a disciple of Milton Freeman, who argue that if the Fed acted more responsible during a great depression, things wouldn't have gone so bad. But after reading my book, he started talking about fiscal cliff, which is the opposite of what treatment was saying. And I thought that was a very important change in the US policy when Germin Minanke at various events kept on saying we cannot afford the fall off the fiscal cliff. The government has to continue borrowing and spending money, meaning that fiscal policy is absolutely essential. And I think that is the key difference between the United States and Europe, because Europe really did not heed any of my advice, especially at the top level, and so they fell into a really serious balance recession and that recession lasted for almost ten years, whereas in the United States, the epicenter of this global financial crisis, because of the efforts made by Jimmerman and get the Fed and Larry Summers also, who actually endorsed my book The Holy grailm Microeconomics. He talked about the importance of fiscal stimulus. It has to be speedy, substantial, and sustained. So Obama administration was trying to put in fiscal stimulus. They made a lot of resistance from them from the Republicans, but at least US was trying to do all the right things, and I think that's why US came out of balance sheet recession much faster than the Europeans. So I would say that my book actually did have an impact on the US policy. If it had impact earlier, it would have probably helped the US economy even sooner. So that's one comment I want to make, and that is that US policy makers realize that they're facing balance sheet recession like EO too into the recession and made all the appropriate changes to fight it. Now, going back to the Chinese issue of where the debt might be, you know a lot of people like to talk about the size of the debt, but what is really important is the difference between the size of the debt and the size of the savings. And the fact that the Chinese interest rates, for example, ten year Chinese government bounds today is offering what two point six percent suggests that savings are far bigger than the debt because if the debt or the borrowing is probabiger than the savings. Interest rates should be higher, not lower, and the fact that ten year government bounce is down to two point six percent suggest to me that overall China's biggest problem is that there are too much savings relative to borrowings. So, having said that, who has the capacity to borrow and spend this money? Well, as you correctly mentioned, the federal government of the central government probably has plenty of rooms left to borrow and spend. But the regional governments I understand, are in very sad shape because they can't sell the land as easily or as expensively as before, and they have used up quite a bit of their resources in the previous years trying to support the economy, and also during the COVID nineteen and so the feeling I get is that regional governments are really overburdened already, and probably they will require quite a bit of help from the central government going forward if they are going to be the one who will be actually implementing fiscal stimulus, which is needed during the balancey recession.

Can I first comment on your first comment about the US. Sure, Well, when I was trying to explain to my formal colleagues at the Federal Reserve that we were suffering from balance saing session in Japan and therefore we need fiscal stimulus, not structural reform. And as a formal recipient of doctoral fellowship from the Board of Goldness, I have been, you know, going back to the FED to give seminars on this issue throughout the nineties, and as you mentioned just now, they did not take any of my warnings. I was bashed every step of the way, with the FED economist saying, come on, just Bank of Japan printing the money and then everything be fine. But I would try to explain that that doesn't work when they are now borrowers. Well, once two thousand and eight Lehman crisis happened, someone I don't know who brought my book to the attention of Jimmer Benenki and he read it the Holy Gramach Economics, the book you mentioned, and he told so many other people in the Federal Reserve to read it as well. And if you notice that at the beginning he was arguing that yes, monetary policy can handle it, as he was a disciple of Milton Freeman, who argue that if the Fed acted more responsible during a great depression, things wouldn't have gone so bad. But after reading my book, he started talking about fiscal cliff, which is the opposite of what treatment was saying. And I thought that was a very important change in the US policy when Germin Minanke at various events kept on saying we cannot afford the fall off the fiscal cliff. The government has to continue borrowing and spending money, meaning that fiscal policy is absolutely essential. And I think that is the key difference between the United States and Europe, because Europe really did not heed any of my advice, especially at the top level, and so they fell into a really serious balance recession and that recession lasted for almost ten years, whereas in the United States, the epicenter of this global financial crisis, because of the efforts made by Jimmerman and get the Fed and Larry Summers also, who actually endorsed my book The Holy grailm Microeconomics. He talked about the importance of fiscal stimulus. It has to be speedy, substantial, and sustained. So Obama administration was trying to put in fiscal stimulus. They made a lot of resistance from them from the Republicans, but at least US was trying to do all the right things, and I think that's why US came out of balance sheet recession much faster than the Europeans. So I would say that my book actually did have an impact on the US policy. If it had impact earlier, it would have probably helped the US economy even sooner. So that's one comment I want to make, and that is that US policy makers realize that they're facing balance sheet recession like EO too into the recession and made all the appropriate changes to fight it. Now, going back to the Chinese issue of where the debt might be, you know a lot of people like to talk about the size of the debt, but what is really important is the difference between the size of the debt and the size of the savings. And the fact that the Chinese interest rates, for example, ten year Chinese government bounds today is offering what two point six percent suggests that savings are far bigger than the debt because if the debt or the borrowing is probabiger than the savings. Interest rates should be higher, not lower, and the fact that ten year government bounce is down to two point six percent suggest to me that overall China's biggest problem is that there are too much savings relative to borrowings. So, having said that, who has the capacity to borrow and spend this money? Well, as you correctly mentioned, the federal government of the central government probably has plenty of rooms left to borrow and spend. But the regional governments I understand, are in very sad shape because they can't sell the land as easily or as expensively as before, and they have used up quite a bit of their resources in the previous years trying to support the economy, and also during the COVID nineteen and so the feeling I get is that regional governments are really overburdened already, and probably they will require quite a bit of help from the central government going forward if they are going to be the one who will be actually implementing fiscal stimulus, which is needed during the balancey recession.

So, just on the idea of physical stimulus, historically, it does feel like a lot of China's stimulus has come in the shape of support measures to companies or these huge construction projects, big infrastructure and development projects of one sort or another. What would be the ideal form of stimulus this time around, because, of course, China is trying to balance various needs and goals here. It's talked a lot about retooling its economy away from manufacturing and real estate and more towards consumption. And yet historically we haven't seen a lot of fiscal support for households and individuals. It just hasn't been a very big thing in China.

So, just on the idea of physical stimulus, historically, it does feel like a lot of China's stimulus has come in the shape of support measures to companies or these huge construction projects, big infrastructure and development projects of one sort or another. What would be the ideal form of stimulus this time around, because, of course, China is trying to balance various needs and goals here. It's talked a lot about retooling its economy away from manufacturing and real estate and more towards consumption. And yet historically we haven't seen a lot of fiscal support for households and individuals. It just hasn't been a very big thing in China.

In terms of I mean, fiscal stimulus can come in various forms, right, You can have tax cuts of all of fiscal policy, or government actually borrowing and spending money, and the spending can go to in very many different places. First of all, tax cuts during balance research is not going to be very effective, and the reason is quite simple. Those people who get a tax cut who use the money to pay down debt, and that's good for that at the individual level perhaps, but collectively that won't help the GDP from collapsing. And so during balanceing recession, tax cuts should not be the main force of supporting the economy. So the government has to borrow and spend money, so within that what will be most effective. And I would argue that all those residential housing projects that were started but are now put on hold because the construction companies either have gone bankrupt or having so much financial problems they cannot move forward. I would recommend Chinese government to go in there and help those construction companies so that all the promised construction will be actually complete. I think that would be the most effective way to spend fiscal stimulus fiscal money, because that way, those people who were feeling very insecure, I mean they paid for the apartment house already or put the down payment. Now they're wondering whether they will get anything from all the investments they made, will at least get that apartments built and they can look forward to perhaps some larger apartments as a result. And the same part would be helping the construction industries. And one key difference between the Japanese and the Chinese situation is that construction is such a large part of Chinese GDP. Construction accounts was something like twenty six percent of Chinese GDP, whereas during the bubble days in Japan it was only around twenty percent, and it wasn't a big part of the picture, whereas in the Chinese bubble it came with a huge construction boom. And so when acid prices collapse but construction boom also go bust, then you are hit from both the real side as well as from the balance EAT side and BALANCEA side. There's not much one can do. But on the construction side, if government comes in and help finish those projects that was started, I think that kind of money will probably go a long way in helping the Chinese economy.

In terms of I mean, fiscal stimulus can come in various forms, right, You can have tax cuts of all of fiscal policy, or government actually borrowing and spending money, and the spending can go to in very many different places. First of all, tax cuts during balance research is not going to be very effective, and the reason is quite simple. Those people who get a tax cut who use the money to pay down debt, and that's good for that at the individual level perhaps, but collectively that won't help the GDP from collapsing. And so during balanceing recession, tax cuts should not be the main force of supporting the economy. So the government has to borrow and spend money, so within that what will be most effective. And I would argue that all those residential housing projects that were started but are now put on hold because the construction companies either have gone bankrupt or having so much financial problems they cannot move forward. I would recommend Chinese government to go in there and help those construction companies so that all the promised construction will be actually complete. I think that would be the most effective way to spend fiscal stimulus fiscal money, because that way, those people who were feeling very insecure, I mean they paid for the apartment house already or put the down payment. Now they're wondering whether they will get anything from all the investments they made, will at least get that apartments built and they can look forward to perhaps some larger apartments as a result. And the same part would be helping the construction industries. And one key difference between the Japanese and the Chinese situation is that construction is such a large part of Chinese GDP. Construction accounts was something like twenty six percent of Chinese GDP, whereas during the bubble days in Japan it was only around twenty percent, and it wasn't a big part of the picture, whereas in the Chinese bubble it came with a huge construction boom. And so when acid prices collapse but construction boom also go bust, then you are hit from both the real side as well as from the balance EAT side and BALANCEA side. There's not much one can do. But on the construction side, if government comes in and help finish those projects that was started, I think that kind of money will probably go a long way in helping the Chinese economy.

Can I ask what about the role of the foreign sector when we sort of break down the Chinese economy and a sort of sectoral model. So it's like, Okay, we know that domestic households have a high level of savings. We know the federal government has not borrowed a lot. But on the other hand, the trade surpluses are massive. And again I sort of mentioned in the intro that one of the themes right now is that Chinese advanced exports, particularly in areas like batteries and evs and other cutting edge stuff, is kind of booming.

Can I ask what about the role of the foreign sector when we sort of break down the Chinese economy and a sort of sectoral model. So it's like, Okay, we know that domestic households have a high level of savings. We know the federal government has not borrowed a lot. But on the other hand, the trade surpluses are massive. And again I sort of mentioned in the intro that one of the themes right now is that Chinese advanced exports, particularly in areas like batteries and evs and other cutting edge stuff, is kind of booming.

If it continues to boom, can.

If it continues to boom, can.

That go some ways in sort of mitigating the need for federal government borrowing absolutely.

That go some ways in sort of mitigating the need for federal government borrowing absolutely.

I mean, if Chinese companies keeps on coming up with new fantastic products, and both Chinese and non Chinese are willing to borrow money to buy those products, then that will be helping the Chinese economy in massive, massive fashion. And I realized, as you mentioned already, that there are many Chinese companies that are highly innovative, coming up with a lot of interesting products, and they should find plenty of export markets for those products, So that part is definitely there. My concern, however, is the same concern that Japan had back in those days. At that time thirty years ago, Japan was running the largest trade of pluses in the world. So many people wanted to buy Japanese cameras, Japanese cars, Japanese appliances, and it was running such a large trade surplus.

I mean, if Chinese companies keeps on coming up with new fantastic products, and both Chinese and non Chinese are willing to borrow money to buy those products, then that will be helping the Chinese economy in massive, massive fashion. And I realized, as you mentioned already, that there are many Chinese companies that are highly innovative, coming up with a lot of interesting products, and they should find plenty of export markets for those products, So that part is definitely there. My concern, however, is the same concern that Japan had back in those days. At that time thirty years ago, Japan was running the largest trade of pluses in the world. So many people wanted to buy Japanese cameras, Japanese cars, Japanese appliances, and it was running such a large trade surplus.

It could not push it even more.

It could not push it even more.

In that if Japan wanted to export even more by, for example, bringing the Japanese end down a little bit, Americans would be very upset. The USTR will be knocking on the Japanese and said, no, you ben opened your market not sending these additional products to US. And I was actually involved in the US Japan trade friction back thirty years ago. At that time, the US Ambassador to Japan was mister Walter Mondale, a former Vice president, who asked away. Recently he found out that this guy Richard Ko, who is frequently appearing in Japanese television programs, actually carries an American passport. So he asked me to come over, and he basically asked me to represent the United States in all these Japanese TV programs on US Japan trade friction. And at that time, usgvent trade friction was really really bad, serious, ugly, you name it. It was really terrible. So I tried to ill go to the US embassy to get a food briefing from staff first there and then go to the television's studios to try to explain the American position to the Japanese audience, even though I was actually employed by the Japanese Research Institute, and all these other Japanese on the program waiting with their guns to shoot me down. You know, that was that kind of situation. So I learned a lot about trade friction back in those days, and Japan really could not rely on additional exports because it was already running such a large trade surplus. So if Japan could have used exports by bringing the Japanese hand down a little bit and export its way out, that would have shortened the balanceing recession by some considerable years. But that option really was not available to Japan at that time because it was such a large trade cirplust country. And I think that applies to China today as well as you know.

In that if Japan wanted to export even more by, for example, bringing the Japanese end down a little bit, Americans would be very upset. The USTR will be knocking on the Japanese and said, no, you ben opened your market not sending these additional products to US. And I was actually involved in the US Japan trade friction back thirty years ago. At that time, the US Ambassador to Japan was mister Walter Mondale, a former Vice president, who asked away. Recently he found out that this guy Richard Ko, who is frequently appearing in Japanese television programs, actually carries an American passport. So he asked me to come over, and he basically asked me to represent the United States in all these Japanese TV programs on US Japan trade friction. And at that time, usgvent trade friction was really really bad, serious, ugly, you name it. It was really terrible. So I tried to ill go to the US embassy to get a food briefing from staff first there and then go to the television's studios to try to explain the American position to the Japanese audience, even though I was actually employed by the Japanese Research Institute, and all these other Japanese on the program waiting with their guns to shoot me down. You know, that was that kind of situation. So I learned a lot about trade friction back in those days, and Japan really could not rely on additional exports because it was already running such a large trade surplus. So if Japan could have used exports by bringing the Japanese hand down a little bit and export its way out, that would have shortened the balanceing recession by some considerable years. But that option really was not available to Japan at that time because it was such a large trade cirplust country. And I think that applies to China today as well as you know.

China.

China.

As you mentioned, China is the largest trade circlust country in the world, and if China tries to bring exchange rates down and try to export its way out, I'm sure a lot of countries will be complaining. So there's something that Chinese can do in that export side, especially they're coming up with new products so that other people in the United States, Japan, or or Western Europe have no reason to resist because there's no domestic manufacturers for those new products. Still, overall, I don't think it's a good idea for China to rely too much on exports because that could produce backlash called trade friction, which is why Japan faced thirty years ago as well.

As you mentioned, China is the largest trade circlust country in the world, and if China tries to bring exchange rates down and try to export its way out, I'm sure a lot of countries will be complaining. So there's something that Chinese can do in that export side, especially they're coming up with new products so that other people in the United States, Japan, or or Western Europe have no reason to resist because there's no domestic manufacturers for those new products. Still, overall, I don't think it's a good idea for China to rely too much on exports because that could produce backlash called trade friction, which is why Japan faced thirty years ago as well.

Just going back to today, we've been talking a lot about both the parallels and the difference between China's current situation and the one that Japan found itself in a few decades ago. But we haven't yet touched on demographics, and of course population growth or the lack of it, is something that is much discussed when it comes to Japan's economy. Is a similar concern going to emerge for China?

Just going back to today, we've been talking a lot about both the parallels and the difference between China's current situation and the one that Japan found itself in a few decades ago. But we haven't yet touched on demographics, and of course population growth or the lack of it, is something that is much discussed when it comes to Japan's economy. Is a similar concern going to emerge for China?

Well, I know.

Well, I know.

That's the kind of a standout Washington consensusy if I.

That's the kind of a standout Washington consensusy if I.

May, on Japan.

May, on Japan.

But if you look at the actual statistics, Japan's population peaked two thousand and nine. What that means is that the bubble burst nineteen ninety, So there was nineteen years, almost two decades, where Japanese population was actually growing, but Japan was stealing deflation. In fact, that twenty years, Japan was experienced the most serious deflation because everyone was paying down debt and so so I would argue that most of the decline that a lot of people referred to population. One can use that perhaps the recent ten years, but certainly not the first twenty years of after the bursting of the bubble. The first twenty years came almost exclusively exclusively from balance sheet problems, not from population problems. Having said that, then you look at the Chinese situation, and we noticed that Chinese populations start shrinking well this year or last year. That's the same year the bubble burst, So Japan had nineteen years before the population started shrinking. In a Chinese case, bursting of the bubble and decline of the population are happening on the same year, and that is likely to make Chinese policy response that much more challenging.

But if you look at the actual statistics, Japan's population peaked two thousand and nine. What that means is that the bubble burst nineteen ninety, So there was nineteen years, almost two decades, where Japanese population was actually growing, but Japan was stealing deflation. In fact, that twenty years, Japan was experienced the most serious deflation because everyone was paying down debt and so so I would argue that most of the decline that a lot of people referred to population. One can use that perhaps the recent ten years, but certainly not the first twenty years of after the bursting of the bubble. The first twenty years came almost exclusively exclusively from balance sheet problems, not from population problems. Having said that, then you look at the Chinese situation, and we noticed that Chinese populations start shrinking well this year or last year. That's the same year the bubble burst, So Japan had nineteen years before the population started shrinking. In a Chinese case, bursting of the bubble and decline of the population are happening on the same year, and that is likely to make Chinese policy response that much more challenging.

You know, you mentioned that one constructive thing that the federal government in China or the central government could do is just make sure the apartments get built. That people have all this uncertainty because they put down payments on apartments they're waiting for that the developers are then hobbled, and there's all kinds that creates all kinds of stagnation.

You know, you mentioned that one constructive thing that the federal government in China or the central government could do is just make sure the apartments get built. That people have all this uncertainty because they put down payments on apartments they're waiting for that the developers are then hobbled, and there's all kinds that creates all kinds of stagnation.

Suppose that happens.

Suppose that happens.

Is there something further that's next, because presumably China doesn't want to just go back to the old model where construction is twenty five or twenty six percent of GDP, or presumably that wouldn't be your prescription to just go back. So let's say that somehow they were able to clean up the mess that the developers and remove some of that overhang is there some structural move that should be then done further, whether it's direct support to household something with the safety net, et cetera, that the government should then undertake to sort of continue on these reforms and not fall back into.

Is there something further that's next, because presumably China doesn't want to just go back to the old model where construction is twenty five or twenty six percent of GDP, or presumably that wouldn't be your prescription to just go back. So let's say that somehow they were able to clean up the mess that the developers and remove some of that overhang is there some structural move that should be then done further, whether it's direct support to household something with the safety net, et cetera, that the government should then undertake to sort of continue on these reforms and not fall back into.

A debt trap.

A debt trap.

Well, I'm actually concerned about the fact that Chinese companies stop borrowing money long before the bubble burst. When you look at the Chinese flow funds data, and if you look at the corporate sector, they stop borrowing money around twenty sixteen. Well up to twenty sixteen, they were borrowing quite a bit of twenty fifteen, they were borrowing quite a bit of money. So household sector was saving money, corporate sector was borrowing money, and that's how economists are supposed to move forward. But starting twenty sixteen, the corporate borrowing starts shrinking quite substantially, and that was, in my view, the most disturbing development in the Chinese economy that we should pay great attention to. And that is because you mentioned earlier, Chinese companies are coming up with all these new products, great products on electric vehicles, batteries and other areas. They should be borrowing money at this stage of Chinese economic development. Just like you know the United States in the fifties and sixties or Japan in the seventies when they had lots of competitive advantage, great new products. Those companies should be borrowing money, not saving money. But for some reason, Chinese companies start reducing their borrowings stock in twenty sixteen, so they were like in the balance reat recession, long before the bubble burst. And I really want to find out what is the cost of this Chinese non borrowing before the bubble burst.

Well, I'm actually concerned about the fact that Chinese companies stop borrowing money long before the bubble burst. When you look at the Chinese flow funds data, and if you look at the corporate sector, they stop borrowing money around twenty sixteen. Well up to twenty sixteen, they were borrowing quite a bit of twenty fifteen, they were borrowing quite a bit of money. So household sector was saving money, corporate sector was borrowing money, and that's how economists are supposed to move forward. But starting twenty sixteen, the corporate borrowing starts shrinking quite substantially, and that was, in my view, the most disturbing development in the Chinese economy that we should pay great attention to. And that is because you mentioned earlier, Chinese companies are coming up with all these new products, great products on electric vehicles, batteries and other areas. They should be borrowing money at this stage of Chinese economic development. Just like you know the United States in the fifties and sixties or Japan in the seventies when they had lots of competitive advantage, great new products. Those companies should be borrowing money, not saving money. But for some reason, Chinese companies start reducing their borrowings stock in twenty sixteen, so they were like in the balance reat recession, long before the bubble burst. And I really want to find out what is the cost of this Chinese non borrowing before the bubble burst.

After the bubble burst, you can explain everything on bolonce.

After the bubble burst, you can explain everything on bolonce.

Sheets, but with the borrowings are shrinking before that, you cannot use balance argument to say why these these companies are not borrowing money. And if the reason why these companies are not borrowing money is due to this renewed trade issues with the United States, then it's a much more serious problem for the Chinese economy because the trade friction and the possible de coupling with the outside world. But the coupling with the Western world means Chinese companies will be losing some of their best customers and the richest customers because the Western nations have far higher per capita GDP than the rest, so if the coupling happens, all these companies will lose their export markets or they cannot rely on export market as much as they were able to do before. And if that's the reason companies were not borrowing money, then Chinese economic problem has a much deeper, much deeper problems to resolve. And as a result of these companies not borrowing money, but the household sector is still saving money. Chinese government actually had to borrow money and spend it to keep the Chinese economy going for five six years before the bubble burst, and that borrowing, mostly done by the regional governments, is putting regional governments in very difficult position now because they have basically used up quite a bit of their borrowing power already before the balance recession is starting, and there I think they will have to come up with a lot of new financing techniques to make sure that these regional governments can continue to borrow and do whatever the fiscal stimulus that is needed to fight the balance recession. But until we find out why Chinese companies stop borrowing money around starting twenty sixteen, it's very difficult to predict where the Chinese economy is going. Because if that if Chinese companies reduce their borrowings start in twenty sixteen because of the coupling fears with the West, or regulatory uncertainties, because Chinese government have been putting in all sorts of regulatory shocks to the IT industry, to the education industry, financial industry, and of course the real estate industry. If those are the reasons why Chinese companies stop holding back their investments and borrowings, then even after balancey problems are resolved, those problems will be still with us, and that will be a huge drag on the Chinese economy going forward.

Sheets, but with the borrowings are shrinking before that, you cannot use balance argument to say why these these companies are not borrowing money. And if the reason why these companies are not borrowing money is due to this renewed trade issues with the United States, then it's a much more serious problem for the Chinese economy because the trade friction and the possible de coupling with the outside world. But the coupling with the Western world means Chinese companies will be losing some of their best customers and the richest customers because the Western nations have far higher per capita GDP than the rest, so if the coupling happens, all these companies will lose their export markets or they cannot rely on export market as much as they were able to do before. And if that's the reason companies were not borrowing money, then Chinese economic problem has a much deeper, much deeper problems to resolve. And as a result of these companies not borrowing money, but the household sector is still saving money. Chinese government actually had to borrow money and spend it to keep the Chinese economy going for five six years before the bubble burst, and that borrowing, mostly done by the regional governments, is putting regional governments in very difficult position now because they have basically used up quite a bit of their borrowing power already before the balance recession is starting, and there I think they will have to come up with a lot of new financing techniques to make sure that these regional governments can continue to borrow and do whatever the fiscal stimulus that is needed to fight the balance recession. But until we find out why Chinese companies stop borrowing money around starting twenty sixteen, it's very difficult to predict where the Chinese economy is going. Because if that if Chinese companies reduce their borrowings start in twenty sixteen because of the coupling fears with the West, or regulatory uncertainties, because Chinese government have been putting in all sorts of regulatory shocks to the IT industry, to the education industry, financial industry, and of course the real estate industry. If those are the reasons why Chinese companies stop holding back their investments and borrowings, then even after balancey problems are resolved, those problems will be still with us, and that will be a huge drag on the Chinese economy going forward.

This was going to be my next question, actually, which is I think in twenty fifteen we had some supply side reforms from China, but then in later years we had various crackdowns on things like the technology sector, on property developers, some parts of the education system. Very famously when it came to real estate, we had the three Red Lines missive and things like that. Are there signs in your opinion that this type of regulatory uncertainty is making companies more nervous about perhaps ramping up their borrowing or their investment.

This was going to be my next question, actually, which is I think in twenty fifteen we had some supply side reforms from China, but then in later years we had various crackdowns on things like the technology sector, on property developers, some parts of the education system. Very famously when it came to real estate, we had the three Red Lines missive and things like that. Are there signs in your opinion that this type of regulatory uncertainty is making companies more nervous about perhaps ramping up their borrowing or their investment.

Well, it's very difficult to ask that directly. Because you know how it is in China. People are not free to say things these days. But talking to a lot of people, I get the sense that those are the concerns that many companies have. And on top of it, China is in the middle of what economists will call middle income trap. You know, middle income chap is if you are the lowest cost producer, all the companies will be moving factories to China because you can produce things at the.

Well, it's very difficult to ask that directly. Because you know how it is in China. People are not free to say things these days. But talking to a lot of people, I get the sense that those are the concerns that many companies have. And on top of it, China is in the middle of what economists will call middle income trap. You know, middle income chap is if you are the lowest cost producer, all the companies will be moving factories to China because you can produce things at the.

Lowest cost in China.

Lowest cost in China.

But once your wages start increasing and other places like Vietnam, Indonesia, Bangladesh start offering even more attractive places to produce products, then these factories will start moving abroad. And China is in the middle of the middle income trap per capital GDP of about one hundred and twenty thousand US. At that point, they should be very careful to encourage more companies to come in and stay invested in China. But those regulatory interventions from the Chinese government's doing the opposite of what Chinese governments should be doing. So if you add that on top of all the other things, that China is already in the middle income trap for capital GDP twelve thousand, that's when these things become very important. That may be one of the key reason why people companies are not investing in China.

But once your wages start increasing and other places like Vietnam, Indonesia, Bangladesh start offering even more attractive places to produce products, then these factories will start moving abroad. And China is in the middle of the middle income trap per capital GDP of about one hundred and twenty thousand US. At that point, they should be very careful to encourage more companies to come in and stay invested in China. But those regulatory interventions from the Chinese government's doing the opposite of what Chinese governments should be doing. So if you add that on top of all the other things, that China is already in the middle income trap for capital GDP twelve thousand, that's when these things become very important. That may be one of the key reason why people companies are not investing in China.

You know, I just want to ask one sort of I have one last question from my perspective, and I actually would love to just shift at the end here to your perspective on the US. And you know, if the US in two thousand and nine was a bit slow out of the gate with the fiscal response, it certainly was not slow in twenty twenty, in twenty twenty one, persistent fiscal support in twenty twenty two and twenty twenty three with some of the public investment acts, et cetera. How much would you attribute, say, the above trend inflation in the US to the fiscal support And do you see some sort of fiscal cutbacks as necessary in order to get inflation back to target or can monetary policy and just sort of stabilization and normalization get the job done.

You know, I just want to ask one sort of I have one last question from my perspective, and I actually would love to just shift at the end here to your perspective on the US. And you know, if the US in two thousand and nine was a bit slow out of the gate with the fiscal response, it certainly was not slow in twenty twenty, in twenty twenty one, persistent fiscal support in twenty twenty two and twenty twenty three with some of the public investment acts, et cetera. How much would you attribute, say, the above trend inflation in the US to the fiscal support And do you see some sort of fiscal cutbacks as necessary in order to get inflation back to target or can monetary policy and just sort of stabilization and normalization get the job done.

Wow, So we are moving to the US, right, I think what happened to the United States? Of course, at the beginning during the pandemic, people kind of allow inventories to fall because they never knew when people will come back to their stores again. And then once they realized that COVID nineteen problems behind us. I don't know what that's actually behind us, because I'm seeing quite a few people getting sick recently, even in Taiwan, and so I don't know whether we are really behind this thing. But suddenly everybody start ordering for more goods to replenish their inventories. But here, of course, you get into a fanancy or composition problems again. Right, if you're just doing if you're the only one doing it, it's not a big deal. But when everybody does it all of the same time, then there will be bottlenecks everywhere. And I think that's how the whole thing started, this inflation talk started. But what else that happened is that, you know, the United States lost for twenty two million jobs during the pandemic. The first part of the pandemic. When that many people lose jobs all of the same time, these workers cannot afford to stay in the same city waiting to find jobs in the same industry any longer. Many of them had to find jobs that will pay them in any industry, in any geographical location. But when people start moving all over the place to look for jobs, their expertise know how skills will be lost because they are not going back to the same jobs. And I think that really effectively moved labors apply curve to the left. That is to say, if you want to get the same people with the same set of skills, you just had to pay more because there's so few of them left in your neighborhood. And if you look at countries where unemployment skyrocketed, like the United States and Canada, wages have also gone up quite sharply this time around, Whereas when you look at Japan, where companies tried to hold on to their workers as long as they can, and so unemployment rate in Japan only went up to three point four percent, that was the worst, and that was just for a month or two and then start coming down again.

Wow, So we are moving to the US, right, I think what happened to the United States? Of course, at the beginning during the pandemic, people kind of allow inventories to fall because they never knew when people will come back to their stores again. And then once they realized that COVID nineteen problems behind us. I don't know what that's actually behind us, because I'm seeing quite a few people getting sick recently, even in Taiwan, and so I don't know whether we are really behind this thing. But suddenly everybody start ordering for more goods to replenish their inventories. But here, of course, you get into a fanancy or composition problems again. Right, if you're just doing if you're the only one doing it, it's not a big deal. But when everybody does it all of the same time, then there will be bottlenecks everywhere. And I think that's how the whole thing started, this inflation talk started. But what else that happened is that, you know, the United States lost for twenty two million jobs during the pandemic. The first part of the pandemic. When that many people lose jobs all of the same time, these workers cannot afford to stay in the same city waiting to find jobs in the same industry any longer. Many of them had to find jobs that will pay them in any industry, in any geographical location. But when people start moving all over the place to look for jobs, their expertise know how skills will be lost because they are not going back to the same jobs. And I think that really effectively moved labors apply curve to the left. That is to say, if you want to get the same people with the same set of skills, you just had to pay more because there's so few of them left in your neighborhood. And if you look at countries where unemployment skyrocketed, like the United States and Canada, wages have also gone up quite sharply this time around, Whereas when you look at Japan, where companies tried to hold on to their workers as long as they can, and so unemployment rate in Japan only went up to three point four percent, that was the worst, and that was just for a month or two and then start coming down again.

Most of the workers are still with the company, all the skills are still available, so when the demand picked up the game, the kind of labor shortage that the United States and Canada faced were not seeing in Japan. And as a.

Most of the workers are still with the company, all the skills are still available, so when the demand picked up the game, the kind of labor shortage that the United States and Canada faced were not seeing in Japan. And as a.

Result, wage increases are much lower, much lower than US or Canada. And so a lot depends on what kind of labor mahak you had. In the case of our United States. Because of this rather sharp left wood shift of labor supply. Earth US ended up having wages going up sharply higher, and that's adding to the inflation that we are talking about now. Whereas those countries where workers stayed with the companies wages are moving up much more slowly. So we have to make adjustments for these key differences between the countries.

Result, wage increases are much lower, much lower than US or Canada. And so a lot depends on what kind of labor mahak you had. In the case of our United States. Because of this rather sharp left wood shift of labor supply. Earth US ended up having wages going up sharply higher, and that's adding to the inflation that we are talking about now. Whereas those countries where workers stayed with the companies wages are moving up much more slowly. So we have to make adjustments for these key differences between the countries.

I think you know, I have just one more question, which is when we last had you on the podcast. I think it was something like May twenty twenty, and a lot of these decisions about how to respond to the pandemic were just being made at that time, and I think the headline of our podcast was something like Richard Coo on why the recovery will be difficult. So, looking back now, was there anything that surprised you about the speed or shape of the recovery in the US or the Western world.

I think you know, I have just one more question, which is when we last had you on the podcast. I think it was something like May twenty twenty, and a lot of these decisions about how to respond to the pandemic were just being made at that time, and I think the headline of our podcast was something like Richard Coo on why the recovery will be difficult. So, looking back now, was there anything that surprised you about the speed or shape of the recovery in the US or the Western world.

Well, actually, the vaccines were developed much faster than anyone had right to expect. You know, typically the things takes five to ten years before it's fully approved, but this time around they will approved much sooner. And people of course came out with these highly innovative vaccines that no one thought of before, So that was a big surprise from the medical side, and the government also putting, as I mentioned earlier, these massive monetary and physical help to the people so that they really didn't have to deplete their savings. As it were, I thought recovery would be slow because one of the reasons I thought recovery would be slow is because I thought a lot of people would be depleting their savings during these lockdowns, and so once the economy begins to normalize, I thought these people would be rebuilding their savings. But if they're rebuilding their savings, replenish their savings to the previous level of possible to go even higher, that would be like another balanceing recession in that so many people be replenishing their savings and as a result, there will be excess savings in the private sector. That was slow that the economic recovery. That was one of the thought that I had back in those days. But instead the governments supplied quite a bit of support to these households, and we ended up talking about excess savings in the household sector that can propel the economy further. That was not in my mind when we last spoke in May of twenty twenty. So those are the surprises that I was not anticipating at the time. But then you turn this thing around. In the Chinese case, Chinese government really did not give as generously as the American government or the European governments to these people who were suffering on the lockdowns, and as a result, the sense I get is that a lot of Chinese households and Chinese companies, small and medium sized companies, they had to really draw down their savings to whether the lockdowns. And if those Chinese companies felt that they don't have enough savings to whether the future rainy days and they would like to increase their savings to make sure that they have enough ammunition to fight the next round, then we may end up having something like balanceet recession, but this time it's on the asset side of the balance sheet, not on the liability side of the balance sheet. But the effect will be the same. If all these Chinese households and companies try to rebuild their savings all at the same time, then Chinese economy would be that much more weaker. It's very difficult to get any data on something like this from the Chinese side, but my sense is that this could be a bigger problem in China than in the United States or in Europe.

Well, actually, the vaccines were developed much faster than anyone had right to expect. You know, typically the things takes five to ten years before it's fully approved, but this time around they will approved much sooner. And people of course came out with these highly innovative vaccines that no one thought of before, So that was a big surprise from the medical side, and the government also putting, as I mentioned earlier, these massive monetary and physical help to the people so that they really didn't have to deplete their savings. As it were, I thought recovery would be slow because one of the reasons I thought recovery would be slow is because I thought a lot of people would be depleting their savings during these lockdowns, and so once the economy begins to normalize, I thought these people would be rebuilding their savings. But if they're rebuilding their savings, replenish their savings to the previous level of possible to go even higher, that would be like another balanceing recession in that so many people be replenishing their savings and as a result, there will be excess savings in the private sector. That was slow that the economic recovery. That was one of the thought that I had back in those days. But instead the governments supplied quite a bit of support to these households, and we ended up talking about excess savings in the household sector that can propel the economy further. That was not in my mind when we last spoke in May of twenty twenty. So those are the surprises that I was not anticipating at the time. But then you turn this thing around. In the Chinese case, Chinese government really did not give as generously as the American government or the European governments to these people who were suffering on the lockdowns, and as a result, the sense I get is that a lot of Chinese households and Chinese companies, small and medium sized companies, they had to really draw down their savings to whether the lockdowns. And if those Chinese companies felt that they don't have enough savings to whether the future rainy days and they would like to increase their savings to make sure that they have enough ammunition to fight the next round, then we may end up having something like balanceet recession, but this time it's on the asset side of the balance sheet, not on the liability side of the balance sheet. But the effect will be the same. If all these Chinese households and companies try to rebuild their savings all at the same time, then Chinese economy would be that much more weaker. It's very difficult to get any data on something like this from the Chinese side, but my sense is that this could be a bigger problem in China than in the United States or in Europe.

Well, Richard, you brought us back full circle to China. So thank you so much. We really appreciate you coming back on all a delight to have you here with us once again and hear what you are thinking about the current situation in China and elsewhere in the world. So thank you so much.

Well, Richard, you brought us back full circle to China. So thank you so much. We really appreciate you coming back on all a delight to have you here with us once again and hear what you are thinking about the current situation in China and elsewhere in the world. So thank you so much.

Oh, thank you. I love them.

Oh, thank you. I love them.

So Joe, that was so much fun. I thought it was really fascinating the distinction he drew between what happened in Japan and what might be happening in China now, and the idea of the big difference being that today people do have this idea of a balance sheet recession in their minds, so you can identify the problem, diagnose it, and then try to identify policy solutions that will hopefully help fix it. Whereas in Japan after the property bubble burst, no one was really quite sure what was happening or what the economic consequences of it.

So Joe, that was so much fun. I thought it was really fascinating the distinction he drew between what happened in Japan and what might be happening in China now, and the idea of the big difference being that today people do have this idea of a balance sheet recession in their minds, so you can identify the problem, diagnose it, and then try to identify policy solutions that will hopefully help fix it. Whereas in Japan after the property bubble burst, no one was really quite sure what was happening or what the economic consequences of it.

It might be right, which is why you know the title of his book, The Holy Grail of Macroeconomics, which is all about that Japanese balance sheet recession. You know, the idea being you can look at Japan and just learn so much about how economies work. I still think he gives you a policymakers like too much credit for the amount of physical.

It might be right, which is why you know the title of his book, The Holy Grail of Macroeconomics, which is all about that Japanese balance sheet recession. You know, the idea being you can look at Japan and just learn so much about how economies work. I still think he gives you a policymakers like too much credit for the amount of physical.

Supports to Europe.

Supports to Europe.

Very strange China.

Very strange China.

So it'll be interesting, you know.

So it'll be interesting, you know.

I remember if we just talked to Brad Setser and his.

I remember if we just talked to Brad Setser and his.

Conclusion was that.

Conclusion was that.

Deep.

Deep.

So I think or at least a.

So I think or at least a.

Deep skeptic in support to households. So it'll be really interesting to see if and when the government decides, look, GDP is slow, it's not getting better, we really have to do something.

Deep skeptic in support to households. So it'll be really interesting to see if and when the government decides, look, GDP is slow, it's not getting better, we really have to do something.

Yeah.

Yeah.

Well, in my mind, and I remember we spoke about this with Brad Setzer as well, it is very strange to me that China does seem to have this reluctance to support the household sector in ways that we have seen in other parts of the world. So I think during the COVID pandemic, and remember the shutdown in China, those shutdown measures were in many respects much harsher than what we saw in other parts of the world, and yet there was very little support for individuals. If you lost your job, if you became unemployed, you basically had to live off of your savings. I think there were some parts of China where maybe people got consumption vouchers, spending vouchers, things like that, but it really wasn't for very much money. And so if you're trying to reorient your economy towards more of a consumption driven one and simultaneously revive economic growth, it seems to me like supporting households and individuals would appear to be a slam dunk. But for some reason that just hasn't happened. And the other thing I would say, and I think this is what is confusing to a lot of people, is that now we see more support or more momentum towards potential fiscal stimulus, and it seems like once again it's going to take the form of perhaps bailing out property developers finishing up some of those big construction projects. And yet just a couple of years ago we saw President Shei shin ping really cracked down on that sector. And so there seems to be a little bit of whiplash here, maybe a little bit of mixed messaging. But I guess in China the idea of opposing or conflicting messages are not that unusual.

Well, in my mind, and I remember we spoke about this with Brad Setzer as well, it is very strange to me that China does seem to have this reluctance to support the household sector in ways that we have seen in other parts of the world. So I think during the COVID pandemic, and remember the shutdown in China, those shutdown measures were in many respects much harsher than what we saw in other parts of the world, and yet there was very little support for individuals. If you lost your job, if you became unemployed, you basically had to live off of your savings. I think there were some parts of China where maybe people got consumption vouchers, spending vouchers, things like that, but it really wasn't for very much money. And so if you're trying to reorient your economy towards more of a consumption driven one and simultaneously revive economic growth, it seems to me like supporting households and individuals would appear to be a slam dunk. But for some reason that just hasn't happened. And the other thing I would say, and I think this is what is confusing to a lot of people, is that now we see more support or more momentum towards potential fiscal stimulus, and it seems like once again it's going to take the form of perhaps bailing out property developers finishing up some of those big construction projects. And yet just a couple of years ago we saw President Shei shin ping really cracked down on that sector. And so there seems to be a little bit of whiplash here, maybe a little bit of mixed messaging. But I guess in China the idea of opposing or conflicting messages are not that unusual.

You know, what I thought was really interesting, and I hadn't really thought about this before, which is that, you know, obviously China runs a massive trade surplus.

You know, what I thought was really interesting, and I hadn't really thought about this before, which is that, you know, obviously China runs a massive trade surplus.

And this idea that eventually.

And this idea that eventually.

Gigantic trade surpluses invokes some sort of political reaction globally that eventually the world does not want to be the buyer of last resort for your economy and you could only push it so far, which I thought was like super interesting. And that really started under Trump obviously with the tariffs, and then is sort of continued under Biden with some of the various trade restrictions and so forth. But this idea that's sort of like politically there might not be even Yes, exports may be growing, but there isn't a lot of juice and the squeeze to that just because at some point you sort of get this global political backlash to your export dominance.

Gigantic trade surpluses invokes some sort of political reaction globally that eventually the world does not want to be the buyer of last resort for your economy and you could only push it so far, which I thought was like super interesting. And that really started under Trump obviously with the tariffs, and then is sort of continued under Biden with some of the various trade restrictions and so forth. But this idea that's sort of like politically there might not be even Yes, exports may be growing, but there isn't a lot of juice and the squeeze to that just because at some point you sort of get this global political backlash to your export dominance.

Yep, absolutely, shall we get there? All right? This has been another episode of the ad Thoughts Podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway.

Yep, absolutely, shall we get there? All right? This has been another episode of the ad Thoughts Podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway.

And I'm Joe Wisenthal. You can follow me on Twitter at the Stalwart. Follow our producers Carmen Rodriguez at Carmen Arman and Dash el Bennett at dashbot and check out all of the Bloomberg podcasts at podcasts and for more odd Lots content, go to Bloomberg dot com slash odd Lots, where we have a blog transcription in the newsletter, and to chat twenty four to seven with fellow listeners.