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"Permanent unemployment beckons to the withering middle class."  Worse for the working class, few of whom can work from home. And this will be the case unless there is an adequate fiscal response from the government. Below find a worked example of such an appropriate response:

Richard Koo showed that Japan prevented a depression in the '90s by replacing the money that was lost to debt retirement after the property crash of '89, when real estate prices fell by 87%, until the economy recovered. Growth flatlined for six years, but GDP did not drop.

"Significance of Japanese experience

Japan faced a balance sheet recession following the bursting of its bubble in 1990 as commercial real estate prices fell 87 percent nationwide. The resulting loss of national wealth in shares and real estate alone was equivalent to three years of 1989 GDP. In comparison, the U.S. lost national wealth equivalent to one year of 1929 GDP during the Great Depression. Japan's corporate sector responded by shifting from its traditional role as a large borrower of funds to a massive re-payer of debt, as shown in Exhibit 5. The net debt repayment of the corporate sector increased to more than 6 percent of GDP a year. And this was on top of household savings of over 4 percent of GDP a year, all with interest rates at zero. In other words, Japan could have lost 10 percent of GDP every year, just as the US did during the Great Depression.

Japan managed to avoid a depression, however, because the government borrowed and spent the aforementioned $100 every year, thereby keeping the economy's expenditures at $1,000 ($900 in household spending plus $100 in government spending). In spite of a massive loss of wealth and private sector deleveraging reaching over 10 percent of GDP per year, Japan managed to keep its GDP above the bubble peak throughout the post-1990 era (Exhibit 6), and the unemployment rate never climbed above 5.5 percent.

This government action maintained incomes in the private sector and allowed businesses and households to pay down debt. By 2005 the private sector had completed its balance sheet repairs.Although this fiscal action increased government debt by 460 trillion yen or 92 percent of GDP during the 1990-2005 period, the amount of GDP preserved by fiscal action compared with a depression scenario was far greater. For example, if we assume, rather optimistically, that without government action Japanese GDP would have returned to the pre-bubble level of 1985, the difference between this hypothetical GDP and actual GDP would be over 2,000 trillion yen for the 15-year period. In other words, Japan spent 460 trillion yen to buy 2,000 trillion yen of GDP, making it a tremendous bargain. And because the private sector was deleveraging, the government's fiscal actions did not lead to crowding out, inflation, or skyrocketing interest rates."

 

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu May 14th, 2020 at 02:43:13 AM EST
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