Tags: Nomura | Depression | Deficit | US

Nomura's Koo: US to Spark Depression by Slashing Deficit

Wednesday, 10 Aug 2011 07:45 AM

Nomura's Richard Koo says that if Washington accepts the S&P's advice to trim the deficit, another Great Depression will soon be on the way.

"Standard & Poor’s does not understand this and says America’s AAA rating may be restored if the government succeeds in trimming its deficit by $4 trillion," Koo writes in a note to investors.

"The adoption of such a policy by the U.S. government today would plunge the economy into another Great Depression."

During a balance sheet recession, when businesses and households are struggling to deleverage, the correct policy — fiscal stimulus — is exactly the opposite of what is needed under normal circumstances, says Koo, whereas active application of stimulus will ultimately minimize the fiscal deficit.

Moreover, Koo says, the experiences of Japan, and more recently Ireland show that o,nce the economy slows as a result of fiscal consolidation, the credit agencies will issue another downgrade, this time citing economic weakness.

“Even worse, they will disavow any knowledge of the fact that it was the fiscal consolidation they themselves prescribed that sparked the downturn,” he says.

“For that reason, we need to be extremely wary of actions taken by rating agencies that do not understand the concept of balance sheet recessions … the rating agencies are now poised to destroy the global economy once again.”

The first time this happened, Koo notes, ratings agencies exacerbated the housing bubble by assigning AAA ratings to a raft of questionable subprime securities.

“This represented a complete abdication of duty for businesses originally intended to serve as an overseer of private-sector finance,” says Koo.

“The housing bubble could never have grown as large as it did had the rating agencies not recklessly issued those AAA ratings, and the balance sheet recession triggered by the bubble’s collapse would not have been nearly as severe.”

Reuters reports that the musings of the ratings agencies are having very real effects on people’s portfolios.

“If you had asked me a couple of years ago if they could do anything more destructive than the mortgage debacle, I would have said never,” says Roger Kirby, an attorney who is of counsel for a New York law firm which has filed a class action against Moody’s on behalf of shareholders.

“But it seems they’re managing to do it again, right now. In order to restore their damaged reputations, they’re interjecting themselves unsolicited into sovereign markets.”

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Nomura's Richard Koo says that if Washington accepts the S P's advice to trim the deficit, another Great Depression will soon be on the way. Standard Poor s does not understand this and says America s AAA rating may be restored if the government succeeds in trimming its...
Nomura,Depression,Deficit,US
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2011-45-10
Wednesday, 10 Aug 2011 07:45 AM
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