America and Europe are faced with a choice: lie down and accept their Japanese fate or choose to inflate or default their way out of this mess.
Gillian Tett of the Financial Times argues that, right now, the U.S. and Europe appear to be going through the same “balance sheet recession” Japan endured that slowed economic growth there for a decade. It’s evidenced through corporations unwillingness to spend and the continued deleveraging of the private sector.
And while the levering up of the public sector may be impacting confidence, Tett thinks the key policy decision now for the U.S. and Europe is whether or not they choose to stay the course and accept this Japan scenario, or choose something different.
That choice would involve political upheaval, and an acceptance of inflation to get the U.S. and Europe out of debt faster. Or, governments too indebted, like Greece and Ireland, could default on their debts and move on, wearing the scars of such a process.
With the amount of times we’ve heard the phrase “balance sheet recession” in the past few weeks, it is now apparent that Richard Koo’s thesis has become somewhat of a consensus. But where the U.S. and Europe go from here is still up for debate and may have much more to do with politics than markets.