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Balance sheet recession ahead

A balance sheet recession is ahead for Australia? Why? And what is a balance sheet recession? Our paper on this is here

Wikipedia ( ) defines a balance sheet recession as follows:

"A balance sheet recession is a type of economic recession that occurs when high levels of private sector debt cause individuals or companies to collectively focus on saving by paying down debt rather than spending or investing, causing economic growth to slow or decline. The term is attributed to economist Richard Koo and is related to the debt deflation concept described by economist Irving Fisher. Recent examples include Japan's recession that began in 1990 and the U.S. recession of 2007-2009."

The reason why a balance sheet recession is ahead for Australia is because we have precisely the same preconditions that triggered the 2008-2009 balance sheet recession in USA and Europe. More details on this historically extreme Australian private debt (most of which is mortgage debt) is here

So how do you "fix" a balance sheet recession? Following is the view of the Bank of International Settlements (the central bank's central bank).

"Historically, prompt and thorough balance sheet repair has proved to be the best way to restore post-crisis growth and stability. This is the lesson of the Nordic banking crises in the early 1990s. Policymakers there intervened quickly and comprehensively to enforce the full recognition of losses, the recapitalisation of the banking system, the disposal of bad assets and the removal of excess bank capacity. These measures tackled the causes of the balance sheet recession and paved the way for a sustained post-crisis recovery. This is also the lesson from Japan's experience."

So has this prompt and thorough balance sheet repair occurred? This is what the ex-chair of the UK's Financial Services Authority said recently ( ):

“Let's start with the question of debt. Lord Adair Turner, who chaired the UK Financial Services Authority between 2008 and 2013 and helped redesign global banking, says the world since has not addressed this root cause of the crisis and that means it's at risk of another one. Lord Turner, now chairman of New York-based Institute for New Economic Thinking, says the world is suffering from "irrational exuberance" and "debt overhang". The latter term refers to countries trapped in a

vicious cycle of debt, and when nations ultimately default on that debt”

Sometimes these bureaucrats are just too polite aren't they.

To call a spade a spade, in the Anglosphere, debt levels are now far worse that they were before the Global Financial Crisis. Household debt levels in Australian and Canada in particular, are now far worse than before the global financial crisis. This means I believe that the probability of a balance sheet recession ahead is now very high - this time with Canada and Australia to probably feel it worse than most of the Anglosphere.

Another very useful perspective on this comes from Andrew Clifford, Chief Investment Officer of Platinum Asset Management.

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