"Rocky Road Ahead" For Financial Markets & Central Banks | Richard Koo, Nomura

**Adam Taggart** (0:00)
As you look across the preponderance of changes going on and your assessment of risks right now in the global economy, do you think that the Fed and the other central bankers have a good shot of a gentle glide path over the next five years, or do you think the road could be kind of rocky?

**Richard Koo** (0:19)
I would say it's going to be quite rocky.

**Adam Taggart** (0:21)
Okay.

**Richard Koo** (0:22)
Not just for the central bankers, but for the financial market as a whole.

**Adam Taggart** (0:32)
Welcome to Thoughtful Money. I'm its founder and your host, Adam Taggart. The winds of change are blowing around the globe. 74 countries representing half of the world's population held national elections last year. Many of them, including the US, saw a replacement of the ruling incumbent by the opposition, often one promising a more nationalistic agenda. With so many new leaders in their accompanying new policies, what's the outlook for the global economy and financial markets here in 2025? To discuss, we've got the great fortune of speaking today with Richard Koo, chief economist at the Nomura Research Institute, as well as author of numerous best-selling books on economics. Richard, thank you so much for joining us today, all the way from Taiwan.

**Richard Koo** (1:17)
Thank you for having me here.

**Adam Taggart** (1:19)
Oh, it's a real privilege. So this is the first time we've had you appear on this program, but it's a great honor. I've got a lot of questions for you, Richard, given your vast expertise in the field of economics. Very excited to talk to you as somebody with an ex-US perspective. A lot of the guests I have in this channel are from the US, so it's always very helpful when we can see through the eyes of somebody who is outside of the West. But before I get to those specific questions, if we can, let me just kick this off with a general question I like to start these discussions with. What's your current assessment of the global economy and financial markets?

**Richard Koo** (1:57)
Well, that's pretty broad. If I may start with the financial market first.

**SPEAKER_4** (2:03)
Sure.

**Richard Koo** (2:04)
I think we are going through a period where we are trying to come out of the leftovers from quantitative easing in so many countries, especially the United States, but others as well. And during the period after 2008, when we had a global financial crisis, so many countries adopted so-called non-conventional monetary easing measures, one of which was quantitative easing. And even though huge amounts of liquidity was injected, none of those central banks actually met their inflation target.
So that shows that what we learn in universities, when the money supplies doubled, the price level were doubled, and all that kind of infreedment was associated with, was completely untrue after 2008 in the West, and actually after 1990 in Japan. Bank of Japan did all sorts of things and nothing happened.

**Adam Taggart** (3:13)
All stuck in deflation.

**Richard Koo** (3:14)
Yeah. And some people call it even deflation. And so we were in a very different world, starting what I call, well, after the bursting of the bubble. Private sector actually were all minimizing debt, because during the bubble period, they borrowed tons of money to leverage themselves up. Once the bubble burst, asset prices collapsed, liabilities remained, and they realized that their balance sheet is underwater. And your balance sheet is underwater, technically bankrupt, so you have to come out of it as quickly as possible. So everybody started repairing balance sheets, meaning paying down debt. And they were doing it even with zero interest rates. But in a national economy, if someone is saving, someone else has to be borrowing money to keep the economy going, right? If everybody is saving money and no one is borrowing money, the economy will just contract like crazy. And in the usual economy, central bank bring rates up and down to make sure that all the saved funds are borrowed and spent, and the economy moves forward. But in the post 2008 and post 1990 in Japan, economies are all, the private sector, so it's all paying down debt, even at zero interest rates. And so we ended up with a huge deflationary gap. So Japan suffered that first, and Europe and United States suffered that after 2008 And in order to correct that, the central bank tried to put in all sorts of money, liquidity into the system. But for that to work, someone has to borrow money to get the money out of the financial institutions and into the real economy. And we had very few borrowers, both in the West after 2008 and in Japan after 1990 So money got stuck in the financial sector, couldn't come out. Inflation rates remained low, economy remained very weak for very long time. But the Central Bank kept on adding these reserves into the system. And now the amount of excess reserves in the banking system in the United States is like 1600 times bigger than just before Lehman, about 2000 times bigger in Japan, and almost 3000 times bigger in the Eurozone. Now, the pandemic then came, inflation became a problem. So Central Bank start tightening monetary policies. But this is the first time in history where Central Bank has to tighten monetary policy with so much excess reserves already in the banking system. This never happened before. You know, Jay Powell often talks about Paul Volcker. I'm sure he is, Paul Volcker is his hero. And I worked under Paul Volcker also when I was at the Fed.