Econ 4020 reaction 10-11 - Term Paper Example

Balance Sheet Recession al Affiliation) Balance sheet recession An American-Taiwanese economist Richard Koo referred to the balance sheet recession to also mean financial unsteadiness. It is brought about by economic agents give much significance to decrease debt than increasing of profit. In this case, the main economic principles are present. These principles include short-run, medium-run and long-run. Balance sheet recession is characterized by two phases. In the first phase, companies aim at improving their profit while people absorb much of their pay increment.

In the other phase, economic agents give much importance to lessening debt rather than maximizing their profit. It means that the economy flourishes at first and then it falls suddenly. Therefore, boom and bust cycle is realized (Koo, 2003).The following are ways that economies fall into balance sheet recession:i. The private sector accumulates up debt in order to buy properties and speculative possessions.ii. The price of assets goes up and the demand of the properties increases, but it reaches appoint where the private sector is faced with reducing wealth and a huge debt.iii. Individual investors reorganize their balance sheet and stop borrowing.iv. All energies are focused towards repaying the debt.

In the process, the credit crunch may emerge because there are no worthy borrowers to lend finances.Recommendations on how to get out of a recessionThe only way to get out of a recession is through a sustained public sector spending. It can be attained through the use of monetary policy, fiscal policies, government increasing spending and reduction of taxes. Monetary policies such as increasing interest rates of borrowing will deter private investors from borrowing. They will rather use their savings to finance investment.

In the process, the more money will be released into the economy, thus, more money will circulate in the market. Therefore, this will bring down the rate of inflation and spark economic growth. Government spending should be increased for the economy to grow again. The government should service Treasury bond and initial public offers so that its citizens can gain capital to reinvest. By doing this, borrowings by citizens will reduce. As a result, private sector debt will reduce drastically, mainly because the investors will be able to repay their debt.

Reduction of taxes will help a great deal in tackling a recession. In doing this, the capital of the investors will increase. Therefore, the economy will grow since the spending power of the citizens has been empowered. ReferenceKoo, R. (2003). Balance sheet recession: Japans struggle with uncharted economics and its global implications. Clementi Loop, Singapore: Wiley.