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MENTAL MODEL · M6213

Balance Sheet Recession

Balance Sheet Recession
BusinessHigh supportMacroeconomics
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Updated 2026-08-05

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INTRODUCTION

English translation pending.

CORE DEFINITION

Named by the economist Richard Koo in his analysis of Japan after 1990, a balance sheet recession follows the collapse of an asset bubble: assets fall in value while liabilities stay fixed, leaving firms and households technically insolvent. Their objective shifts from maximizing profit to minimizing debt, so they repay loans and hoard cash even at zero interest rates. Monetary policy loses traction because borrowers are absent, and fiscal expansion has to absorb the demand they withhold.

SCAFFOLDING EFFECT

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Reduce cognitive load

- Read the objective: check whether an actor is maximizing profit or minimizing debt. - Stop pushing credit: recognize when cheap money cannot work because nobody wants to borrow. - Repair first: restructure the balance sheet before expecting any stimulus to take effect.

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When liabilities exceed assets, every spare unit of cash is worth more applied to debt than to investment, because solvency rather than profit is now the binding constraint. Firms therefore repay loans even at zero interest, and the money that would have funded demand disappears from the circular flow. Aggregate demand falls regardless of the interest rate, so monetary policy loses its usual channel and fiscal spending must fill the gap.

MINIMUM ACTION

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Source support: Explicit

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    zh.wikipedia.orghttps://zh.wikipedia.org/wiki/%E8%B3%87%E7%94%A2%E8%B2%A0%E5%82%B5%E8%A1%A8%E8%A1%B0%E9%80%80ZH · Explicit
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