What happens if enterprises also actively save? -Part 5

Ineffective monetary policy in the case of a balance sheet recession

Since many enterprises have experienced technical bankruptcy and are insolvent, their primary goal is to repair their balance sheets and minimize debt. Therefore, even if the interest rate is very low, the enterprise will not borrow. As an analogy says, you can lead a horse to the river, but you cannot force it to drink. The problem is on the demand side of funds, not the supply side. This is obviously the same as the lack of liquidity during the financial crisis, when liquidity was abundant at this time. Under this circumstance, the effect of monetary policy has fallen sharply. Even if the zero interest rate and quantitative easing monetary policies implemented by developed countries have little effect, the economy has fallen into a "liquidity trap" or "quantitative easing trap."

Balance sheet recession mainly studies the recession that occurs after the impact of non-financial corporate balance sheets. In fact, financial institutions also participate more in the financial market, and there may also be a large number of bubble assets on their balance sheets. After being hit hard, banking financial institutions will also take the initiative to repair their balance sheets, especially in the case of stricter supervision, there will be loan reluctance. In this way, the decline in the balance sheet of financial institutions will also have an impact on corporate financing from the supply side of funds.

In the case of a balance sheet recession, fiscal policy is required to take the initiative to absorb excess bank savings and borrow money from banks for expenditures, thereby stabilizing the economy. Even if the fiscal deficit and government debt scale expand, we will not hesitate to do so. If the fiscal policy does not act at this time, it will lead to a downward spiral in the economy.