Balance Sheet Recession: When Debt Weighs Down the Economy | Vibepedia

A balance sheet recession occurs when private sector entities (households and corporations) prioritize debt reduction over spending and investment, even when interest rates are low. This phenomenon, famously theorized by economist Richard Koo, stems from a prior period of excessive debt accumulation, often fueled by asset bubbles. When these bubbles burst, balance sheets become impaired, leading to a deleveraging cycle that suppresses aggregate demand. Unlike a typical recession driven by insufficient demand, this type is characterized by a surplus of savings and a deficit of creditworthy borrowers, making conventional monetary policy less effective. Understanding these causes is crucial for navigating prolonged periods of economic malaise.