Inside and outside at the same time. That is the key.Richard KooTHIS IS NOT INVESTMENT ADVICE. INVESTING IS RISKY AND OFTEN PAINFUL. DO YOUR OWN RESEARCH.I read Richard Koo’s books years before I spoke to him, a conversation I share here. Richard is the first person I know to provide a comprehensive diagnosis for something evident across much of the world—weak borrowing. While many people have the capacity to borrow money, most don’t. Explaining this phenomenon is interesting in two respects. First, the propensity of the private sector not to borrow much impacts the price of many things dear to us, like stocks, bonds, and real estate. Second, Koo came up with the idea by looking at the same data as everyone else but arriving at a different, more insightful solution.Creativity is exactly that—looking at the same thing as others but seeing a different answer. I asked Richard why he thought he was able to spot something everyone else missed. His answer was that he was an outsider and an insider at once. He is Taiwanese but speaks fluent Japanese. He was inside Nomura Bank but inside the think tank, not the trading floor. He was at the US Fed, but his formative experiences were in Asia. That’s a rare combination and while being an outsider doesn’t always feel nice, it does hone the talent of observation.His framework explained something I first noticed in the 1990s. I was standing on a trading floor in Boston talking to our $/yen trader. On his desk, he had a Japanese newspaper advertising a 30-year mortgage at 1.5% or thereabouts. I knew interest rates in Japan were low but seeing that number was a shock. Why wasn’t everyone levering up to buy a new house? If house prices rose a few percent a year, you could borrow for free, right?But it isn’t that simple. The tricky thing to understand about economies is how many economic relationships are self-reinforcing. For instance, if people don’t want to borrow, then interest rates are low, and real estate prices are depressed, which leads to people not wanting to borrow, which keeps interest rates low. In slightly different language, both Soros and my old boss Ray wrote about this.Richard talks about a “balance sheet” recession. It’s an odd but powerful concept. The essence is that a borrower is cash flow positive but balance sheet negative, such that they use their cash to pay down debt, not buy stuff, which then leads to widespread economic weakness, which then leads to worse cash flow. Everyone is thrifty at once, which makes the pie shrink, which forces everyone to be yet more thrifty. John Maynard Keynes coined the term the “paradox of thrift” in 1936 after the Great Depression.In Japan’s case, the 1990 real estate bubble left the corporate and banking sectors with terrible losses, which they slowly tried to pay off. But their frugality meant the economy was so weak they were caught in a trap. The only solution was that someone needed to spend big to get the economy to operate above potential, generate inflation, and boost nominal incomes such that debt burdens fell. That only began to happen after 20 years, in 2010, when the Bank of Japan printed a lot of money and the yen slowly weakened. In 2008 in the US, the same thing risked happening. But this time the central bank chief was Bernanke who had studied the Great Depression and knew exactly what to do, which was force money into the system. He printed money and bought bonds and shoved dollars into bank balance sheets such that they were forced to lend it out because the interest rate on their balances dropped to zero. The Japanese mimicked his policy and are now doing much better.Yet years after the 2008 real estate crisis, US household debt as a percentage of GDP is still falling. The long tail of financial crises is profound. I believe China is going through the same thing now, which is why I have so little confidence in the measures Beijing has announced. As I’ve said before they are addressing symptoms—falling stocks and bond