This is a very important point as it highlights why the Swedish Model which requires banks to recognize the losses on the excess debt in the financial system is always superior to the Japanese Model that forces the real economy to bear the burden of the excess debt.
With the Swedish Model, deleveraging occurs upfront as banks recognize the losses on the excess debt. As a result, both fiscal and monetary stimulus go to kickstarting the economy.
With the Japanese Model, deleveraging occurs over time as capital is diverted from growth and reinvestment. This long-term deleveraging creates a tremendous drag on the economy. A drag that Mr. Shilling points out is enough to offset the positive effects of both fiscal and monetary stimulus.
And the power of deleveraging according to Shilling is "gigantic", because it is offsetting tremendous amounts of stimulus:
"Witness the fact that despite all the fiscal and monetary stimuli here and abroad since 2008, economic growth remains slow at best.
Federal deficits have been running $1 trillion-plus, the result of weak tax collections, tax cuts and government spending surges with the resulting leap in federal borrowing. …But these huge deficits and more to come as the postwar babies retire and draw Social Security and Medicare benefits have brought fiscal policy in Washington to a standstill.
…with frozen fiscal policies here and a number of foreign lands, responsibility to do something to aid the economy has shifted to central banks. Earlier, they pushed the short-term rates they control to close to zero with little effect. Then they turned to quantitative easing, which pumped up financial assets but did little to promote employment, its stated goal."