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15 of 16 people found the following review helpful
5.0 out of 5 stars Brilliant critique of consensus policy
Richard Koo, chief economist of Tokyo's Nomura Research Institute, has written a fascinating and important book. He claims that capitalist economies have two phases: the ordinary phase, in which firms aim to maximise profits, and the post-bubble phase, when they aim to pay off their debts. He believes that he has found the missing link of economics: "corporate debt...
Published on 14 Sept. 2009 by William Podmore

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8 of 16 people found the following review helpful
2.0 out of 5 stars Selective data
Koo's argues using selective data that Japan's lost decade was not really lost and that it would have been a depression without massive government spending. He proposes that governments should spend massively when confronted with a 'Balance Sheet Recession'. The argument is not convincing from the confusing set of charts that Koo uses and I would suggest that Japan hasn't...
Published on 18 Jun. 2009 by Pyor


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15 of 16 people found the following review helpful
5.0 out of 5 stars Brilliant critique of consensus policy, 14 Sept. 2009
By 
William Podmore (London United Kingdom) - See all my reviews
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This review is from: The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession (Paperback)
Richard Koo, chief economist of Tokyo's Nomura Research Institute, has written a fascinating and important book. He claims that capitalist economies have two phases: the ordinary phase, in which firms aim to maximise profits, and the post-bubble phase, when they aim to pay off their debts. He believes that he has found the missing link of economics: "corporate debt minimisation, therefore, is the long-overlooked micro-foundation of Keynesian macro-economics."

It's still boom and bust. Koo claims that in the boom phase, monetary policy works, but not fiscal; in the bust phase, only fiscal policy works, not monetary. He shows how monetary policy cannot fight a slump. He contends that only huge fiscal stimuli, government actions to boost domestic demand, can prevent slumps.

Koo claims that, in the 1930s depression, in Japan's recession since 1990, and in the present crisis, the problem was the private sector's lack of demand for loans, not a lack of funds from the central banks. Contrary to the consensus, these depressions were not caused by the wrong monetary policy.

How to fight a slump? Cutting spending to reduce government debt is the road to disaster. In the 1930s, both President Hoover and Chancellor Bruning insisted on balancing the budget, which crashed the US and German economies. In 1945 the British government's debt was 250% of GDP, but the country survived. Between 1933 and 1936, President Roosevelt raised government spending by 125%, so GDP rose by 48% and tax revenues rose by 100%. But in 1937 he changed tack and cut spending: industrial output fell by 33%.

Japan's recession (caused by falls in the value of its assets - land and loans) destroyed 1500 trillion yens' worth of wealth - three years of Japan's GDP. (The USA's depression lost it one year's GDP.) In Japan, monetary stimuli failed, so the Japanese government proposed irrelevant Thatcherite supply-side changes, like privatising the post office.

In 1997 the Hashimoto government, under IMF pressure, cut spending and raised taxes to balance the budget. As a result, output fell for five quarters, Japan's worst post-war meltdown, and the budget deficit rose from 22 trillion yen in 1996 to 38 trillion in 1999. In 2001, the Koizumi government did the same - with the same result. It also tried the monetary policy of quantitative easing. But this did not increase lending or the money supply. It was irrelevant.

Subsequently, the Japanese government adopted a policy of no fiscal consolidation without growth, i.e. no spending cuts or tax rises before private-sector demand recovered. This fiscal stimulus prevented a 1930s-style depression; by 2005, firms had started to borrow again.

Again, in Germany's balance sheet recession of 2000-05, "the Maastricht Treaty prevented it from applying the fiscal stimulus it needed. This deepened the recession", as Koo observes.

Finally, he notes the harmful effects of the free movement of capital: "in view of the explosion of cross-border capital flows during the past two decades contributing to adverse currency movements and the widening of global imbalances, some restrictions on those flows may be desirable." He also notes the damage done by free trade: "that market forces have not only failed to rectify trade imbalances but actually made them worse suggests that some kind of government action may be necessary."
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3 of 3 people found the following review helpful
5.0 out of 5 stars I Can See Why He Has Been Called "The Economist's Economist" !, 23 Jan. 2011
By 
Rob Julian (Birmingham, UK) - See all my reviews
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This review is from: The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession (Paperback)
This book is an excellent exercise in well structured logical argument and the clear concise communication of a complex subject. If I was creating a Dream-Team type university experience, I would want Richard Koo as one of my main lecturers or professors.

At the heart of this book is the concept that some recessions are different. He argues that a recession that comes after the bursting of a large financial bubble in that country, will not respond to the usual monetary policies relevant to normal recessions. In a normal recession lowering interest rates will re-stimulate companies to invest and free up cash from their loan repayments, but in a "balance sheet recession" many companies will have been stung by the asset bubble bursting, and will be prioritising paying down their loans and liabilities, regardless of how low interest rates go. Taken as a whole, the companies of the troubled countries prioritise improving their (often hidden) damaged balance sheets, and therefore stray from the profit maximising and maximum return on capital theories which underpin monetarist economic theory. Where as monetarist theory expects lower interest rates to kick start a recovery, in this balance sheet recession companies continue to contribute negative investment flows, sucking activity out of the macro economy year on year.

Koo therefore explains that the states role in this abnormal situation is to create state investment (spend and borrow) to counter-act the negative investment (extra saving and paying down of liabilities) of the country's companies, in order to maintain a more constant level of activity in the economy. States should continue to match this de-investing behaviour until the country's companies have repaired their balance sheets and start to invest in a profit maximising and return on capital maximising way as normal.

I agree with his analysis completely as regards Japan. But Japan is an exceptional country, which produced a stratospheric financial and property bubble exactly because it was such a modern technological giant which everyone thought would never relent. In terms of these balance sheet recession concepts being such an exact fit to other countries, I am not so sure. Japan's mighty world beating industrial brands ensure that it has maintained much of is core economic strength and resulting trade surplus right through its "lost decade", while which also significantly the rest of the world was not also in recession. As Koo notes, countries with a trade deficit, (ie most western countries) have the option of devaluing their currency as part of their response to a recession. As he mentions this is what the smaller Asian countries did in the late nineties crisis. Also this is what has naturally happened in financial service dependant Britain, and this is what printing money is doing for the dollar. Japan however was and is a trade surplus country thanks to its industrial giants and conservative consumer habits, and therefore devaluing its currency to stimulate investment and export activity is the wrong answer to its particular dilemma. Therefore the bold option of extreme mega deficit state spending becomes the best policy, and a risk easier to live with when you have the security of knowing your companies are still fundamentally competitive and the world still wants to buy your produce.

Britain does not have the same comfort! therefore perhaps such an extreme government deficit would be more worrying, and the more conventional mix of devaluation and gradual changes in tax and spend policies to reflect our new lower long-term international earning power are more relevant. But I would emphasise the word gradual, and Koo's concept of dis-investment by private companies shrinking the economy could make the British governments cuts in state spending before a full recovery look too hasty. Thanks to this book I now have a better understanding of Japan and also recessions.
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3 of 3 people found the following review helpful
5.0 out of 5 stars Excellent but flawed, 24 Jan. 2010
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This review is from: The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession (Paperback)
I very much enjoyed this book and as everyday passes it seems to grow with relevance. It is very interesting and informative and offers some insightful contrarian views on the nature of modern recessions/depressions.

While I have rated it 5 stars it does have some flaws. As one of the other reviewers have commented the data and the quality of the charts are rather lacking. It would have been nice to have more detail and some of the underlying data.

While the author might be right; his approach lacks some academic rigour. The book doesn't sufficiently test alternative hypothesises and eliminate them as possible explanations. Rather the author immediately moves onto his theory as the only possible explanation.

Stylistically, it could have been shorter, a little less repetitive and more concise. Though these are minor complaints.
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26 of 29 people found the following review helpful
5.0 out of 5 stars Deserves a Nobel Prize, 16 Nov. 2008
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Koo's thesis is stunning, yet simple. I was appalled at my own ignorance - having assumed like many others that Japanese government spending and fiscal packages had done little good over the last 15 years or more. Wrong! Highly relevant in 2008 not only to Gordon Brown's plan to spend Britain out of recession but also to the fiscal straitjacket of the Maastricht Treaty. The text is as enjoyable as a J.K. Galbraith classic, yet backed up with key statistics & charts to match. This book should be mandatory reading for all Chancellors & finance ministers.
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1 of 1 people found the following review helpful
5.0 out of 5 stars Introducing "balance sheet recessions", 4 Jan. 2012
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This review is from: The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession (Paperback)
Richard Koo introduces what he calls a "balance sheet recession": where the private sector decides to pay down existing debt instead of making new borrowings even when interest rates are at zero.

This happens in the wake of the bursting of an asset price bubble -- as in the Great Depression, the bursting of the Japanese real estate/stock bubble, and after the subprime crash. Asset price falls create a huge hole in the private sector's balance sheets: assets go down, debt stays the same, leading to declines in net worth. Japanese firms had large cross-holdings in other Japanese firms and in Japanese property. Large falls in the values of these assets made many Japanese firms technically insolvent -- even though many of these firms still made world-renowned products.

The response from these firms was to channel all new cash flow into repaying debt. But when everyone pays off debt in coordination there's a huge gap in aggregate demand which can lead to anaemic growth for as long as the deleveraging continues. This is the classic Keynesian paradox of thrift.

Koo's answer is for the government to step in and plug the gap in aggregate demand with expansionary fiscal policy -- but this stimulus has to be sustained all through the period of deleveraging. Such sustained public borrowing is often politically unfeasible, as recent events in the US and UK show, and this also happened twice in the Japanese experience. In these situations the benefits of expansionary policy are overlooked while the public focusing on the growing deficits. In Koo's words "no one becomes a hero by preventing a crisis". Koo points out that the rise in Japanese public debt prevented GDP and incomes from falling, even though the asset price collapse and subsequent deleveraging was much greater than in the Great Depression.

But what about monetary policy? The whole idea of a balance sheet recession renders it useless. Fractional reserve banking usually means that when the central bank injects liquidity to the system this will lead to a multiplicative increase in the money supply as loans are made, money placed back into the banking system therefore allowing even more loans to go out. But if the private sector won't borrow no matter the interest rate then the liquidity stays inert in the banking system. In fact, the money goes to the only place it can: into financing the government deficit. This means why the US and UK currently have 10-year interest rates on the order of 2% despite large deficits, and why the Japanese government has a 10-year interest rate of 1% despite a much higher debt-to-GDP ratio!

Koo asserts that balance sheet recessions are qualitatively different from normal cyclical recessions, making them unique in not triggering a burst of spiralling inflation -- as in the 1970s -- in response to expansionary fiscal policy. Balance sheet recessions only occur after the bursting of large asset price bubbles.

If Koo's analysis is correct than this poses dire problems for the UK's future. Not only is the government restricting policy before balance sheets have been mended, but the fundamentals for the UK seem worse than Japan's in a couple of respects. Household savings were very high in Japan, meaning that the deleveraging was retricted to private companies. A gradual decline in the household savings rate since the bubble burst has cushioned some of the fall in aggregate demand. UK households now have to deleverage just as hard as anyone else. Secondly, Japan's export industry stayed afloat after the bubble burst. Japanese companies still exported their sought-after cars and consumer electronics to the rest of the world, providing an external source of aggregate demand. The UK is struggling to wean itself off its persistent trade deficit, with no end in sight.
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1 of 1 people found the following review helpful
5.0 out of 5 stars A tour de force, 31 Oct. 2010
By 
Nicholas Clark (Copenhagen, Denmark) - See all my reviews
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This review is from: The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession (Paperback)
An inspiring read! Nomura's chief economist, Richard Koo enriches our understanding of how to deal with recessions. His key insight is the need to distinguish between ordinary business cycle garden-variety recessions and it's far more dangerous post-bubble cousin: the balance sheet recession. Whereas companies can be counted on to act as profit maximizers in the former case, grand misallocations of capital leaves many businesses overextended and struggling with insolvency in a post-bubble scenario. As companies fight to avoid liquidation their focus is changed from profit maximization to debt minimazation. At the macro level this deleveraging causes a 'fallacy of composition' rendering loan demand insensitive to changes in interest rates. Japan is the case in point. Between 1990 and 2003 the corporate sector saw a reduction in borrowing equivalent to 18% of GDP! The policy implications are clear: Whereas monetary policy is sufficient in the former case, it is ineffective in the latter. With higher saving denting demand, the government needs to step in too fill the gap, lest the economy sinks into depression. Koo makes a convincing case that it was not an overly restrictive monetary policy that caused the great depression, but rather lack of loan demand. As was the case in other balance sheet recessions including recent Japan and Germany in 2000-2005. Koo does not advocate expansionary fiscal policy during ordinary recessions and he is definitely no Keynesian. He warns that only thing a government must not do during balance sheet recession is to pursue fiscal consolidation. Overall his work makes a strong case for being long the world's most detested asset class.
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4 of 5 people found the following review helpful
5.0 out of 5 stars Complex issues, layman terms, 2 Oct. 2009
By 
R. Tomany (Dublin, Ireland) - See all my reviews
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This review is from: The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession (Paperback)
An excellent read.
I'm not an economist but the logic presented throughout this is thorough, compelling and at all times reinforced by statistical evidence.
The macroeconomic theory explained throughout is that economies operate in two phases of a cycle - the 'yang' phase, when firms concentrate on profit maximisation; and the 'yin' phase, much rarer, when the aim is debt repayment. This theory on its own makes sense, as it relates to how individuals and households themselves behave when faced with a drop in their asset values.

In any discipline there tends to be a rush to voodoo magic to explain anomalies that the author may not be capable of explaining himself. Instead of wandering off into a fog, Koo stays clearly connected to the layman reader, using simple terms, analogies and hard eveidence to reinforce his point. So there is nothing like 'price stickiness' in this book. Instead we get convincing evidence from the two major downturns of the last century - the US Great Depression and the Japanese Great Recession.

The overwhelming conclusion is that Governments faced with a balance sheet recession must use fiscal policy to correct it and maintain this until the economy has shifted back into a 'yang' phase. All thoughts of correcting a budget deficit must be postponed until the private sector can once again become the engine for the economy. Writing from Ireland, where we have had a more severe property correction than most and are facing into a budget of fiscal correction in December, it makes me think that negotiating funds for fiscal expenditure may instead be the most important issue for our Government now.
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4.0 out of 5 stars Overtly repettive, 2 Feb. 2014
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This book is very repetitive, he probably repeats his point over 50 times and makes a very good case for it too. Though perhaps he reveres this theory excessively as if having solved all the problems between macroeconomics. Nonetheless good book with good evidence of the theory and then explanation of why it matter in economic debates.
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5.0 out of 5 stars Finally Somebody Tells It Like It Is!, 18 Feb. 2014
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This review is from: The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession (Paperback)
Amazing book, although somewhat repetitive.

Koo has a proven track record and debunks the most prevalent myths about what went wrong, and is still going wrong to this day, in Japan.

A good read for anyone regardless of capabilities in economic theory.
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5.0 out of 5 stars Great book, I hope Abe has read it!, 1 May 2013
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This review is from: The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession (Paperback)
This book makes a clear case with plenty of evidence for the core reasons behind the Japanese stagnation of the last 20 year or so. Required reading for anyone with an interest in Japan.
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