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The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession | 
 enlarge | Author: Richard C. Koo
Publisher: Wiley
Category: Book
List Price: $34.95
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Rating:  1 reviews
Sales Rank: 33531
Media: Hardcover
Pages: 300
Number Of Items: 1
Shipping Weight (lbs): 1.3
Dimensions (in): 9.1 x 6.1 x 0.9
ISBN: 0470823879
Dewey Decimal Number: 339.0952
EAN: 9780470823873
ASIN: 0470823879
Publication Date: July 15, 2008
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Product Description
Japan's "Great Recession" lasted from approximately 1992 - 2007 and finally provided the economics profession with the necessary background to understand what actually happened during the US recession of the 1930s. The discoveries made, however, are so far-reaching that a large portion of economics literature will have to be modified to accommodate another half to the macro economic spectrum of possibilities that conventional theorists have overlooked.
In particular, Japan's Great Recession showed that when faced with a massive fall in asset prices, companies typically jettison the conventional goal of profit maximization and move to minimize debt in order to restore their credit ratings. This shift in corporate priority, however, has huge theoretical as well as practical implications and opens up a whole new field of study. For example, the new insight can explain fully the precise mechanism of prolonged depression and liquidity trap which conventional economics - based on corporate profit maximization - has so far failed to offer as a convincing explanation.
The author developed the idea of yin and yang business cycles where the conventional world of profit maximization is the yang and the world of balance sheet recession, where companies are minimizing debt, is the yin. Once so divided, many varied theories developed in macro economics since the 1930s can be nicely categorized into a single comprehensive theory, i.e., the Holy Grail of macro economics
The policy implication of this new discovery is immense in that the conventional aversion to fiscal policy in favor of monetary policy will have to be completely reversed when the economy is in the yin phase.
The theoretical implications are also immense in the sense that the economics profession will no longer have to rely so much on various rigidities to explain recessions that have become the standard practice within the so-called New Keynesian economics of the last twenty years.
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| Customer Reviews:
Excellent Macro Review, but No Smoot-Hawley Tariff Act Discussion July 22, 2008
James East (Orlando, FL)
8 out of 10 found this review helpful
At the risk of getting taken to the wood shed by both Academics and Economists, I will venture out and provide a few comments from the view of an aspiring autodidact.
First, I would like to commend both the author and editor on a good job in the editing process, as this translation reads and flows like an English first edition. Second and as for the subject matter, the thesis is well documented and one would have a hard time to find fault with its premise. However, I will take issue with two minor points (A & B below) of which I hope will expose a small point for possible improvement and betterment for the "search of the holy grail" that hopefully in the end, may actually boost the thesis.
At issue, and from page 108 "we must conclude that the Great Depression was 13.6 percent a credit supply problem and 86.4 percent a credit demand problem."
A) I am very surprised that any discussion about the Great Depression would not even mention the Smoot-Hawley Tariff Act of 1930, which started moving thru congress the year before in 1929. Some have previously argued that this legislation started the intial cracks in the stock market before it eventually broke in October. In addition, and a very important consequence of this act was what subsequently happened to world trade and its subsequent higher retaliatory tariffs from around the world after it became law. As the US economy moved thru the next 2 years, many more tariffs were increased even after its original passage into law all thru and up until the 1932 elections at which point the winning candidate ran on a non-Nationalistic platform (i.e. on a reduced tariff platform). Why is this so relevant? It is very relevant because on top of the already pre-existing war debt, even more private debt was lent to foreign entities during the boom of '21-'29. As the entire world contracted due to the reduced trade, the repayment of domestic debt by foreign entities became tough and may have contributed more than marginally to further decreased asset prices and of debt deflation? -- Which leads to my next point B.
B) Though discussed, it appears that the short discussion to dismiss Irving Fisher's debt-deflation thesis may have missed the point that Mr. Fisher was making. In the light of both the asset bubble cracking in late '29, then the subsequent reduced trade which played havoc not only on meeting interest payments, but actually principal debt repayment, placed further pressure on asset values. Toss in some increased tax rates, and the (9) point debt-deflation thesis (see below) holds up very well, at least in my view.
Assuming a state of over-indebtedness exists (meaning corporate and private), this will lead to liquidation, through the alarm either of debtors or creditors or both. Then we may deduce the following chain of consequences 1) Debt liquidation leads to distress selling, 2) Contraction of deposit currency, as bank loans are paid off which leads to the slowing of the velocity of money which precipitates more selling, 3) A fall in the level of prices, causing, 4) A still greater fall in net worths of business, precipitating bankruptcies, 5) A like fall in profits, curtails employment and production, 6) A reduction in output, trade, and employment, lead to, 7) Pessimism and loss of confidence, which in turn leads to, 8) Hoarding and slowing down more the velocity of circulation, and the above eight cause, 9) Complicated disturbances in the rates of interest, or the fall in money rates and the rise in the real, or commodity, rates of interest.
Outside the two points above (A) & (B), a highly recommended book on both the macro economy and the benefits of fiscal policy over monetary policy under certain (or specific) economic conditions. A truly worthy read for one's Macro Economic education.
Side note: If there is a 2nd Edition, note that Long-Term Capital was not a bank, but a highly leveraged US Hedge Fund. However, the reference maybe was meant to be for Long-Term Credit Bank of Japan.
Post Script: Given the recent actions by the US Government in September 2008, many policy makers appear to be aware of the dangers to which Mr. Koo warns about in his earlier book "Balance Sheet Recession" and in the updated version of "The Holy Grail of Macroeconomics". Time will tell if the US Congress will comply, or repeat some of the mistakes of the past.
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