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The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession Hardcover – May 4, 2009

39 customer reviews
ISBN-13: 978-0470823873 ISBN-10: 0470823879 Edition: 1st

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Editorial Reviews


"As I have noted before, the best analysis of what happened to Japan is by Richard Koo" (Financial Times, February 18th 2009)

From the Inside Flap

How did the great Depression of the 1930s get to be so bad for so long? That question has baffled economists for decades. Ben S. Bernanke, the current Fed Chairman, even called understanding the great Depression the as yet-unattained "holy Grail of Macroeconomics." Japan's Great recession of 1990-2005 finally gave us some vital clues as to how a post-bubble economy can plunge into prolonged recession while leaving conventional policy responses largely ineffective.

Building on the author's earlier work Balance Sheet Recession: Japan's Struggle with Uncharted Economics and its Global Implications (John Wiley, Singapore, 2003), The Holy Grail of Macroenomics: Lessons from Japan's Great Recession argues that there are actually two phases to an economy, the ordinary (or yang) phase, in which the private sector is maximizing profits, and the post-bubble (or yin) phase, in which private sector is minimizing debt, or repairing damaged balance sheets. Although conventional economics is useful in analyzing economies in the yang phase, it is less useful in explaining phenomena such as the "liquidity trap" that is typical of an economy in the yin phase. The distinction between the yin and yang phases also explains why some policies work well in some situations but not in others. Indeed, it offers the crucial foundation to macroeconomics that has been missing since the days of Keynes.

This groundbreaking book not only explains what happened to the U.S. during the Great Depression and to Japan during the Great recession, it also offers important policy recommendations for fighting post-bubble economic downturns in any country, including the current subprime crisis in the U.S.


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Product Details

  • Hardcover: 320 pages
  • Publisher: Wiley; 1st edition (May 4, 2009)
  • Language: English
  • ISBN-10: 0470823879
  • ISBN-13: 978-0470823873
  • Product Dimensions: 6.3 x 1.1 x 9.3 inches
  • Shipping Weight: 1.3 pounds (View shipping rates and policies)
  • Average Customer Review: 4.5 out of 5 stars  See all reviews (39 customer reviews)
  • Amazon Best Sellers Rank: #896,179 in Books (See Top 100 in Books)

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Most Helpful Customer Reviews

51 of 53 people found the following review helpful By William Podmore on September 14, 2009
Format: 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.
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11 of 11 people found the following review helpful By A. Menon on October 22, 2009
Format: Paperback Verified Purchase
This book is a good account of the phenomenon of debt aversion. The thesis of the book is pretty straightforward and is that, after asset bubbles burst and businesses are technically insolvent through liquidation analysis, they are likely to pay down debt irrespective of monetary policy. The fact that the businesses are technically insolvent despite market prices is described as being a function of information asymmetry and bank incentives.

This realization is deemed to be the missing link to complete economist's understanding of how to bridge fiscal macroeconomic thought and monetary economic thought and the solutions required in the aftermath of a burst asset bubble. Discussing the shortfalls of Friedman's positions on the demand function for money to be a function of nominal interest rates, it is argued that when one is in the position of being insolvent yet operational, the focus shifts from using lending lines to maximise ROE to using free cashflow to minimize the debt that is causing this insolvency. When this market regime is upon us, it is the need of the government to use fiscal policy to fund the output gap.

I think this is pretty accurate as an analysis of the problems that arise in monetary policy when the world is in fear of the phenomenon that hurt them (being burdened with debt that is greater relative to the asset base one had assumed would back it) and this aversion has macroeconomic repurcussions. My only criticism is, I dont think this is as obscure a result as is described. Most ecnomists realize how output gaps can arise, how debt aversion can form. Richard Posner, who is a judge, talks about debt aversion off-hand as though its well known. So all in all i think its a god perscriptive piece on a very real phenomenon we deal with but its not revolutionary and this phenomenon is discussed by others (though few have gone in to as much detail about it).
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10 of 10 people found the following review helpful By Peter in China on August 12, 2013
Format: Paperback
3.5 Stars


Overall, Koo's conclusions regarding Japan's economic malaise, and balance sheet recessions in general is spot on. I was really impressed with his originality of thought and analysis (for an indoctrinated neo-classical economist this is no easy feat! )


Koo's understanding of banks lend, where savings come from, national debt, and foreigner's purchasing of national debt is just wrong. More specifically, he fails to understand the following:

1) The money multiplier, a stable of econ textbooks, doesn't actually exist! The Fed even admitted so in 2010. In fact, causality runs in the opposite direction. When a bank makes a loan, it then borrows the reserves (from other banks or directly from the central bank) to cover its reserve requirement. Loans create reserves.

2) Investment creates savings! Keynes knew this. Bank operators know this. In the book, Koo contends that people must save first before investment can happen. At the household level this is true, but at the macro level its just the opposite. Whenever a bank makes a loan, it creates money. The portion of this new money that is not used is what adds to savings. As banks are always able to get money from the Fed/overnight market, they do not need people's 'savings' to finance investment.

3)Foreigner's Financing of National 'Debt'

In the book, Koo says a potential major threat to the US financial system would be if foreigners stopped buying our debt. This is asinine on multiple levels. First, when other countries run a trade surplus with the US (usually bc they have artificially suppressed their FX rates), by definition they will end up with excess dollars.
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The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession
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