When do banks and businesses not seek to maximize profits? When they've fallen into a state of negative net worth, such as after the bursting of an asset bubble. In this situation, it doesn't matter how cheap money is -- the usual monetarist response to a recession -- because, survival taking precedence, businesses opt to pay down debt instead.
Author Richard Koo calls this situation a balance-sheet recession. He discovered it while working on the long Japanese recession of the 90s that extended into the 2000s. He particularly noted the beneficial effect of a fiscal stimulus, versus monetary policy, or worse, an attempt to balance the budget. The same conclusions can be drawn about the Great Depression in the 1930s US, where the economy would improve as long as FDR kept up government spending, but would fall back into recession when he let programs lapse or when pressured to adhere to conventional neo-classical economics, such as trying to balance the budget in 1937.
We can see the same thing happening today in the US, where the Fed has reduced the bank loan rate to almost zero, handed out hundreds of billions of dollars to banks, only to find out that banks have used the money to pay down debt and strengthen their balance sheets, rather than make new loans. It's the old "pushing on a string" analogy. And so much for Ben Bernanke's helicopter.
Koo sees the concept of a balance-sheet recession as something that is missing from both neo-classical and Keynesian economics. He asserts that there's an economic cycle of upturn (yang) and downturn (yin) and what works in the yang environment, like monetary stimulus, fails in the yin environment.
I have a personal quibble here with Koo's concept that neo-classical economics ever works, even in the yang phase.... That is, the thirst for profits in the yang phase inevitably produces a growing disparity of income, where the investor class takes an ever-larger share of the profits, which goes back into ever more investments. But if the income of the salaried middle-class stagnates, as it did in the 1920s and again in the 1990s-2000s, then the middle-class can't afford to buy what business is producing. Business then responds by encouraging the increased use of credit in order to maintain rising sales, necessary for rising stock prices. Eventually this produces both an asset bubble and a credit bubble, finally collapsing into the yin phase where the taxpayers have to bail out the system.
In this work, Koo concentrates on the yin balance-sheet recession phase, fortunately. (Though he does make some solid criticisms of neo-classical theory.) His experience in Japan has given him a good insight into what works and doesn't work. Even though Japan struggled for some 14 years, until 2005, and is now struggling along with the rest of us in this global downturn as their exports have crumbled, Koo notes that it could have been much worse. After all those years, they finally figured it out -- and their experience should be a lesson for the US, if we're paying attention.
Koo also adds an interesting appendix on money, Walras, and macroeconomics. Basically, why neoclassical economics fails to understand what money really is, and the results of that failure.
Hopefully, Pres Obama's economic advisors will take Koo's recommendations to heart. (According to a blurb on the book cover, Larry Summers has at least read it, though he seems non-committal as to whether or not he agrees with it.) As physicist Max Planck once noted, new ideas may only get accepted when the supporters of the old ideas die off.
The book is not a difficult read for the layman, though not a quick read either. It does tend to get repetitious at times. But it's a solid contribution to our understanding of how a market economy actually works, and so not to be missed by anyone interested in macroeconomics. As for those of you who are macroeconomists by profession, working in the shadow of St. Milton, read this book and come into the light. :-)
Other Used, New, Collectible from $7.44
Paperback
Buy new:
$108.87$108.87
$12 delivery April 19 - May 6
Ships from: papercavalier Sold by: papercavalier
Buy new:
$108.87$108.87
$12 delivery April 19 - May 6
Ships from: papercavalier
Sold by: papercavalier
Buy used: $22.25
Buy used:
$22.25
See Clubs
Loading your book clubs
There was a problem loading your book clubs. Please try again.
Not in a club? Learn more
Join or create book clubs
Choose books together
Track your books
Bring your club to Amazon Book Clubs, start a new book club and invite your friends to join, or find a club that’s right for you for free.
Download the free Kindle app and start reading Kindle books instantly on your smartphone, tablet, or computer - no Kindle device required.
Read instantly on your browser with Kindle for Web.
Using your mobile phone camera - scan the code below and download the Kindle app.
The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession First Edition
by
Richard C. Koo
(Author)
{"desktop_buybox_group_1":[{"displayPrice":"$108.87","priceAmount":108.87,"currencySymbol":"$","integerValue":"108","decimalSeparator":".","fractionalValue":"87","symbolPosition":"left","hasSpace":false,"showFractionalPartIfEmpty":true,"offerListingId":"jDmIMLOig7G8MVmGrcYa1MEgWmov6Rk%2By%2FujvA%2FlHAbmx6bsm4NO7%2FPCGnb37Lq2Dy5zGN2It1a5xKq%2FfoMpj9mo9rBy0g%2FWIoatBH598PQ9tYC5UlcqSaspN5BF7g52V4JBUCf0QXqZqj6VMfulX7pKAsJ9dyAx%2FOQ4aucIqQWeObh%2BRAjzLQ%3D%3D","locale":"en-US","buyingOptionType":"NEW","aapiBuyingOptionIndex":0}, {"displayPrice":"$22.25","priceAmount":22.25,"currencySymbol":"$","integerValue":"22","decimalSeparator":".","fractionalValue":"25","symbolPosition":"left","hasSpace":false,"showFractionalPartIfEmpty":true,"offerListingId":"jDmIMLOig7G8MVmGrcYa1MEgWmov6Rk%2B68Dj2PdxEpFJHNAi12hLRdPaBrzHBp8NjDHos7i55oUyC0Q4zeh9hCn%2Fcf1DP%2Fzmd%2ByR6pWIYYpFbP02WrN2fxvVqnUVu38rD8Vm0vU1Mn%2FYxo7hDfJNqXBXB1XVhbojKyZKcLODwWsM67iqBlljDQ%3D%3D","locale":"en-US","buyingOptionType":"USED","aapiBuyingOptionIndex":1}]}
Purchase options and add-ons
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.
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.
- ISBN-100470823879
- ISBN-13978-0470823873
- EditionFirst Edition
- PublisherWiley
- Publication dateMay 4, 2009
- LanguageEnglish
- Dimensions6.3 x 1.1 x 9.3 inches
- Print length320 pages
Frequently bought together

This item: The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession
$108.87$108.87
Get it Apr 19 - May 6
In stock
Usually ships within 4 to 5 days.
$34.67$34.67
Only 6 left in stock (more on the way).
Total price:
To see our price, add these items to your cart.
Try again!
Added to Cart
One of these items ships sooner than the other.
Choose items to buy together.
Customers who bought this item also bought
Page 1 of 1 Start overPage 1 of 1
The Other Half of Macroeconomics and the Fate of GlobalizationRichard C. KooHardcover$16.70 shippingOnly 6 left in stock (more on the way).
Pursued Economy: Understanding and Overcoming the Challenging New Realities for Advanced EconomiesRichard C. KooHardcover$21.43 shippingOnly 7 left in stock - order soon.
The Escape from Balance Sheet Recession and the QE Trap: A Hazardous Road for the World EconomyRichard C. KooHardcover$20.07 shippingOnly 1 left in stock (more on the way).
Customer reviews
4.5 out of 5 stars
4.5 out of 5
148 global ratings
How customer reviews and ratings work
Customer Reviews, including Product Star Ratings help customers to learn more about the product and decide whether it is the right product for them.
To calculate the overall star rating and percentage breakdown by star, we don’t use a simple average. Instead, our system considers things like how recent a review is and if the reviewer bought the item on Amazon. It also analyzed reviews to verify trustworthiness.
Learn more how customers reviews work on AmazonReviews with images
1 Star
Quality issues upon receiving paperback
I just received a new copy of the paperback edition and there are some significant quality issues with the book. Several pages aren't lined up properly and stick out from the bottom and the binding glue is a bit of a mess. I would consider this to be very low quality by todays standards. See photos.
Thank you for your feedback
Sorry, there was an error
Sorry we couldn't load the review
-
Top reviews
Top reviews from the United States
There was a problem filtering reviews right now. Please try again later.
Reviewed in the United States on April 5, 2009
Reviewed in the United States on August 21, 2013
First of all, Richard Koo is one of the best economists at Nomura, who
are the best Investment Banking firm in the world, IMHO.
So, my expectations were a little high.
On the one hand, it is a very good update of contemporary thinking on Macro-Economics.
In particular, the concept of a "Balance Sheet Recession" is discussed in detail.
On the other hand, the major Lessons from Japan's Great Recession are that politicians
are ignorant, and that Central Bankers are stupid.
Anyone who follows the politics of American Macro-Economic policy knows that we do not
have anything which could be described as "a Fiscal Policy", because there are too many
people in this country who consider Keynes to be evil (kind of like Darwin). It does not
help that the Left regards a crisis as a cynical opportunity to push their agenda.
The Bank of Japan is called "Jurassic Park" because it is inhabited by ancient creatures
with tiny brains. This book gives the terrifying details of how Japanese monetary policy
and regulatory policy were mismanaged for over 20 years. It also describes how the
opponents of the BOJ orthodoxy were unable to formulate an alternative policy, and
were unable to build a consensus for change.
The truly depressing thing is to see how Europe is following in Japan's footsteps, and
how America is stumbling along the same path.
are the best Investment Banking firm in the world, IMHO.
So, my expectations were a little high.
On the one hand, it is a very good update of contemporary thinking on Macro-Economics.
In particular, the concept of a "Balance Sheet Recession" is discussed in detail.
On the other hand, the major Lessons from Japan's Great Recession are that politicians
are ignorant, and that Central Bankers are stupid.
Anyone who follows the politics of American Macro-Economic policy knows that we do not
have anything which could be described as "a Fiscal Policy", because there are too many
people in this country who consider Keynes to be evil (kind of like Darwin). It does not
help that the Left regards a crisis as a cynical opportunity to push their agenda.
The Bank of Japan is called "Jurassic Park" because it is inhabited by ancient creatures
with tiny brains. This book gives the terrifying details of how Japanese monetary policy
and regulatory policy were mismanaged for over 20 years. It also describes how the
opponents of the BOJ orthodoxy were unable to formulate an alternative policy, and
were unable to build a consensus for change.
The truly depressing thing is to see how Europe is following in Japan's footsteps, and
how America is stumbling along the same path.
Reviewed in the United States on October 22, 2009
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).
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).
Top reviews from other countries
Pau
5.0 out of 5 stars
Simply a MUST
Reviewed in Mexico on June 29, 2019
Should be in the curriculum of every economics degree. Great narrative, contextualized perfectly to drive home its conclusions. A must for any economics scholar, portfolio manager or market strategist.
Dr. Gurbachan Singh
5.0 out of 5 stars
Must read
Reviewed in India on November 2, 2017
This book is brilliant. It does overlap with Koo's other book but it helped to read this as well. I understood his analysis better now. It is fresh thoughts. It challenges orthodoxy (politely). It reconsiders Keynes, Friedman, Temin, Bernanke, and others. It is a must read for policy makers.
Dr. Gurbachan Singh, Visiting Faculty, Indian Statistical Institute (Delhi Centre) and Ashoka University
Dr. Gurbachan Singh, Visiting Faculty, Indian Statistical Institute (Delhi Centre) and Ashoka University
3 people found this helpful
Report
Andrea
5.0 out of 5 stars
Dal titolo presuntuoso
Reviewed in Italy on February 8, 2018
A dispetto del titolo l'autore presenta le sue argomentazioni con umiltà e semplicità.
Partendo dall'esperienza del Giappone degli anni '90 espone la sua teoria che, seppure in maniera incompleta per sua stessa ambizione, ambisce a spiegare sia i periodi di crisi come la grande depressione americana degli anni '30 sia i periodi successivi come il boom post-bellico, la stagflazione e la crisi che inizia nel 2008.
Sorprendente, almeno per chi obnubilato dall'ideologia anti-stato, che la giustificazione per una maggiore spesa pubblica venga dal guardare alle esigenze del settore privato (in particolare delle imprese).
Partendo dall'esperienza del Giappone degli anni '90 espone la sua teoria che, seppure in maniera incompleta per sua stessa ambizione, ambisce a spiegare sia i periodi di crisi come la grande depressione americana degli anni '30 sia i periodi successivi come il boom post-bellico, la stagflazione e la crisi che inizia nel 2008.
Sorprendente, almeno per chi obnubilato dall'ideologia anti-stato, che la giustificazione per una maggiore spesa pubblica venga dal guardare alle esigenze del settore privato (in particolare delle imprese).
Eric Carr-tune
5.0 out of 5 stars
The best economics book I have ever read
Reviewed in Canada on May 13, 2012
It has been over a year since I read this book, but I know that it is ESSENTIAL reading for EVERYONE because more than any other book (Economics related or not) I have ever read, the material presented in this book still sits in my memory banks and has proven invaluable in recognizing future patterns that WILL occur again and how best to avoid the trappings of them.
This book is so easy to read and understand. At first, though, I will admit that I began to believe he was repeating information too many times, but that later proved to be the genius method by which I was able to retain what I learned from his presentation of the FACTs.
The title of this book could be construed as misleading in that it has nothing to do with religion. However, I'll let that completely slide, because this book is a true treasure and should be part of every school's curriculum.
Buy it, read it, and then lend it to those who need it... which is everyone. Just make sure you get it back because you will definitely want to read it again!
This book is so easy to read and understand. At first, though, I will admit that I began to believe he was repeating information too many times, but that later proved to be the genius method by which I was able to retain what I learned from his presentation of the FACTs.
The title of this book could be construed as misleading in that it has nothing to do with religion. However, I'll let that completely slide, because this book is a true treasure and should be part of every school's curriculum.
Buy it, read it, and then lend it to those who need it... which is everyone. Just make sure you get it back because you will definitely want to read it again!
4 people found this helpful
Report
Rob Julian
5.0 out of 5 stars
I Can See Why He Has Been Called "The Economist's Economist" !
Reviewed in the United Kingdom on January 23, 2011
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.
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.
4 people found this helpful
Report





