Review of The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession (Hardcover)

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.



Click Here to see more reviews about: The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession (Hardcover)