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Jun. 24th, 2010 05:13 pm![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
johnny9fingersAnd further to my last post:
en.wikipedia.org/wiki/Lost_Decade_(Japan)
I quote from the end of the Wiki article.
Economist Richard C. Koo wrote that Japan's "Great Recession" that began in 1990 was a "balance sheet recession." It was triggered by a collapse in land and stock prices, which caused Japanese firms to become insolvent, meaning their assets were worth less than their liabilities. Despite zero interest rates and expansion of the money supply to encourage borrowing, Japanese corporations in aggregate opted to pay down their debts from their own business earnings rather than borrow to invest as firms typically do. Corporate investment, a key demand component of GDP, fell enormously (22% of GDP) between 1990 and its peak decline in 2003. Japanese firms overall became net savers after 1998, as opposed to borrowers. Koo argues that it was massive fiscal stimulus (borrowing and spending by the government) that offset this decline and enabled Japan to maintain its level of GDP. In his view, this avoided a U.S. type Great Depression, in which U.S. GDP fell by 46%. He argued that monetary policy was ineffective because there was limited demand for funds while firms paid down their liabilities. In a balance sheet recession, GDP declines by the amount of debt repayment and un-borrowed individual savings, leaving government stimulus spending as the primary remedy.
Now, Paul Krugman describes Japan's lost decade as a liquidity trap rather than a balance sheet recession.
Whichever it is will be telling in the coming years. I'd bet on Koo rather than Krugman, but I'd be happy to be wrong, as I'm not proud. And it's not as if it makes any material difference: we're still in it up to our middles.
en.wikipedia.org/wiki/Lost_Decade_(Japan)
I quote from the end of the Wiki article.
Economist Richard C. Koo wrote that Japan's "Great Recession" that began in 1990 was a "balance sheet recession." It was triggered by a collapse in land and stock prices, which caused Japanese firms to become insolvent, meaning their assets were worth less than their liabilities. Despite zero interest rates and expansion of the money supply to encourage borrowing, Japanese corporations in aggregate opted to pay down their debts from their own business earnings rather than borrow to invest as firms typically do. Corporate investment, a key demand component of GDP, fell enormously (22% of GDP) between 1990 and its peak decline in 2003. Japanese firms overall became net savers after 1998, as opposed to borrowers. Koo argues that it was massive fiscal stimulus (borrowing and spending by the government) that offset this decline and enabled Japan to maintain its level of GDP. In his view, this avoided a U.S. type Great Depression, in which U.S. GDP fell by 46%. He argued that monetary policy was ineffective because there was limited demand for funds while firms paid down their liabilities. In a balance sheet recession, GDP declines by the amount of debt repayment and un-borrowed individual savings, leaving government stimulus spending as the primary remedy.
Now, Paul Krugman describes Japan's lost decade as a liquidity trap rather than a balance sheet recession.
Whichever it is will be telling in the coming years. I'd bet on Koo rather than Krugman, but I'd be happy to be wrong, as I'm not proud. And it's not as if it makes any material difference: we're still in it up to our middles.
