Hearing comparisons between the US and Japan? Confused about deleveraging, private saving, and government spending? Look no further – Richard C. Koo explains it all in his testimony before the Committee on Financial Services U.S. House of Representatives.
The first point Koo makes is that ordinary recessions – which tend to come up every so often – and full-fledged depressions are “two different diseases requiring totally different treatments.” What’s the difference? In a depression, the private sector is focused solely on getting rid of debt. Who cares? Just take an example: a family makes $1000 and saves $100. Normally that $100 is lent by the family’s bank to a borrower who can invest and use that money. But in today’s world, where everyone is trying to get rid of debt, no one wants to borrow that $100. This is just what happened during the Great Depression, and also what happened to Japan in the 1990s. But Japan was smart: the government borrowed and spent $100 instead, keeping the money flowing. Even though it increased the government’s debt by 460 trillion yen, it sustained over 2,000 trillion yen – “making it a huge bargain,” the understated Koo points out. On the other hand, cutting spending and government deficits will have the opposite, devastating effect.
Read his full testimony here.