–Are we the next Japan? Ask Richard Koo

Mitchell’s laws: Reduced money growth never stimulates economic growth. To survive long term, a monetarily non-sovereign government must have a positive balance of payments. Economic austerity causes civil disorder. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.

Richard Koo is chief economist for the Nomura Research Institute. He is one of the very few prominent economists, not with the University of Missouri, Kansas City, who understands Monetary Sovereignty. Recently, he was interviewed by MONEY magazine senior editor, Kim Clark. The interview ran in the October 11th issue. I urge you to read it.

According to Clark, Koo says:

“Government spending is the key to getting the economy back on track — and that 2009’s massive stimulus package didn’t go far enough.”

Actually, I predicted back in an April 9, 2008 letter to the Chicago Tribuen, that the various stimulus plans were too little, too late.

Here are some excerpts from the Koo interview:

Clark: Some people look at Japan and say the government spent huge sums on public projects and there was no real growth, so spending didn’t really cure the economy.
Koo: The early ’90’s recession in Japan was far worse than people realize. Commercial real estate prices nationwide in Japan fell 87% from the peak. Imagine U.S. housing prices down 87%. The fact that the Japanese government halted what could have been an enormous drop in GDP in the early ’90’s speaks to the success of its economic policies.

Clark: But Japan did suffer a major recession again in 1997.
Koo: The Japanese made a horrendous mistake in 1997. The Organization for Economic Cooperation and Development and the International Monetary Fund said to Japan, “You are running a huge fiscal deficit with an aging population. You’d better reduce your deficit.” When the government cut spending and raised taxes, the whole economy came crashing down. I see exactly the same pattern in the U.S. today. If the government acts to cut the deficit while people are continuing to pay down their debts, then we could have a second leg of decline that could be very, very ugly.

Sound familiar? Japan cut its deficit and a major recession resulted. This is why I have predicted a major U.S. recession or depression for 2012.

Clark: So are you saying that the stimulus package didn’t go far enough?
Koo: Obama kept the economy from falling into a Great Depression. . . The economy is still struggling, so people say that money must have been wasted. Not true. The expiration of the package is behind the economy’s weakness now. Yes, the Bush tax cuts were extended . . but tax cuts are the least efficient way to support the economy . . .because . . . a large portion will be . . . used to pay down consumer debt. Government spending is much more effective.

Clark: Congress recently committed to slash our defict by $2.5 trillion . . .
Koo: (In Japan), the cutback caused a second recession. Think about the Great Depression; war spending is what finally pulled the economy out. The Japanese government didn’t do enough spending in the early 1990s and added another 10 years to the problem. If the U.S. avoids that mistake, maybe in a couple of years you will be out of this mess.

Here we have Japan, a Monetarily Sovereign nation just like the U.S., that went through exactly what we are going through, and made exactly the same mistakes we are making. What have our politicians, media and old-line economists learned from Japan’s experience. Apparently, nothing.

Are you angry enough to write to your political leaders and your favorite media? If not, when?

Rodger Malcolm Mitchell

No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. The key equation in economics: Federal Deficits – Net Imports = Net Private Savings


4 thoughts on “–Are we the next Japan? Ask Richard Koo

  1. Enjoyed Mr. Mitchell’s book (Free Money) and, admittedly initially dubious, did some more reading (Mr. Mosler’s “Seven Myths…” and Chang’s “23 things they don’t tell you about capitalism…”). One minor question and that is the nagging issue of debt servicing costs; i.e. the perception that we somehow have to pay interest on the purported “debt” in order to balance the books.

    What amazes me is how this small amount of reading helps one to see the mantras touted by both sides of the major political houses–neither having spent the time to learn some basics, review a bit of financial history, or to even understand the absolutely key difference between what our federal government can do and what 50 states, all municipalities, all businesses, and all individuals cannot do: print money. It’s amusing to watch guys like Bill O’Reilly attempt to ridicule guests with his examples of Greece … which, he fails to know, is like a state in the US without monetary sovereignty because it’s tied to the Euro and doesn’t have its old drachma.

    While I’m sure there is a point of craziness in simple money creation (perhaps undermining the full faith and credit beliefs which sustain our acceptance of our “dollar” medium of exchange), it’s probably not as insane as the current ideas which seem absolutely embedded in having something to cling to, whether the gold standard we had (sort of) until 1971 or the “new” run-up in gold as a portfolio segment for those who can afford such ideas.

    I’d like to see Congress throw out some more dollars to do a lot of positive things … and the idea of our alleged “federal debt” increasing isn’t as much of a fearful thing when one considers the spin-up of the economy, the good things which can be realized, and how economic enlargement would narrow the gap to where we sustain a growth level commensurate with a reasonable inflation rate.


    1. Thanks Ed,

      I suspect the myths will not disappear in a bright flash, but will have to die the death of a thousand cuts. The enlightened continually must contact their political representatives and the media and even old-line politicians with the Monetary Sovereignty message.

      Rodger Malcolm Mitchell


  2. As an MMTer obviously I agree with most of what Koo says. However he makes a big mistake when he says that extending the Bush tax cuts are not much use because “a large portion will be . . . used to pay down consumer debt.” Those tax cuts benefit the wealthy primarily, and that’s not the portion of the population which is most seriously in debt.

    The real reason that those tax cuts are not brilliantly effective is that the monthly spending of wealthy households is less sensitive to changes in post-tax household income than is the case with poorer households.

    As for Koo’s claim that “Government spending is much more effective”, the big problem with boosting govt spending in a recession, is that it distorts the economy towards the public sector: a distortion that has to be unwound come the recovery (assuming that public spending as a proportion of GDP is to remain constant in the long term).

    So all in all, I favour boosting ALL sectors of the economy by the same amount in a recession: poor households, rich ones, private sector and public sector.


  3. Ralph, I suspect the Bush tax cuts are valuable, simply because they are tax cuts. As such, they add dollars to the economy. There may be a timing difference in the effect, but adding money to the economy always is stimulative and pulling money out of the economy is anti-stimulative.

    Though the rich may spend in different ways from the poor, their spending/saving enters the economy over time.

    As for federal spending distorting the economy toward the public sector, it depends on the type of spending. For instance, while continuing federal purchases of goods and services may offer the distortion you mention, direct benefits like Social Security don’t.

    Rodger Malcolm Mitchell


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