This is just scary. This video illustrates everything that is wrong with the world economy and is a microcosm of exactly why we are in the situation we are in.
It’s incredible. It really shows how incredibly smart people could come up with such insane explanations and recommendations…you have to be that smart to come up with something so ridiculous. (I went into this here).
There is quite a bit to debunk there, and I don’t really feel like going through all of it, but basically the whole notion of “balance sheet recession” is just nonsense. It’s something created in the minds of whiz-kid economists so that they can make their failed models fit with reality. That’s how it works. They make a model to describe how the world works, then the world in reality plays out drastically different than the model says it should (or could), and the geniuses use their smarts to come up with very clever explanations as to how they weren’t wrong. It’s usually either one of two things: (a) they reframe the data (or their previous conjectures about the economy) such that they get to say “See? Things played out exactly like I would have expected”…even when it’s the exact opposite of that.
Paul Krugman could teach an entire course on this. See here for a perfect example. (And of course you can catch a whole series of these at Bob Murphy’s site, as well as Bill Anderson’s blog, devoted entirely to Krugman’s nonsense. For specific “Krugman Kontradictions” as Murphy calls them, see Krugman’s article at the Mises Wiki).
That’s one way they deal with being empirically wrong. The other way is (b), just a simple “oh…we weren’t wrong. Our models are right. It’s just that this situation is different.” As you can see, this is the technique used by Koo.
There has been plenty of writing on the case of Japan. For an excellent (and very extensive) look into the reality of Japan’s “lost decades” see here:
The Myth of Japan’s Lost Decades
Other writings:
The Rise and Fall of the Japanese Miracle
Japan’s Bust: An Austrian Critique of the Fed’s Explanation
The Japanese Currency Intervention
But without getting too far into it, notice how Koo always starts an explanation or a hypothetical with the problem already occurring. For example, at 3:24 he rhetorically asks “why did it happen?” And goes on to give his answer. He admits that it wasn’t that everyone just went all berserk. He says “during the bubble days, they borrowed tons of money to invest in all sorts of assets, thinking that they’re going to make more money. [The] asset price bubble collapsed, liabilities remained…so they realized ‘we have more debt than what you can show on the asset side’…”
Uh. Great. So, where did this bubble come from? Where did they get all the money to bid up all these assets to these insane artificial levels? How was it possible for everyone to be paying such high prices, enough to shove them even higher and higher, to a point at which a bubble is inflated? And why did it pop? Why did asset prices drop all of a sudden?
He doesn’t explain any of this. He doesn’t even venture to begin to ask these questions. He just starts the story in the middle (or, really, at the end) by basically saying “oh yeah these people bought this stuff, and it was a bubble. Then the bubble burst and they all of a sudden were upside down, with liabilities far outpacing their assets.” And then he just goes on to extrapolate his theory from there. The problem with this is, if you start with a faulty foundation, all further explications are faulty.
So why does he start in the middle? Why doesn’t he explain those fundamental issues of how the bubble came about in the first place and how and why it popped? Basically it’s two reasons. 1) He can’t answer those questions. And people who are trying to put forth the presumption that they know everything don’t usually ask themselves questions they don’t have answers to. And 2), those questions aren’t necessary (or even relevant, evidently) to his theory. His explanation works without them. (In fact, that’s why it works…that’s the only way it can work is if he ignores those fundamental points.) So why should be bother with them?
For his explanation (and prescription) to work, he can’t ask (and therefore doesn’t need) those questions or their answers. It’s kind of like looking at a burning city, and saying “see, you had this burning building, and it was so close to this other building, that that building caught fire too…and the flames just spread throughout the area, until it engulfed the whole block. And then, you see, the weather had been very dry, and it was very windy that day, so the wind actually helped to shove the flames outside the block and beyond. That tire yard and carpet warehouse were actually quite conducive to feeding the flames, so they only made things worse. There was so much on fire, and the flames were so big, no amount of water could do much to quell them…etc. etc.”
Well, that’s great…but…why was there a building on fire in the first place?? And why didn’t it get put out earlier, when the flames were small enough that water could quell them?
“Quiet son, I’m explaining how the city burned down. If you’re patient I’ll explain how to use various technologies to guide the fire in safer directions in the future…”
You get the idea.
So again, for the reality of Japan, see the links above. For our crisis, you can see here.