In which the Japanese economist tables the idea of the “balance sheet recession” — which happens when the indebted focus on paying down debt.

The argument runs like this: If price levels fall, the real value of debt will rise. If many people are highly indebted, they will stop spending and pay down their debt. Meanwhile the economy falls into a vicious downward spiral.

Koo argues that is what happens after the implosion of a debt-fuelled asset-price bubble such as we experienced in 2008. People suffer a “debt trauma”, which discourages people from borrowing for years.

Quantitative easing makes matters worse, he says, rather than better. Better to risk  prolonged fiscal deficits.

Finally, Koo argues that the policy of QE has been mistaken in the US and the eurozone because of inadequate (in the US) or no (the eurozone) understanding of balance-sheet recessions. Not everyone agrees.

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