An interview with Richard Koo: The Escape from Balance Sheet Recession and the QE Trap

For years the Western world mocked Japan’s attempts to recover from its spectacular debt-fuelled boom and bust, blaming the Bank of Japan for doing far too little and far too late, and lamenting Japanese fiscal stimulus as extreme recklessness, where the only achievement has been to propel Japan’s debt levels into the stratosphere.

Now, seven years after much of the developed world’s own debt fuelled bubbles went pop, some people (us included) are starting to wonder if Japan’s post bubble experience was actually a good outcome, relative to today’s exceptionally dark prognosis for not just the Eurozone but other economic blocs too.

Richard Koo is developing a cult following as someone who has long seen the parallels between the Japan of the 1990s and where we are today. With theories rooted in Keynesianism, he has consistently argued that Japan’s lost decade and the 1930s Great Depression came about because of ‘balance sheet recessions’, where the private sector’s determination to delever in the aftermath of a debt-fuelled bubble means households and/or companies can’t be encouraged to borrow and spend at any level of interest rate. Instead, the private sector’s desperation to save means that it is up to the government to step in to prevent the downward spiral of debt deflation.

Richard’s very accessible recent book, Escape from Balance Sheet Recession and the QE Trap, provides a broad update on his previous work, applying his theories to the problems faced today in Japan, the US, Europe and China. We discuss aspects of this in the brief interview below.


We have 10 copies of Richard’s book to give away in our competition.

Question: In 1937, US President Franklin D Roosevelt reacted to an improvement in the US economy by aggressively cutting back the budget deficit, which arguably caused a 30% slump in industrial production, a surge in unemployment, and a 50% crash in equities that saw the Dow Jones return to 1933 levels. Sixty years later, encouraged by the IMF and OECD among others (and despite Richard’s warnings at the time!), Japan repeated the same mistake, which had similar consequences – Japan’s economy contracted an unprecedented 5 quarters in a row as reported at the time, helping to trigger a banking crisis (although other events in Asia in 1997 undoubtedly greatly exacerbated the damage). Who was the Japanese prime minister at the time?

Please email your answer to

This competition is now closed.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Mike Riddell

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