book

Pursued Economy

Name: Pursued Economy
Author: Richard C. Koo
ISBN: 9781119984276

by Richard C. Koo

August 2022

Intermediate to advanced

512 pages

14h 37m

English

Wiley

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Cover
Title Page
Copyright
Dedication
Preface
About the Author
CHAPTER 1: Introduction to the Other Half of Macroeconomics
Basic Macroeconomics: One Person's Expenditure Is Another's IncomeThe Importance of Financial IntermediationThe Role of Fiscal and Monetary PolicyTwo Reasons for the Disappearance of BorrowersMechanism of Deflationary SpiralsThe Paradox of Thrift as Fallacy-of-Composition ProblemThe Importance of Borrowing for Economic GrowthNo Follow-Through on Keynes's Insights after World War IIBorrowers Disappeared When Faced with Solvency ConstraintEconomists Never Considered Recession Driven by Debt MinimizationThe Scale of the Deleveraging ProblemThe Economics Profession Failed to Consider Deleveraging EconomiesNo Name for Recession Driven by Debt MinimizationThe Paradox of Thrift Was the Norm before the Industrial RevolutionFour Possible States of Borrowers and LendersA Shortage of Lenders Has Well-Known RemediesThe Absence of Borrowers and the “Other Half” of MacroeconomicsFixation with Profit-Maximization Assumption Prevented Full BreakthroughNotes
CHAPTER 2: Balance Sheet Problems Create a Shortage of Borrowers
Japan in Balance Sheet RecessionVisualizing Balance Sheet Recessions in the WestThe First Casualty of Disappearing Borrowers: Monetary PolicyThe Great Depression as Balance Sheet RecessionSame Decoupling of Monetary Aggregates Seen in Post-1990 JapanLender of Last Resort Needed in Case 4Government Must Act as Borrower of Last Resort in Cases 3 and 4In Case 3, Bond Market Invites Government to BorrowThe Self-Corrective Mechanism of Economies in Balance Sheet RecessionsG20 Reverses Course at 2010 Toronto SummitFour Central Banks' Track RecordsQE Did Not Accelerate Money Supply Growth in Japan, the United Kingdom, or EuropeFed Officials Did Not Pledge to Raise Inflation by Expanding Money SupplyBernanke Rescued the U.S. Economy with Policy that Clashed with His Teacher's ViewsOther Central Banks Supported Fiscal AusterityPeople in Real Economy Understand that QE Is MeaninglessMarket Participants Still Assume Economy Is in Case 1 or 2Fiscal Policy's Track RecordThe Difficulty of Measuring Fiscal Multiplier during Balance Sheet RecessionsTax Cuts or Government Spending?Oil Price Declines during Balance Sheet RecessionsThe Size of Balance Sheet Problems MattersDebt Trauma May Last a Long TimeFiscal Stimulus Must Be Maintained Despite Large Public DebtNotes
CHAPTER 3: Introduction to the Concept of Pursued Economy
Borrower Availability and the Three Stages of Economic DevelopmentStage I of Industrialization: The Urbanization PhaseGrowth Exacerbates Income Inequality in Pre-LTP Urbanization StageStage II of Industrialization: The Post-LTP Maturing EconomyExplosion of Borrowing for Capacity- and Productivity-Enhancing InvestmentsStage III of Industrialization: The Pursued EconomyJapan's Ascent Forced Changes in the WestInequality Worsens in the Pursued EraThree Stages of Japanese IndustrializationFree Trade Accelerated Globalization while Rendering War ObsoleteChina Now in Post-LTP Golden Era of IndustrializationThe Happiness of NationsInsufficient Attention to Trade Deficits and Loss of Manufacturing JobsConceptual Origins of “Post-Industrial Society” and Pursued PhaseThe Rise and Fall of CommunismLTP and Inclusive Social OrderThe Real Source of Thomas Piketty's InequalityNotes
CHAPTER 4: Macroeconomic Policy during the Three Stages of Economic Development
Labor's Progression during the Three Stages of Economic DevelopmentWorkers Are on Their Own in the Pursued PhaseConsumers' Progression during the Three Stages of Economic DevelopmentDifferent Inflationary Trends during the Three Stages of Economic DevelopmentThe Fall in Corporate Borrowings and Loss of Monetary Policy EffectivenessUltra-Low Interest Rates Became Entrenched in Japan for the Same ReasonThe Neutral Rate of Interest Also Depends on the Stage of Economic DevelopmentFiscal Policy Challenges in the Three Stages of Economic DevelopmentThe Danger of Using Multipliers and Elasticities from the Wrong EraFundamental Macro Policy Challenges Facing Pursued CountriesFundamental Solution to Fundamental ProblemNot a Job for the Private SectorIndependent Commission Needed to Select and Oversee ProjectsProblems with the Debt Limit ArgumentThe Debt Limit Argument Ignores the Fact that Debt Is the Flipside of SavingsThe Lack of Public Awareness of Excess SavingsThe Quality of Projects and Their Macroeconomic Context Are ImportantRepeating the Mistake of Communist Central PlannersPursued Economies Are Susceptible to BubblesCentral Banks Are Part of the Problem, Not Part of the SolutionMoney Invested in Existing Assets Stays in Financial MarketsPursued Economies Prone to Cycles of Bubbles and Balance Sheet RecessionsViolent Swings Do Not Help AnyoneGovernments Should Invest Actively until Structural Reforms Start to Bear Fruit“Financial Capitalism” and Pursued EconomiesWhen Waiting for Good Projects Is a Bad IdeaA List of Selected Projects Should Be Prepared for Future CrisesPolicy Makers Unable to Shake Off Memories of Golden AgeDefiance Helped Keep Japanese Pensioners from Losing EverythingIs a 2-Percent Inflation Target Appropriate for Pursued Economies?The Phillips Curve Is for the Golden EraRecovery in Private Investment Would Not Bring Back the Golden EraThe Proper Way to Run a Pursued Economy versus a Golden Era EconomyNotes

CHAPTER 5: Economic Growth and Challenges of Remaining an Advanced Country
Over-Stretching Is Required for Economic GrowthConsumer- and Business-Driven Economic GrowthPositive Fallacy-of-Composition during Golden EraTwo Strategies for Businesses to FollowProfit Motive and ProductivityProblems with the Concept and Measurement of ProductivityProfitability and Physical ProductivityHigher Productivity Does Not Necessarily Lead to Higher Wages in Pursued EconomiesWill Higher Minimum Wage Boost Productivity?Export-Driven Economic Growth Faces Fewer HurdlesImport-Substitution Model Seldom SustainableTransparency Is the Greatest Attraction of U.S. MarketThe Importance of Recognizing the Source of Over-StretchingThe Middle-Income Trap and Difficulty of Transitioning from Strategy B to Strategy ADemographics and Corporate Investment DecisionsDemographics as Endogenous to Economic DevelopmentThe Three-Pronged Reforms Needed for a Pursued Economy to Stay AheadHow the United States Answered Japan's ChallengeReaganomics and Learning How to Run FasterThe Need for Labor Market Flexibility in Pursued EconomiesSupply-Side Reforms Need Time to Produce ResultsThe Challenge of Finding and Encouraging InnovatorsThe Need for the Right Kind of EducationThe Increased Importance of Education in the Pursued EraThe Challenge of Keeping Students in SchoolThe High Price of Asian Educational AchievementThe Importance of a Proper Tax and Regulatory EnvironmentThe Importance of Interpreting Inequality Statistics CorrectlyBetter Distribution of Medical Care or More New Medicine?The Importance of Entrepreneurs in Over-StretchingThe Renewed Attraction of Socialism and Difficulty of Achieving Public ConsensusMaking Established Political Parties Relevant Again in the Pursued EraAdvanced Economies Are Fighting Two WarsA Case Study in Bad Taxation: Japan's Inheritance TaxTaiwan Slashed Inheritance Tax and Gift Tax Rates to 10 PercentThe Global Implications of Taiwanese Tax CutHow to Reorganize Society for the Pursued Phase Is an Open QuestionPreparing Emerging Economies for the FutureChina's Challenges: Decoupling, Demographics, and Middle-Income TrapDeng Xiaoping's Decisions Led to the Greatest Economic Growth in Human HistoryChinese U-Turn under XiThe Domestic Over-Stretching Required after DecouplingThe Economic Destiny of Human ProgressConclusionNotes
CHAPTER 6: Monetary Policy during the Pandemic and the Quantitative Easing (QE) Trap
Corporate Bond Yield Movements in Japan and Europe Also Relatively MildCapital Markets Have Shrugged Off Central Bank Financing of Fiscal DeficitsExchange Rates Have Also Held Steady Because Central Banks Acted TogetherInflation ReturnsThe Return of Fiscal Stimuli after 50 YearsThe Energy Sector Will Not Return to Pre-2020 WorldSDG Concerns May Return Economies to Case 1Normalizing Post-Pandemic Monetary Policy Will Be ChallengingThe Need for a Shock AbsorberThe Fed Is More Concerned about Real Estate than EquitiesThe First Attempt at NormalizationQE Trap: Tug-of-War between Monetary Authorities and MarketsFirst Iteration of QE TrapGlobal QE TrapThe Difficulty of Normalizing the Central Bank Balance SheetThe Fed Tackled the QE Exit Problem Head-OnNo Theoretical Consensus on How to Wind Down QESymmetric Inflation Targets Are Both Ineffective and DangerousPost-2022 QT Clearly Framed as Inflation-Fighting Tool“We Are All Japanese Now”Bubbles Create Both Financial and Macroeconomic Problems When They BurstFinancial Crises Can Be Contained in about Two Years If Properly AddressedRecovery from Balance Sheet Recessions Takes Far Longer than Two YearsCalling the Post-2008 Economic Downturn the GFC Was a MistakeThe ECB's Policy Review Was Far from AdequateLarge and Expensive Rate Hikes Are Required to Contain InflationThe Total Cost of QE May Outweigh BenefitsThe Fallacy of Helicopter Money ArgumentFour Versions of Helicopter Money (1): Dropping Money from the SkyFour Versions of Helicopter Money (2): Direct Financing of Government DeficitsFour Versions of Helicopter Money (3): Direct Cash Handouts to ConsumersFour Versions of Helicopter Money (4): Government Scrip and Perpetual Zero-Coupon BondsHuge Exit Problems for Zero-Coupon Perpetuals and Government ScripMMT Steps into the Spotlight Ahead of the 2020 U.S. ElectionMMT Expectations versus RealityLarger Fiscal Deficits Do Not Require MMT When Private Demand for Borrowing Is WeakChange in Private-Sector Borrowing Should Be a Key Metric for Judging Effectiveness of Monetary PolicyThe Shape and Form of the QE Trap Depends on Actions of Other Central BanksWill Borrowing during the Pandemic Help Relieve Debt Trauma?Neither Monetary nor Fiscal Stimulus Comes CheapNotes
CHAPTER 7: Europe Is Repeating Mistakes of the 1930s
The Failure of Economics in the 1930s and the Rise of National SocialismHistory Is Repeating Itself since the Global Financial Crisis (GFC) in 2008Germany's Balance Sheet Recession Preceded Others by Eight YearsDefective SGP Invites Extreme-Right Political PartiesPredictions of Eurozone Crisis Are IgnoredPolicy Makers Need to Ask Why Eurosceptics Made Such GainsNo Official Recognition of the DiseaseThe SGP Should Have Forced Countries in Case 3 to Use Fiscal StimulusGermans, Who Suffered Most after 1929, Have Ironically Made Others Suffer since 2008European Recovery Is Led by Internal DeflationCOVID-19 Exposes Defects in Eurozone Structures AgainThe Euro's Institutional DefectCapital Flight Is at the Core of Eurozone ProblemsMarket-Based Fiscal Discipline Created a Backlash against EuroFiscal Dis-Union Is Needed to Make Monetary Union WorkFiscal Dis-Union Will also Normalize Monetary PolicyDifferentiated Risk Weights as an Alternative to Fiscal Dis-UnionRecycling Peripheral Savings Back to Peripheral CountriesMisplaced Fear of “Diabolical” Feedback LoopMaking Monetary Union Work without Fiscal UnionThe German Model Is Not for EveryoneThree Problems with Milton Friedman's Call for Free MarketsNotes
CHAPTER 8: Money and Banking in the Other Half of Macroeconomics
Two Banking System ExternalitiesAre Eurozone Banking Problems Still Unresolved?Two Eurozone Misunderstandings Regarding Japanese and U.S. Banking ProblemsJapanese Banks Began Writing Off Bad Loans Early OnWhy NPLs Did Not Decline Even as Provisions RoseThe Real Cause of Japan's Slump Can Be Traced to Borrowers, Not LendersU.S. Rescue of Commercial Real Estate Went against Market Principles but Led to RecoveryVolcker's “Pretend and Extend” Saved the World during Latin the American Debt CrisisEurozone Fails to Distinguish between Ordinary and Systemic Banking CrisesVisualizing the Eurozone Credit CrunchThe Right Way to Inject CapitalGhosts of American Asset Strippers Are Killing European Banks“Too Big to Fail” Had Little to Do with GFCRemembering Volcker's Actions in 1982Obsession with Too-Big-to-Fail May Constrain Future Policy ActionsAre Reserve Requirements and Money Multipliers Obsolete?Individually, Banks Are Financial Intermediaries, but Collectively, They Are Money CreatorsThe Variability of the Money Multiplier and Its Policy ImplicationsHow the Money Supply Lost Its Role as Leading Indicator of Economic ActivityData Is Needed on “Operating Loans” as Distinct from “Financing Loans”Money Creation Does Not Mean Wealth CreationNotes
CHAPTER 9: Backlash against Globalization and Conflict between Free Trade and Free Capital Flows
Backlash against Globalization in Pursued CountriesMistakes in Textbook Economics' View of Trade Triggered Social BacklashFree Trade Theory Is Incompletely TaughtImportance of Trade and Current Account BalancesDisappearance of Trade-Balancing MechanismFree Capital Flows Ended Exchange Rates' Ability to Rectify Trade ImbalancesInfluence of Trade and Capital Flows on Foreign Exchange MarketEconomics Profession Allowed Trade Imbalances to ContinueTrade Imbalance Is Not Decided by Investment/Savings (I/S) BalanceI/S Balance Theory Cannot Explain What Happened to the U.S. EconomyIndividual Savings Result in Collective Dis-SavingLong-Term Structural Impact of Exchange RatesIrreversibility of Factory Relocation in Medium TermExport “Push” Is Often More Important than Import “Pull”Open Capital Markets Are a Relatively New PhenomenonCapital Flows Distort Trade FlowsEfficiency Gains from Capital Flows?Capital Flows Are Undermining Effectiveness of Monetary PolicyNational Policy Objectives Are Inconsistent with Free Capital FlowsMany Different Countries, One Financial MarketFinancial Types Have No Choice EitherA New Realization in Foreign Exchange Market?Converse of Optimal Currency Theory Is NeededThe Case for Government Intervention in Foreign Exchange MarketCan Governments Escape from Policy Trilemma?Trilemma's Implicit Assumption Is Not Consistent with Foreign Exchange Market RealityTrilemma Is Irrelevant When Desired Exchange Rates Help Rectify ImbalancesDetermining Trade-Equilibrating Exchange Rate Is No Easy TaskCentral Bank Intervention Is Effective If It Sides with Trade-Driven FlowsThe “Asian Plaza Accord” and the Responsibility of Surplus Countries to Sustain Free TradeSurplus Countries Opening Markets Is Preferable to Currency AppreciationAdjustments to Exchange Rates Can Lead to Capital Flight“Paying Back Our Fathers' Debt”Two Types of “Equalizing” Capital Flows and the Quality of InvestorsChilean Solution to Deter Uninformed InvestorsConsider Organizing National Teams before Plunging into ProtectionismTime to Rethink Capital Market LiberalizationThe Most Realistic SolutionNotes
CHAPTER 10: Rethinking Economics
Rethinking MacroeconomicsStructural or Balance Sheet Problems?Structural Reforms Require a Correct NarrativeSummers's Secular Stagnation ThesisBeware of Fake “External Shocks”Beware of Fake Allusions to “Expectations”Where the Analysis Begins Is ImportantConventional Models Have Trouble Dealing with Abrupt ReversalsObsession with Mathematics Is Killing Macroeconomics' CredibilityPower of Plain Language in EconomicsEconomists Should Learn from Medical Science, Not PhysicsEconomics Has No Meaningful Theory of GrowthAn Existential Issue for Economics ProfessionEconomics: A History of Changing FadsBetter Data Are NeededPolitical Implications of Dysfunctional EconomicsDifficulty of Maintaining Fiscal Stimulus in Peacetime DemocraciesDanger Posed by the Half-EducatedSummary of Appropriate Policy Mix in Different Stages of Economic DevelopmentConclusionsNotes
References and Bibliography
Afterword
Note
Index
End User License Agreement

Content preview from Pursued Economy

CHAPTER 3Introduction to the Concept of Pursued Economy

When borrowers disappear because of an absence of attractive investment opportunities, which was also the cause of the centuries of economic stagnation that preceded the Industrial Revolution, a very different mindset is needed to address the problem. This is because the reasons for this problem vary depending on the stage of economic development, and each requires a different policy response.

Today's developed economies all started out as agrarian societies, and the centuries-long paradox of thrift only ended with the arrival of the Industrial Revolution. The invention of new products and the machines needed to manufacture them produced a huge number of investment opportunities for the first time in history. Private-sector businesses that would not borrow money unless they were certain they could pay it back found numerous promising projects and started borrowing. The financial sector also developed to meet the newfound demand for funds. This process continued as long as there were debt-financed projects sound enough to pay for themselves.

Thus began a virtuous cycle in which investment created more jobs and income, which, in turn, created more savings to finance additional investment. Unlike the government investments in earlier centuries that eventually ran into financing difficulties, private-sector investments could sustain themselves as long as attractive new products were continuously brought to market. With new ...

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Pursued Economy

by Richard C. Koo

CHAPTER 3Introduction to the Concept of Pursued Economy

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