Richard Koo identifies the phenomenon of ‘balance sheet recession’. When lending goes into existing assets, rather than into the productive economy, the resulting asset price bubble bursts, leaving households and firms paying down debt. Monetary policy is rendered ineffective, because no-one wants to borrow money, even at very low interest rates. Investment goes overseas to low cost competitor economies. Koo concludes that only debt-funded fiscal policy can stimulate advanced so-called ‘pursued’ economies suffering balance sheet recession.

This core argument is repeated very frequently, making the book too long. It neglects wider critiques of monetary policy, including the lagged effect of interest rates on demand where people hold fixed rate mortgages, its ineffectiveness against imported exogenous inflation, the counterproductive inflationary interest rate increase in business costs etc. Koo is orthodox and pre-Keynesian, appealing to loanable funds and fractional reserve theories of bank lending, and claiming that savings generate investment, equalised by the interest rate. More controversially, he is dismissive of QE, MMT, ‘helicopter money’, perpetual zero-coupon bonds, negative interest rates, mathematical models, Keynes, Friedman, IMF, and OECD! In claiming that commercial banks don’t create money, Koo is simply wrong.

On QE, he writes that funds remain ‘stuck in the financial sector’ and had ‘no place to go except into existing assets’. Lower interest rates were ineffective due to Koo’s ‘balance sheet recession’. The costs of central banks paying variable rate interest on QE reserves is huge, amounting to $110bn/year in the US, and £20bn/year in the UK. The loss on selling bonds at lower prices in QT is also huge, estimated at >£100bn in the UK. The US Federal Reserve mitigates this loss by offsetting its seigniorage from future money creation.

Politically, Koo opposes austerity and the ‘balanced budget obsession’. Other more ‘conservative’ proposals are for deregulation, tax cuts, labour market flexibility, education, entrepreneurship, increased return on capital, reduced inheritance and gift tax, retaining historic architecture, and hard work and study. He concludes that ‘conservatives will have to drop their insistence on balanced budgets; progressives will have to abandon their focus on organised labour’.

Koo admits that QE is ‘de facto bank financing of budget deficits’ (p231), avoiding devaluation because ‘all central banks are doing the same thing’ (p232). However, he writes ‘How to unwind trillions of dollars of QE without sending bond yields or exchange rates to punitive levels is therefore the single most important challenge monetary authorities in the West and Japan face today’ (p271). He fails to consider that central bank purchase of its own government debt renders it zero net debt, hence potentially funding his proposal for fiscal stimulus. Direct money financing of government expenditure, which Koo resists, would avoid all the dysfunctionalities he lists of achieving the same result through QE via the bond market.

Koo’s key proposal is fiscal stimulus. The $5.5tn US QE performed better than in the UK or EU because of no US austerity, and huge fiscal stimulus, of $787bn by Obama, and $3.9tn by Biden. He is vague about the funding of fiscal stimulus, saying that projects should be self-financing, or debt funded, which is unproblematic because all debt is matched by saving elsewhere in the economy. This comes very close to the MMT proposal which Koo earlier derides, derived from Wynne Godley’s identity that private, government, and trade sector balances must add to zero. Even so, public sector debt remains hugely visible and concerning. Again, a direct money financing solution is superior.

On global trade Koo points out that hiking rates to combat inflation causes huge flows of hot money into the currency, overvaluing the currency, raising bond prices, reducing yields, and increasing the trade deficit. Whilst free trade generates mutual comparative advantage, free capital flows are destabilising if not matched by free flows of labour and goods. Koo challenges the ‘policy trilemma’ that only 2 policy goals of free capital flows, independent monetary policy, and a stable exchange rate can be simultaneously achieved. Surplus economies in Asia could jointly revalue the currencies, and/or open their economies to imports. Otherwise capital controls may be needed.

It’s curious that, after 30 years of advocacy, with endorsements from eminent economists and central bank governors, Koo’s idea has not been widely implemented. Monetary orthodoxy is very resistant to change. Or perhaps Koo is too single minded, failing to foster the creative debate needed.