Much of today’s discussion at this “no-media” event in San Francisco centred around what, if anything, the United States can learn from the Japanese “lost decade” after that country’s economy crashed in the 1990’s.

The world’s foremost authority on that topic is probably Richard Koo, the author of The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession.   Koo is an engaging speaker who has the ear of economic leaders around the world.  His thesis is that in a “balance sheet” recession, private sector balance sheets take a bath and the private sector starts to save.  This, coupled with slower growth, leaves a hole in GDP you could drive a Mitsubishi truck through. The solution, says Koo, is to shore up lost GDP with government spending.  While it sounds like basic Keynesian economics, Koo’s take is that debt is better diverted from private sector balance sheets to public sector ones where its existence won’t necessarily lead to pulling in the spending reigns.  Once the private sector balance sheets are cleaned up, Koo argues that governments can dispose of their debt in a more orderly fashion.

But wait, won’t ballooning government spending lead to inflation?  Not so, says Koo.  He points to Japan’s low inflation rate – achieved in the midst of one of the world’s worst debt to GDP ratios. More…