Debt Overhang

Keep an eye out for Krugman's coming multi-book review:

There’s a lot to like in Koo’s idea of balance-sheet recessions -- how an overhang of corporate debt held down Japan’s economy, how an overhang of household debt is doing the same to America. And Koo is unique -- which is a good thing -- in arguing both that protracted deficits are sometimes desirable, and that Japan is actually a success story in the sense that its deficits made it possible to repair corporate balance sheets without a Great-Depression-level slump.

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And I don’t understand at all his argument that monetary expansion is positively harmful. He seems to be making up arguments on the fly here; he’s so determined to defend the primacy of fiscal policy that he has to insist that anything else is a very bad thing. (In that sense, I guess, he’s the anti-Scott Sumner).

Oh, and finally, surely some inflation would help by reducing the real debt overhang; that’s arguably an important part of the reason World War II put a final period on the Great Depression.

Bernanke, Paulson and Geithner (and then Obama) - in tandem with foreign governments - were successful in preventing another depression also. So maybe humanity has learned a bit.