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W ilhelm R öpke and R ichard C . K oo On Secondary Deflations and Balance Sheet Recessions
Author(s) -
Olsen Andreas Hardhaug
Publication year - 2015
Publication title -
economic affairs
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.24
H-Index - 18
eISSN - 1468-0270
pISSN - 0265-0665
DOI - 10.1111/ecaf.12120
Subject(s) - deflation , keynesian economics , recession , economics , balance sheet , boom , debt , monetary economics , inflation (cosmology) , business cycle , asset (computer security) , monetary policy , macroeconomics , finance , engineering , physics , computer science , computer security , environmental engineering , theoretical physics
The concept of a ‘secondary deflation’ was developed in the 1930s by the G erman economist W ilhelm R öpke, who saw it as something different from a normal depression. While a primary deflation is a necessary reaction to the inflation from a boom period, a secondary deflation is independent and economically purposeless. Röpke argued that secondary depressions occurred in the US , G ermany, F rance and S witzerland during the 1930s, but was vague on what made them follow primary depressions. Recently, the Taiwanese–American economist R ichard C . K oo has claimed to have discovered the ‘ H oly G rail of macroeconomics’, that is, what made the G reat D epression so deep and long. During the G reat D epression, the bursting of the asset price bubble resulted in private sectors having more debt than assets; as they shifted from maximising profits to minimising debt, the consequent debt deflation shrank the economy. According to K oo, Western economies today are suffering from a similar ‘balance sheet recession’. Strengthened by the notion of a balance sheet recession, R öpke's long‐lost insights might advance our understanding of the business cycle in general and the present crisis in the US and the E urozone in particular.