Secondary Deflations & Balance Sheet Recessions

What is it about?

The concept of a ‘secondary deflation’ was developed in the 1930s by the German economist Wilhelm Röpke, 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 was vague on what made them follow primary depressions. Recently, the Taiwanese–American economist Richard C. Koo has claimed that what made the Great Depression so deep and long is private sectors had more debt than assets; as they shifted from maximising profits to minimising debt, the consequent debt deflation shrank the economy.

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Why is it important?

By connecting the idea of a secondary depression (Röpke) to Koo’s concept of a balance sheet recession we arrive at a more comprehensive theory of cycles that has room for both J. M. Keynes and the Austrian School. Such a synthesis can serve to explain not only how to combat economic crises like the one the Western world is facing now, but also how to avoid them.