Capital Based Macroeconomics: Boom and Bust in Japan and the U.S.

Some economists and the financial press believe that the U.S. in the 1990s and Japan in the 1980s experienced economic growth driven by a positive productivity shock. The economic growth was accompanied by growth of money and credit aggregates. Proponents of real business cycle considered the money growth benign, while adherents of the natural rate theory viewed it as beneficial because either the price level was stable or inflation rates were extremely low. A capital-based-macroeconomics shows how and why the accompanying growth of money and credit with or without declining interest rates was neither beneficial nor benign. Credit creation sets up the economy for a boom and eventual bust. In the case, first of Japan and then the U.S., the ‘boom’ was followed by a ‘bust’ in their respective asset markets and the real sectors of the economy.