Monday, November 18, 2013

"Secular Stagnation"

The economics world is abuzz about a speech that former Treasury Secretary Larry Summers gave at an IMF Research Conference on November 8.

While I don't typically recommend talks by economists, this one might be worth a view.

Summers points out that real GDP growth has been essentially stagnant for the past few years, and unemployment remains unacceptably high, despite massive monetary stimulus attempts by the Federal Reserve.

Could it be, Summers asked, that the U.S. is mired in a period of "secular stagnation"?

Moreover, while he acknowledges that the Fed's actions staved off economic disaster in 2008, what tools would be available if another crisis were to arise?

Here's Paul Krugman writing in this morning's New York Times:

Mr. Summers began with a point that should be obvious but is often missed: The financial crisis that started the Great Recession is now far behind us. Indeed, by most measures it ended more than four years ago. Yet our economy remains depressed. 

He then made a related point: Before the crisis we had a huge housing and debt bubble. Yet even with this huge bubble boosting spending, the overall economy was only so-so — the job market was O.K. but not great, and the boom was never powerful enough to produce significant inflationary pressure. 

Mr. Summers went on to draw a remarkable moral: We have, he suggested, an economy whose normal condition is one of inadequate demand — of at least mild depression — and which only gets anywhere close to full employment when it is being buoyed by bubbles. 

I’d weigh in with some further evidence. Look at household debt relative to income. That ratio was roughly stable from 1960 to 1985, but rose rapidly and inexorably from 1985 to 2007, when crisis struck. Yet even with households going ever deeper into debt, the economy’s performance over the period as a whole was mediocre at best, and demand showed no sign of running ahead of supply. Looking forward, we obviously can’t go back to the days of ever-rising debt. Yet that means weaker consumer demand — and without that demand, how are we supposed to return to full employment? 

In other words, what if there are secular causes behind our current period of economic stagnation that government policies can do very little to address?

There's lots to ponder from this short talk.

For investors, however, one possible conclusion might be that the widely-held assumption that interest rates and inflation are inevitably around the corner might not be as obvious as most assume.