The new economic black: Secular stagnation // Must read

Dear All,

 

(Hat-tip Jesper)

 

This is becoming the new "craze" – explaining nothing, but claiming someone else is at fault..

 

Do like the fact/conclusion that :  1870s-1970s Gold standard limited policy action through simplification…, now its argued inflation targeting is doing same thing…from 1970s to ??? 2070???

 

What do however upset me is that the HARVARD crowd is now blaming everyone else for the misery. Summers is the worst thing that ever happened to US politics and economics – he is clearly smart guy, but applying himself wrongly – the interventionist policy continued under another Harvard alumni – Obama – clearly have failed. Now the blame game has started, the timing perfect – this week dis-approval of Summers Master Obama turns negative for the first time. Obama have always ridden high on personal approval now his is disapproved of. Historically when a President rating turns negative his term is over………( http://www.huffingtonpost.com/2013/11/15/obama-approval-rating-201_n_4284396.html)

 

The solution is not MORE of anything, but significant less of him and other macro "none-thinkers" –

 

The solution:

 

·         Reestablish the price discovery of money (by stopping QE),

·         Focus on SME's through accepting the supply side of the economy is the ONLY solution to the situation created

·         Put the individual back in in charge of their own life (This generation is the biggest "entitlement generation ever). We have spent the years since we won the Cold War repeating the mistakes of Sovietunion – more and more planned economies, less connection btw voters and most importantly we have ZERO accountability of the policy makers – as seen by Summers "newest" contribution.

 

Sad Monday….

 

Steen

 

http://www.economist.com/blogs/freeexchange/2013/11/secular-stagnation-0?fsrc=rss

Secular stagnation
The solution that cannot be named
Nov 18th 2013, 7:18 by R.A. | LONDON

EARLIER this month the IMF held a research conference in honour of Stanley Fischer. It featured a murderer's row of macroeconomic stars as speakers including, to round out the event, one Larry Summers. The video of Mr Summers' talk is now publicly available and is being heralded, with some justification, as an important and incisive piece of analysis. It also perfectly and maddeningly encapsulates the problem at the heart of the rich world's economic debate—and its economy, for that matter.

Mr Summers argument is short and sweet. The rich world risks following the path blazed by Japan in the 1990s. That is not a place we should want to go, Mr Summers reminds us. He recounts an exercise conducted in the early days of the Clinton administration, when the president's economic advisers assembled a series of long-run economic forecasts. "Japan's real GDP today is about half what we believed it would be at the time," Mr Summers somberly intones.

To diagnose the malady leading the rich world down this road, he highlights two observations. First, he points out, the expansion prior to the crisis was a strange one. Borrowing and asset prices soared, he notes, but by most key measures—capacity utilisation, unemployment, and inflation—the economy was not bumping up against its potential. "Even a great bubble wasn't enough to produce any excess in aggregate demand," Mr Summers says.

And second, more than four years after the end of the downturn real output isn't anywhere close to regaining its pre-crisis trend. On the contrary, it has fallen farther behind that trend. There has been no recovery in the share of population working. And there is little sign that central banks will be willing or able to raise short-term interest rates meaningfully above zero any time in the next few years.

The way to explain these dyamics, he suggests, is to imagine that the real, natural rate of interest is negative. And so at prevailing rates of inflation there is no way to get short-run nominal interest rates low enough to generate the sort of strong recovery that used to be common after deep recessions. What's more, he says, this state of affairs may persist for quite a long time. And that means that the crisis is not over. Monetary policy is only going to get tighter. Fiscal policy will probably get tighter and almost certainly won't be appreciably looser. Mr Summers closes by saying:

We may well need, in the years ahead, to think about how we manage an economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activity, holding our economies back, below their potential.

I think it's important and welcome for someone of Mr Summers' stature to point out how serious a problem the zero lower bound is and to note that it is not going away any time soon. But this discussion sorely needs a dose of real talk, and soon. Or nominal talk, I should say.

Just why the real natural rate of interest is so low is an interesting question. Maybe it's down to a global savings glut, spurred by emerging-market reserve accumulation and exchange-rate management. Maybe it is a transitory symptom of widespread deleveraging. Maybe its roots are more structural in nature: a product of demographic or technological trends. I have my own suspicions, but the important thing to point out is that for the purpose of this discussion and this crisis it doesn't matter. 

The zero lower bound is a nominal problem. However low the real interest rate, an economy can keep nominal rates safely in positive territory by running a sufficiently high rate of inflation. Back in August, another eminent economist, Robert Hall of Stanford University, contributed a paper on the zero lower bound to the Kansas City Fed's Jackon Hole conference, in which he estimated that the market-clearing real rate of interest is -4%. Now again, just why the real, natural rate of interest is currently -4% is an interesting question, but it's irrelevant to the challenge of closing the output gap. All that matters there is that expected inflation is between 1% and 2% instead of near 4%. That's the problem; that's what's keeping tens of millions of people out of work and hundreds of millions languishing in a perpetually weak economy: a couple of percentage points of inflation.

And central banks are entirely to blame for that.

Mr Summers notes that excess or even adequate aggregate demand was never a problem in the pre-crisis expansion. That was by design. In 2004 core inflation in America finally ticked above 2% after two years of near-deflation worries. The Federal Reserve wasted no time at all jacking up the federal funds rate. As the 2000s progressed core inflation stayed well behaved despite soaring commodity prices, but the Fed kept on hiking; it didn't reverse course until the financial crisis had begun. For that matter, the deflation scare of the early 2000s might not have been a problem in the first place if Alan Greenspan had not ignored the signals being sent by his beloved price index for personal consumption expenditures. Core PCE was well in hand in the late 1990s, but Mr Greenspan raised rates anyway. Here is your age of bubbles and secular stagnation:

The rich world's biggest macroeconomic problem at the moment is a nominal problem and it is within central banks' power to fix it.

Now some will argue that because of the zero lower bound central banks lack sufficient policy traction to raise inflation. I don't believe that. Over the course of the recovery the Fed, for example, has become alarmed by falling inflation expectations on several occasions, and when it subsequently took action inflation expectations rose. That they have never risen much above 2% at any point in the recovery can probably be attributed to pretty clear signals from the Fed that higher inflation would not be welcome. Signals like: adopting an official 2% inflation target, and setting short-run inflation expectations of 2.5% as an upper bound on what is consistent with the Fed keeping its policy rate near zero. At no point has the Fed done what its own chair reckoned Japan needed to do, at a minimum, to escape its own doldrums: set an inflation target of 3% or 4%.

There are many aspects of macroeconomics that are extraordinarily tricky, but this is not one of them. Central banks' current inflation goals are inconsistent with a real recovery or a sustained exit from the zero lower bound. They should raise them and try to increase expectations of inflation.

Why isn't this option on the table? Maybe it is; there are signs (like this paper by Fed economists, presented at the IMF conference) that some central banks are at least considering ways to court temporarily higher inflation. But even the most radical policy shifts being entertained are probably too timid to prevent a zero-lower-bound relapse during the next contraction. And there is no sign of imminent adoption of even those too-timid radical options. And even when famous straight-shooters like Mr Summers are given a platform from which to shoot straight they all too often decline to argue for more inflation. Perhaps because that's not the sort of thing this generation of economists does.

This is a generation, after all, that came of age during the 1970s. It is a generation, I would wager, that considers the whipping of inflation to be the most important and laudable shift in macroeconomic policy of their professional lives: a significant intellectual and practical achievement. Whatever else is happening in an economy, low and stable inflation cannot be questioned as an end or put at risk.

I keep coming back to this paper by Barry Eichengreen and Peter Temin, on the mentality of the gold standard:

The mentalité of the gold standard had developed during the long boom of the late 19th and early 20th centuries. It survived the shock of World War I and promised a safe haven for ships of state buffeted by stormy social, political and economic seas. Its anchor, however, proved a millstone around their necks...

Its rhetoric dominated discussion of public policy in the years before the Great Depression, and it sustained central bankers and political leaders as they imposed ever greater costs on ordinary people. The mentalité of the gold standard proved resistant to change even under the most pressing of economic circumstances...Basil Blackett observed in 1932, "...the gold standard has become a religion for some of the Boards of Central Banks...believed in with an emotional fervour which makes them incapable of an unprejudiced and objective examination of possible alternatives."

Countries only began the struggle to restore prosperity under new leadership, that of individuals who had not been party to the rhetoric of the gold standard in previous lives.

The belief in the critical importance of low and stable inflation is more flexible than the gold standard was, and it is born of a better understanding of the workings of the macroeconomy. But it is a binding constraint on recovery and prosperity all the same. And the unwillingness to question its continued utility in the face of evidence that it is doing real harm looks all too similar to the intellectual fetters that led central bankers to persist in foolish policy in the early 1930s.

Best regards

Jesper Christiansen

Danica Pension
Investments
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