Secular stagnation ‐ are we stuck in Summers' long winter?

Abstract

Stunningly low global long‐term bond yields provide some credence to a secular stagnation view of the world. We present an analytical framework – culminating in a simple scorecard – for assessing the extent to which purported drivers and manifestations of secular stagnation match global economic and financial developments and we compare with a complementary narrative focusing on balance sheet boom and bust. We find some support for each, but think global rates will not stay as low for as long as markets price in. Larry Summers has used the term to refer to a situation where demand and supply for savings deliver very low equilibrium real interest rates. The bulge in middle‐aged savers, falling prices of investment goods, and flows of savings ‘uphill’ from emerging markets may have all led to real rates trending much lower in recent decades. Another version of the story is that slow technical progress depresses demand for borrowing, and pushes down on real rates. This is less compelling, and based more on anecdote than anything else. There are as many reasons to be optimistic, as pessimistic, about the supply side. There are holes in the secular stagnation narrative. Until very recently, G7 savings rates have trended down rather than up, partly because of another decades‐long trend of financial innovation. Furthermore, few economists, nor the Fed or the BoE, expect policy rates in the US or UK to stay low for as long as is priced in to markets. A complementary narrative would stress the role of the credit‐fuelled mega‐boom and subsequent balance sheet blow out and Great Recession, and then the long road to financial repair. This is more consistent with the path of savings rates over recent decades, and the policy response – including QE – can explain much of the rest. We see the two explanations as complementary and reinforcing. In global terms, they appear no better or worse than each other. Comparing across countries, Japan comes closest to resembling secular stagnation, followed by EZ, US and UK, according to our scorecard. We think ultra‐low long rates will not be borne out by the future path of short rates, but acknowledge a significant risk they might, for example, if monetary policy remains too tight on average because of zero bound effects on interest rates and limited scope for fiscal accommodation.