Secular stagnation: Why is stagnation bubbly?

Posted: January 6, 2014 in economy
Tags: , ,

LAST weekend crowds of economists gathered in frigid Philadelphia for the annual meetings of the American Economic Association. Among the highlights of the conference was a panel discussion on the consequences of austerity featuring a few policy heavyweights, including Larry Summers. Mr Summers reprised and extended the comments he made at an IMF gathering last year on the subject of “secular stagnation”. The room was packed, no doubt to hear more about Mr Summers’ diagnosis. (You can get a flavour of the remarks from a new op-ed in the Financial Times.)The basic set-up of his narrative remained unchanged from last year. Imagine a world, he said, in which resources are increasingly concentrated in the hands of those with high propensities to save and low propensities to invest: reserve accumulating foreign governments, for example, and the very rich. In that world, the real rate of interest that clears the market—that balances savings and investment and therefore ensures that no willing workers are left unemployed—could fall to and remain at very low levels.It could fall to such a low level that the central bank would need to keep its policy rate near zero to clear the market; with interest rates near zero, asset prices would soar, such that a full-employment equilibrium inevitably meant a dangerous rise in financial instability. Alternatively, the market-clearing interest …

via Economic Crisis http://www.economist.com/blogs/freeexchange/2014/01/secular-stagnation?fsrc=rss

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