Accepting the Reality of Secular Stagnation - Arts & Humanities Assignment Help

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Secular stagnation

With a somewhat different list of factors in mind, the Harvard economist Alvin Hansen labeled the failure of private investment to fully absorb private savings “secular stagnation” because of the threat that it would mean insufficient demand. There are a number of things we would expect to see if secular stagnation has been taking hold in recent years. First, a high supply of savings and a low level of demand should mean low interest rates. Indeed, real rates by almost any measure have been trending downward over the last 20 years, even as budget deficits have increased.

This is what we have seen with real-term interest rates negative in the industrial world despite major run-ups in government debt. Second, one would expect that difficulties in absorbing savings would lead to reduced growth and difficulty in achieving target inflation. This is what has been observed. At present markets do not expect any country in the industrial world to hit a 2 percent inflation target.

Despite unprecedentedly low interest rates and deficits at record levels after more than a decade of recovery, growth has been tepid. Notably—contrary to the views of those who explained low rates after the recession by pointing to “headwinds”—central banks have found it impossible to raise rates and still count on the momentum of recovery. Third, disappointing growth has coincided with inflation’s surprising again and again on the downside. Economists teach beginning students that reduced quantity and reduced price suggest a decline in demand. If, as many suggest, the dominant reason for stagnation is disappointing productivity performance, we would expect to see prices rise rather than fall. Absent extraordinary policy settings, deflation might be setting in.

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