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Paul Krugman, New York Times, November 16, 2013: Secular Stagnation, Coalmines, Bubbles, and Larry Summers
We haven't talked monetary policy in a while and hopefully Carlitos Bam Bam is still browsing this website for anything interesting. In the above article, Krugman cites a presentation by Larry Summers at the IMF Research Conference that he agrees with. First the basics:
Basically what Krugman and Summers are saying is that our current economy is driven by a monetary policy that is "de facto constrained" by the zero lower bound on interest rates...and that the natural rate of interest that balances desired savings and investment for full employment is negative. Nothing new here...saving hurts the economy and hurts investment. Worrying about debt and deficits only exasperates the recession...or depression.
Furthermore, he states that while spending is good, and productive spending is the best, spending on unproductive things is still better than no spending. And while that certainly applies to public spending, it also applies to the private sector...wholly or partially wasteful private sector spending is also beneficial to the economy unless it "stores up trouble for the future." He is specifically targeting corporations that are sitting on trillions of dollars in cash. Again there is nothing new here that many economists haven't already cited.
Now carry that kind of line of thinking into an analysis of the cyclic bubbles over the past 25 years. While some would argue that loose monetary policies and low interest rates encourage bubbles that will drive up inflation later, it simply has not happened. Quoting Krugman:
"So how can you reconcile repeated bubbles with an economy showing no sign of inflationary pressures? Summers’s answer is that we may be an economy that needs bubbles just to achieve something near full employment – that in the absence of bubbles the economy has a negative natural rate of interest. And this hasn’t just been true since the 2008 financial crisis; it has arguably been true, although perhaps with increasing severity, since the 1980s."
He further theorizes that without the successive bubbles, our economy would be stuck in a liquidity trap
, and that looking forward to the continuation of current monetary policy, one needs to thinking of the liquidity trap as "the new normal."
On the topic of secular stagflation, census projections indicate that the population of workers aged 18 to 64 will grow at a very slow annual rate of 0.2 percent between 2015 and 2025...and that translates into slower growth and lower investment demand.
Krugman further states that "in a liquidity trap saving may be a personal virtue, but it’s a social vice. And in an economy facing secular stagflation, this isn’t just a temporary state of affairs, it’s the norm."
He concludes with this statement: "If we’re going to have persistently negative real interest rates along with at least somewhat positive overall economic growth, the panic over public debt looks even more foolish than people like me have been saying: servicing the debt in the sense of stabilizing the ratio of debt to GDP has no cost, in fact negative cost."
There is much more to read in Krugman's article and I recommend it for anyone that likes to think about this stuff in a different way. CBB if you are reading this, I would be interested in the MMT perspective of the Summers/Krugman "radical manifesto."