The Dow was flat yesterday. Gold lost a little, still bouncing around in the low $1,200s.
Let’s see what Larry Summers has to say about it. We always appreciate Summers: his mind is sharp, and it cuts to the wrong conclusion very quickly.
Why stagnation might prove to be the new normal, is the headline of his piece in Monday’s Financial Times.
There – he’s done it again. Whatever is said about today’s cockeyed economies, there is nothing ‘normal’ about them.
What’s normal about a government that runs up as much debt as it had in WWII, with no war, no national emergency, and no way to pay the money back?
What’s normal about an economy that depends on the lowest interest rates in three generations, and a central bank that holds them down like a crooked butcher with his finger on the meat scale?
And what’s normal about an advanced capitalist country where the typical man earns less than he did 43 years ago?
Alright, alright. Let’s give Summers a chance.
It might be the ‘new normal’ because the Fed’s tools – EZ money wrenches and interest rate hammers – can no longer fix an economy, he says. At best they “drive only moderate growth”.
And once you get to an interest rate of zero, you can’t go lower, even if that isn’t enough “to spur enough investment to lead to full employment”.
You’re caught, in other words, in the trap you set yourself!
When you get in that situation, consumers and investors see prices falling and they decide to sit tight. Why buy now when you can get more for less later?
“Look at Japan”, he suggests. After its bubble burst in 1980, growth over the next five years was actually stronger than in the US following the busted bubble of 2008.
Then, instead of returning to a booming economy, Japan remained in an on-again, off-again deflationary slump.
Yes, several times it appeared that the Japanese economy had reached an ‘escape velocity’. And each time, the economy quickly fell back to earth.
Why couldn’t the Japanese feds – who did just about everything the US feds have done – get their economy to pick up some speed?
Nobody really knows. Summers suggests that it might be a combination of things, which now affect the US economy as well as Japan.
First, the labour force is growing more slowly than before.
Second, productivity growth is also harder to come by.
Third, consumption may be declining – “due to a sharp increase in the share of income held by the very wealthy, and the rising share of income accruing to capital”. Unlike the poor, rich people do not upgrade their living standards when they earn more money. They are already enjoying the lifestyles they want; more money is merely saved or invested in other projects.
Uncharacteristically, he offers no solution. He merely tells us that “secular stagnation should be viewed as a contingency to be insured against – not a fate to which we ought to be resigned”.
So how do we protect ourselves? “Pre-empting structural stagnation is so profoundly important”, he writes, because the standard treatment for them – EZ money – drives “investors to take greater risks, making bubbles more likely”.
Summers offers more insights into why the US may face a Japanese-style slump, but he misses the only one that really explains it.
Let’s see, the Japanese bubble burst. The Japanese feds came to the rescue, with the typical tricks and treatments of modern macroeconomic meddling.
The result? A long stagnation.
Go forward 18 years. The US bubble bursts. The US feds come to the rescue – again, with the typical tricks and treatments of modern macroeconomic management.
In Japan, as in the US, the authorities bailed, bullied, and boondoggled their way to a makeshift ‘stability.’ In both countries, they avoided a quick, painful correction.
Banks and other companies that should have gone broke were saved. Investments that should have gone belly-up were spared.
The rich, at least in the US, who should have seen their wealth substantially reduced, got even richer.
And both countries got a long period of stagnation. It has gone on for 23 years in Japan.
In the US, we soon enter our seventh year of slumpy, crisis-prone ‘recovery.’
Want to stop the stagnation? Easy peasy: just stop meddling.