The full column appears here:
https://www.ft.com/content/d60cdc40-9fec-11ea-b65d-489c67b0d85d
Summary:
When former US Treasury secretary Lawrence Summers delivered
his famous address on the return of secular stagnation at the IMF in 2013,
he revived interest in a Keynesian construct that had fallen into disuse since
the 1940s. He argued that a chronic excess of savings, relative to capital
investment, may be developing in the global economy, forcing long-term interest
rates down and threatening a persistent shortage of demand.
Mr Summers’ warnings have proven largely justified in the
last 7 years. He now believes that the COVID-19 crisis may deepen secular
stagnation, because risk aversion in the private sector will increase
permanently, leading to more precautionary savings by households, and less
investment by businesses. As he puts it, “just in case will replace just in
time”.
A permanent state in which the equilibrium nominal interest
rate throughout the developed world is at or below the central bank policy rate
is, to put it mildly, really worrying. Traditional monetary policy would
become impossible, without major policy reforms to change the situation. There
are three possible consequences of this.
The first is that the world could be stuck at zero. All the
advanced economies may follow the example of Japan since 2016, with interest
rates across the entire yield curve stuck at zero, and fiscal policy battling
against a continuous rise in government debt ratios. For asset markets, this
would represent a low-return world, with demand management becoming
increasingly hamstrung in recurring recessions.
The second could involve permanent fiscal stimulus and
rising debt. By reversing the trend decline in interest rates, this policy
may result in an immediate period of negative returns for both bonds and
equities.
And the third could give us very negative interest
rates. Negative rate policy could only succeed if pursued aggressively,
taking policy rates to minus 3 per cent, or even lower, in recessions. By
extending the decades-long downward trend in interest rates, this approach
would probably prolong high returns from both bonds and equities.
The political feasibility of these extremely radical fiscal
and monetary policy changes seems highly questionable. But if Mr Summers is
right about the deepening of secular stagnation, such reforms might be needed
to avoid Japanese-style deflation in Europe, and even the US.
