Larry Summers has revived the Alvin Hansen pre-1940 notion of secular stagnation. This says that the demand for goods and services will remain subdued because consumers are satiated and the technological frontier had been reached. Summers thinks, like those aficionados of the Club Of Rome’s impending resource depletion theory, that Hansen was just a prophet before his time.
So he is urging that there be no interest rate increases (read “the government should continue printing money to force lower interest rates”). It is unlikely that his fellow Keynesian promoter of an active government role in economic stimulus, Janet Yellen, will take a different view.
The recovery from the 2007 recession has been sluggish to say the least – the US, Japan and Germany this year are steaming along at 1-2 per cent growth. Japan and the US have budget deficits of 6 and 4 per cent respectively. And all of them have expanded the share of government spending in GDP, almost all of which is non-productive.
Now the Chinese sell-off is being repeated globally. That means an intensification of the sickness created by governments’ refusals to understand the need to clear up imbalances. The solutions involve allowing interest rates to encourage savings, while denying unproductive government sanctuaries for those savings and freeing up the waste that is government spending. But even if governments understood this, they would face an uphill task of persuading voters that such short term pain is essential.
Summers now says the Fed has missed the boat on allowing interest rate increases (which he never advocated we catch anyway). The chances of markets self-correcting are now said to be low. Another deluge of monetary support for markets is in the offing, thereby consigning the world to an indefinite period of stagnation.