That was the recovery that was

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.

world economic indicators

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.

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17 Responses to That was the recovery that was

  1. Lem

    Well, there you go, QE doesn’t work.

    Krugman says we therefore should try more.
    Meantime, Hockey is running around telling everyone not to panic. Hilarious!
    This should be an interesting day.

  2. Infidel Tiger

    Of course government intervention works. We just haven’t had enough of it.

    More power!

  3. Roger

    The Chinese population is going to become very restive under conditions of limited growth or even recession. The unspoken deal the Chinese Communist Party made with the people to provide a more open economy in exchange for retaining the party’s iron grip on power and privilege will be questioned by more ordinary Chinese folk and not just dissidents. Look for a distraction to be created in the South China Sea. War is the greatest form of government intervention in times of economic stagnation.

  4. Roger, I have very little doubt that the west is staring down the barrel of a monetary and human disaster. Our leaders have shown no ability whatsoever to step outside their Keynesian Idealism, and as a result, we are woefully unprepared to face it.
    I think you are right. The South China Sea is going to become a flashpoint, along with the Persian Gulf and Southern Europe.
    And the finger points toward one man, and his backers.

  5. stackja

    Some got rich. Many got poor. As was always. Tulips anyone?

  6. Shauno

    Is it just coincidence that the graph shows the ww2 victor and two of the axis powers.

  7. mc

    Winston, yeah..it is all Tony Abbotts fault.

  8. Dr Faustus

    The Chinese population is going to become very restive under conditions of limited growth or even recession.

    This is a major emerging issue. China is still in the beginner stages of transforming its economy, with the predictable lumpy results you would expect from a command economy let loose. It now has a significant, fairly comfortable, city-based middle class – with enough excess wealth to pump up the stock market and property casinos – while still retaining a huge rump of the population who are struggling out of abject poverty.

    Exactly as you say, the implicit deal is that this inequality is temporary – and brisk economic growth will distribute wealth out to the provinces before envy kicks off another revolution. Central Government is pumping up the impression that GDP growth is running about 7% – but observers of the real economy suggest it’s actually significantly lower and may be as low as 2%.

    At that rate it is hard to pretend that an agricultural worker can look forward to anything other than a desperate, marginal life. How Central Government responds really matters: if the Cultural Revolution kicks off again we will really know what global impact means.

  9. mareeS

    Just go into slow mode. We had to do this after 1975 (Whitlam and Cairns) 1992 and after 17% interest rates. Like when the battery of the computer runs down.

    Self preservation isn’t rocket science. You just do what you need to do.

    Simples!

  10. Lem

    The Chinese population is going to become very restive under conditions of limited growth or even recession.

    What’s mandarin for “no worries”?

  11. mundi

    Get ready for a long period of stagflation, coupled with a slow increase in taxes, and continued growth of government.

    So just more of the last 8 years….

  12. rich

    What’s mandarin for “no worries”?

    ??? – mei guan xi

    literally , “it doesn’t concern you, don’t mention it”

  13. motherhubbard'sdog

    Meantime, Hockey is running around telling everyone not to panic.

    He’s probably been reading Hitchhikers Guide to the Galaxy.

  14. Entropy

    So if we see hockey carrying a towel and an electronic thumb we should be worried?

  15. Fred Lenin

    I am no economist ,but my understanding of the chinese economywas that it started from a very low base ,so spectacular percentages were normal. I put it this way ,a 10 percaent increase on 100 looks good ,but to get that from 1000 is much more difficult ,therefore if you get to 10000 10 per cent becomes really hard to get . i dont know if our muppet politicians understand these facts ,I know the left dont as we saw during tge krudgiliard days . The Poop is now about to hit the fan and we have fools who have No Idea hiepw to handle it .Obviously spendinfpg will Have to be Cut whether to stupid pollies like it or mot . The lenders of money will be demanding very high interest to cover risk and the large demand that will happen.I can see a huge clean out of incompetent career politicians whise only thought is themselves we will need people of patriotism and ability ,we live in interesting times .

  16. JohnA

    motherhubbard’sdog #1777466, posted on August 25, 2015 at 3:00 pm

    Meantime, Hockey is running around telling everyone not to panic.

    He’s probably been reading Hitchhikers Guide to the Galaxy.

    OK, so who’s on the lookout for the whale and the bowl of petunias (“Oh no, not again!”)?

  17. Roger

    At that rate it is hard to pretend that an agricultural worker can look forward to anything other than a desperate, marginal life.

    Yes, and the urban families who have sunk all their savings into the property market on the gamble that values would continue to increase as the middle class swelled will see their investment tank with the economy. Few will be buying apartments with stagnant wages and the market is already oversupplied – last estimate I saw was around 50 million + empty apartments in China.

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