This is just note to myself. Off late there has been discussion in the economists’ circle regarding ‘Secular Stagnation’. I may be late but I do believe that it is going to have profound impact on the global securities markets for the next few years – at least one to three – including on the outlook and policies of major central banks.
Generally prolonged period of slow economic growth is termed as economic stagnation. If this period is accompanied by rising inflation – like in the ’70s – then it is called stagflation. Many opponent of QE were raising that spectre few years ago, but those fears have since receded. Economic stagnation, on the other hand, refers to growth below the long term trend or the potential growth.
Secular stagnation means negligible or no economic growth in a market-based economy. The term came into being during the Great Depression with initial credits going to Alvin Hansen, a Harvard University economics professor belonging to the Keynesian school.
In 2013, Larry Summers raised the prospect of return of ‘secular stagnation’, essentially restarting a debate about its causes and policy actions to counter it. Like with most economic theories, this one too comes with it share of conflicting definitions and understandings.
Paul Krugman postulates that the underlying changes in the economy – like slowing growth in the working-age population – that have afflicted the USA and Europe for the last several years or Japan for the past couple of decades are going to lead to more instances of persistent shortfalls of demand, which can’t be overcome even with near-zero interest rate. He says that it is a demand-side concept and not supply-side. Summers analysis matches with Krugman to a large extent.
Another argument is made by Professor Robert J. Gordon of Northwestern University economics department (see VoxEU eBook). Gordon argues that the US economic growth will continue to be slow for the next 25 to 40 years – not because of a slowdown in technological growth but because of four ‘headwinds’: demographics, education, inequality, and government debt. As he writes that he and Summers are talking about different aspects and that his version of slow future growth refers to potential output itself.
I am more concerned about the implications arising from demand-side. Will do more research.