Secular stagnation — or the idea that there is a growing supply-demand imbalance in the global economy — has been a major concern of Summers’ since he first revived the idea in 2013.
And in a note to clients this week, Citi’s Willem Buiter echoed Summers’ fears of the perils of secular stagnation, calling it a “grave threat for many advanced economies and for some emerging markets, notably China.”
“We do not think that, absent the appropriate policy response, this threat will disappear anytime soon, as neutral real short-term rates may remain persistently negative and below the lowest achievable policy rates and market rates in the absence of exogenous demand stimuli. With ageing populations, rising inequality and excessive debt, private saving propensities are unlikely to fall.”
Citi pointed to three trends that support Summers’ concerns.
- Nominal and real interest rates have plummeted in developed nations over the past several decades, reaching incredibly low levels in recent years.
- Inflation levels have fallen substantially across advanced economies. Average headline inflation for OECD countries is at it’s lowest level since 1980, not including the level at the start of the recent financial crisis.
- Economic growth has missed expectations in recent years while unemployment remains an issue in many developed nations.
“The combination of these three developments is consistent with the view that desired saving has exceeded desired investment (aggregate demand has fallen short of aggregate supply), therefore putting downward pressure on real interest rates,” Buiter and his team wrote.
“Stuck at the lower bound on nominal interest rates, there could be a persistent, indeed intensifying, deficiency of effective demand, without any of the normal self-correcting drivers of private consumption and investment demand capable of lifting the economy out of this Keynesian trap.”
Former Fed Chair Ben Bernanke, among others, have criticised the secular stagnation hypothesis, but Summers has held his ground.
“[T]hroughout the industrial world the vast majority of the revisions in growth forecasts have been downwards for many years now,” Summers wrote on his blog in response to Bernanke. “So, I continue to urge that it is worth taking seriously the possibility that we face a chronic problem of an excess of desired saving relative to investment.”