Secular stagnation is the idea that the economy won’t be able to create enough demand to sustain its growth trend unless interest rates are extraordinarily low. (Summers’ specific worry is that the zero lower bound on interest rates, or nominal interest rates at 0%, is too high for the economy to sustain its growth trend.)
Summers writes that, “[Marc and I] are in agreement that the essence of the secular stagnation issue is not whether technology has stopped advancing; but rather whether there is a mismatch between desired saving and investment opportunities that results in low equilibrium real interest rates, precipitates financial instability, and may inhibit economic growth … [We] agree that we are headed into a period of soft real interest rates, where there will be more money available than great deals. This may, as he suggests, not be all bad; as it will make it easier for risky ideas to get funded.”
But for Summers, this isn’t all good.
Summers adds that, “The danger which I think is very real is that the zero lower bound on nominal rates will prevent the attainment of full employment as desired investment falls short of desired saving. A related danger is that the very low interest rates will encourage risk-taking and asset price inflation in ways that will ultimately give rise to financial instability …
Recent good news about the state of the US economy should not blind us to this reality.”
Summers also wonders about some of Andreessen’s assertions regarding the deflationary nature of technological change.
The whole Summers’ post is worth reading in full, as the whole issue of whether or not the economy is mired in secular stagnation really can’t be forgotten.
It’s not the sexiest idea in the world, and it is not an easy one to talk about, but a major part of the current economic debate is wrestling with this idea.
Disclosure: Marc Andreessen is an investor in Business Insider.