How to Survive a Secular Stagnation
Mohamed El-Erian
President @ Queens' College, Cambridge | Finance, Economics Expert
This post originally appeared on Bloomberg View.
Are the U.S. and Europe suffering from more than the aftermath of a major financial crisis? Might they be stuck in an unusual and prolonged equilibrium, in which frustratingly slow economic growth is the norm?
These are the crucial questions addressed in a new e-book from the Center for Economic Policy Research that I would recommend to policy makers, academics and investors alike.
Back in 2009, when I was working at the investment company Pimco, my colleagues and I argued that economic growth in the West would fail to bounce back sharply, as it typically does after a crisis-induced downturn. Instead, Western economies would face unusually sluggish growth and persistently high unemployment. We called it the “new normal.” The notion was initially dismissed by many as “unrealistic” and then as too “fatalistic.”
Now the idea is being reinforced in a major way under the moniker “secular stagnation” -- brought to public awareness by the Harvard University economist Larry Summers. In the book, the CEPR brings together respected economists from different schools of thought -- including Summers, Paul Krugman and Barry Eichengreen -- to discuss the various possible explanations, which tend to involve three elements:
- Structural headwinds from aging populations, poor infrastructure, heavy debt burdens, slow productivity growth and inequality;
- Demand that is poorly distributed around the world and in many cases inadequate as people channel money toward paying down debt instead of spending; and
- A "sclerosis" effect in the labor market as persistent unemployment erodes skills and youth joblessness threatens to create a lost generation.
One disturbing finding is that policy measures such as central-bank stimulus may be ineffective in simultaneously delivering high growth, robust job creation, price stability and financial soundness. As Summers puts it, if the macroeconomic goals are attained, "there is likely to be a price paid in terms of financial stability.”
Given the enormous stakes for current and future generations, the book rightly argues that serious thinking should be devoted to developing alternative policies. These involve pro-growth initiatives such as investing in education and infrastructure -- ideas that have broad support among economists but have been stymied by political dysfunction. A second part looks at more controversial proposals for economic rethinks and institutional revamps, such as increasing central banks' inflation targets or raising the retirement age.
Even today, there are people who believe that Western economies are suffering just from flesh wounds. Others feel that the ongoing period of gradual healing will prove sufficient to achieve economic liftoff, supported by the steadfast policies of central banks. Only a minority believe that something more worrisome may be in play, which is why the CEPR's contribution is so important.
Hopefully, by demonstrating why new economic thinking is needed, the book will raise awareness and catalyze innovative analysis. In any case, the work is extremely relevant to markets, where much of today’s pricing seems to assume that the old thinking is still valid.
Mohamed A. El-Erian is the former CEO and co-CIO of PIMCO. He is chief economic advisor to Allianz, chair of President Obama’s Global Development Council, and author of the NYT/WSJ bestseller “When Markets Collide.” Follow him on twitter,@elerianm.
Photo: AFP via Getty Images
Transaction Officer at Skye Bank Nigeria Plc
10 年There is a slow down in everything we do,just because only the same individual still have control over our economy there should be a change in hand.We must change most of the people in power.
Team builder helping hotels GM's with network marketing possibilities.
10 年Gold will survive
Economist
10 年I did a little analysis on the stock market. In looking at a historical chart of the Dow, I see four obvious bubbles: 1986-1988, 1995-2000, 2003-2008, 2009-2014. I decided to take a look at what I call the stock market's "speed", in other words, how many points per year did the market rise during these bubbles? Before I mention those numbers though, I will say that the market rose about 250 points per year during what most consider a boom time, but not a bubble, that was the period 1983-1995, during which the computer age helped to drastically improve productivity and, for all intents and purposes, change the world. It was what one might consider a sustainable pace of growth in the stock market, because it driven by strong economic growth and was never followed by a crash. Now, let us look at the bubbles I mentioned previously. The speed of the market from 1986-1988 was about 500 points per year. The market ultimately crashed by 500 points, 50% of the 1000 point increase during the bubble. The speed of the market from 1995-2000 was about 1600 points per year. The market ultimately crashed by 4000 points, 50% of the 8000 point increase during the bubble. The speed of the market from 2003-2008 was about 1200 points per year. The market ultimately crashed by 7500 points, 125% of the 6000 point increase during the bubble. The speed of the market from 2009-2014 has been 2100 points per year! If, as in previous bubbles, the market loses at least 50% of its increase during the bubble, the market could lose 5250 points, which would be half of the 10500 points of the increase during the bubble. That would put the Dow at about 12000 or so. If it lost all of its previous increase, as happened in the crash of 2008, that would put the Dow at about 7000 or so. Both of these are EXTREMELY likely scenarios, except for one thing: the Fed. The crazy thing about this current bubble is that not only will it be up to the Fed to rescue us after the crash, but it is the Fed who created this bubble in the first place! Yes, the Fed basically created the 2003-008 bubble too by keeping interest rates too low for too long, but this time around they have fed the stock market beast DIRECTLY!!! So, if the Fed knows that they will ultimately be responsible for rescuing the economy from the next crash, what do you think the Fed is going to do? Answer: They are going to do EVERYTHING in their power to make sure there is no next crash!!! How do you do that? Well, you keep interest rates low for another 1000 years, or you pump even more money into the economy. Here's the problem with that approach: the more money they pump into the economy, or, let's be honest, the stock market, the more the bubble will grow. Eventually the Fed will realize they can't do this anymore. Or, worse, the whole entire thing will explode, just like a balloon that simply can't take any more air. So, the Fed is really in a pickle, and I honestly don't know how they get out of this. At some point some big investor is going to say, ok, enough, I'm taking my profits and heading for the exit. That will be the end. The big question is how long will the stampede out of the market last? Well, if history is any guide, a drop of 50% of the previous increase is extremely likely, while giving back all the gains of the bubble is definitely not out of the question. The bottom line is the longer this charade goes on, the bigger will be the fall, that's almost an absolute certainty because as EVERYONE knows by now, THERE IS NO FREE LUNCH!!! Now, I did a little more analysis and extrapolated the Dow to where it would be if the pace of growth was the same as during the sustainable rise from 1983-1995, or 250 points per year. In other words, with no bubbles, just a nice steady increase. That would leave the Dow at about 8750, obviously a far cry from the Fed-induced values of today. Now, one could say you need to take inflation into account. Ok, if we assume inflation of about 3% per year (not exactly sure what the inflation rate was during that period, or what it has been from 1983 to now, but just using an estimate) that would put the Dow at about 15300, a good bit below today's value. So, in summary, there is a very good chance we will see another crash. It's pretty much inevitable. The question is when will it happen, what will cause it and how long will the Fed allow this to continue? Without the bubbles of the recent past, the Dow should be about half the value it is now, or about 2000 points lower if you adjust for inflation. I happen to think, though, that adjusting for inflation is not really appropriate since inflation is embedded in the market's speed as time goes on. In other words, the market's speed was much lower in the bubble preceding the crash of 1929, but prices were much lower too. Thoughts?
Retirement Expert, Adviser Firm of the Year South East 2024, and 6 time Citywire Top 100 Firm, Creating your Gap Decade, Your 8 Life Boxes,
10 年The 'new normal' is not popular, because it's the simple truth ... It's hard to take on board
Economist & Academic
10 年If this continues, at some point nationalisation of private debt may not sound like a radical idea and nationalisation of the financial system may perhaps be the only way to achieve it.