Secular stagnation: Glut busters

WITH eminences like Larry Summers sparking new interest in the idea of “secular stagnation”, a particular view about the macroeconomics of the pre-crisis period seems to be coalescing. America was in the grips of a savings glut, the story goes, driven by several factors, such as: reserve accumulation by foreign governments and central banks, high levels of saving by pre-retirement Boomers, and the concentration of income in the hands of rich households with low propensities to consume. Available savings piled up while attractive investment opportunities remained flat or (in some versions of the story) declined. This imbalance corresponded to a chronic demand shortfall and tumbling interest rates. As interest rates fell it became ever harder for the central bank to buoy up demand by cutting its policy rate. Weak demand was only overcome when an unsustainable bubble-creating mechanism was established. Low rates drove asset prices higher. That, in turn, supported rapid growth in private debt, and together soaring debt and asset prices lifted demand high enough to generate full employment (through the mechanisms of rising consumption and house-building). But this obviously couldn’t go on forever and didn’t; when credit could grow no more the economy collapsed. Since we haven’t solved the underlying savings glut, the American economy now has three options, according to this …

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