Solution to secular stagnation

Finally managed to catch up with the piece written by Lawrence Summers about a month ago in FT, imploring the Fed not to raise interest rates until the whites of inflation were seen.

I managed to read the speech by Andrew Haldane made last August on whether the UK economy was in agony or ecstasy, with a lot of cricketing analogies.

Last week, after the release of the transcripts of the FOMC Meetings held in 2009, Wall Street Journal had posted that Ms. Janet Yellen had well forecasted the downturn or the slow (non) recovery of the US economy in 2009. They called her a ‘forecasting ace’.

All these are fine and dandy. It is one thing to identify a problem. It is another thing to come up with answers. Also, it is important to realise that not all problems have answers and that some answers might create costs that might be an even bigger problem later.

In that context, are negative or very negative real rates the solution (the only solution?) to the problem? Or, a good downturn is the answer to a recovery? No 1980s and 1990s without the 1970s. No 1945-1965 without acknowledging the ‘enabling’ 1939-1945 or 1929-1935.

In other words, no creation without destruction or no capitalism without creative destruction.

Second and most importantly, none of them – sadly, including Andrew Haldane, have acknowledged the costs of low interest rates and the bubbles they create in all corners of the world. Their bust will leave lasting impact – and wipe out all the pyrrhic gains of growth and employment – in the context of a financialised and leveraged world.

I re-publish below a portion of the speech made by Ottmar Issing, former Chief Economist of the Bundesbank about which I had blogged nearly a year ago:

But I think there is no defence for the concept of asymmetrical policy once a Bubble – or whatever you will call it – is building up. One argument was that monetary policy is too blunt a tool. I think this argument has lost its credibility. We know from many studies that even small early increases in interest rates would have an impact on interest rate structure, risk-taking, etc. In the context of an asymmetric approach and “risk management,” ………… I’m reminded of many, many meetings here or especially in the U.S. with my friends from the Fed. Their reaction was absolutely clear: when I referred to a potential Bubble in real estate, what I heard always was “never in the last 50 years have real estate prices fallen on a nationwide aspect. For me, this was not a comfort. …………. and once this happened their reaction to my critique or argument was very relaxed: “In the meantime, we have had much higher GDP, higher employment , more houses, etc. So compared to (these benefits), the cost of raising interest rates would be much too high – much too high.” I have never seen so far the comparison of the high cost of the mess we are in if we take this “risk management” approach. [Emphasis mine] – LINK [My blog post from 26th March 2014 here]


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