Thursday, 24 May 2018

More secular stagnation nonsense.

There is a recent article by Paul Schmelzing entitled “The ‘suprasecular’ stagnation”, which has some interesting material about the decline in interest rates over the last six hundred years or so. See chart below.


The only slight fly in the ointment is that the article starts with the myth put about by Lawrence Summers that a fall in interest rates equals some sort of “stagnation”. Summers’s reasoning, as I understand it, is that interest rate cuts are used to impart stimulus to economies, thus if interest rates are at or near zero, then such cuts are not possible, which allegedly condemns us to permanent stagnation.

Well it now seems, to judge by Schmelzing’s article that we have been “stagnating” for six hundred years! But wait: output per head  in European economies has risen about ten fold over the last six hundred years. Add to that the population increase over that period, and the GDP of European economies will have expanded about thirty fold, if not fifty fold. That’s not my idea of “stagnation”.

Moreover, Summers’s claim that stimulus cannot be imparted just because interest rates are at or near zero is nonsense. As Keynes pointed out in the early 1930s, stimulus can be imparted by simply having government and central bank create more base money and by spending that money and/or cutting taxes.

Indeed, the latter is exactly what several governments have done over the last five years or so, only in a round-about way. That is, they have implemented fiscal stimulus in the form of “government borrows $X, spends $X and gives $X of bonds to borrowers”. Central banks have then created new money and bought back those bonds via QE. That all nets out to “the state (i.e. government and central bank combined) prints $X and spends it”!

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