Over at Equitable Growth: Very good points from Ryan Avent, Matt O'Brien, Larry Summers, Paul Krugman, and Ben Bernanke. And rereading all these has convinced me of one additional thing: with the North Atlantic plus Japan as a group clearly in a situation in which the Wicksellian natural rate of short-term safe nominal interest is less than zero, how could it ever be part of an optimal policy for the U.S. to raise its short-term safe nominal interest rates above the zero lower bound?
Highlights: READ MOAR
A 10-year nominal Treasury bond rate no higher than inflation is supposed to be the current value of the natural interest-rate? Good God! That is absurd! Something is wrong with our economy, and wrong at a much deeper level than a simple shortage relative to demand of the supply of safe-and-liquid-store-of-value assets that can be hoarded! It makes no sense that real capital assets must be at such a premium valuation in order to induce wealthholders not to hoard but rather to invest in the future! And if you were to say that, you would be Larry Summers.
You may say: In the mid-2000s, it was all because wealthholders in China had this extraordinary and not-entirely-rational demand, and today it is because wealthholders in Germany have an analogous extraordinary and not-entirely-rational demand for the safe-and-liquid-store-of-value assets by the US government. And if you were to say that, you would be Ben Bernanke.
And you may say: Those extraordinary foreign demands for dollar assets as safe-and-liquid-stores-of-value are, today, reflections of insane austerity and secular stagnation in Europe, and were, last decade, reflections of the global imbalances caused by China’s rapid development and potential political instability. And if you were to say that, you would be Paul Krugman.
And, of course, all three are right.
- Why are interest rates so low? :
- Why are interest rates so low, part 2: Secular stagnation
- Why are interest rates so low, part 3: The Global Savings Glut
- Germany's trade surplus is a problem :
- Liquidity Traps, Local and Global :
- On Secular Stagnation: A Response to Bernanke **:
Germany's Trade Surplus Is a Problem: "In recent years China has been working to reduce its dependence on exports and its trade surplus has declined....:
...In 2014, Germany’s trade surplus was about $250 billion (in dollar terms), or almost 7 percent of the country’s GDP.... The euro... is too weak (given German wages and production costs) to be consistent with balanced German trade.... Second, the German trade surplus is further increased by policies (tight fiscal policies, for example) that suppress the country’s domestic spending.... The fact that Germany is selling so much more than it is buying redirects demand from its neighbors (as well as from other countries around the world), reducing output and employment outside Germany at a time at which monetary policy in many countries is reaching its limits.
Persistent imbalances within the euro zone are also unhealthy.... Systems of fixed exchange rates, like the euro union or the gold standard, have historically suffered from the fact that countries with balance of payments deficits come under severe pressure to adjust, while countries with surpluses face no corresponding pressure. The gold standard of the 1920s was brought down by the failure of surplus countries to participate equally in the adjustment process.... Germany has... several policy tools at its disposal to reduce its surplus... [that] would make most Germans better off.... Investment in public infrastructure.... Raising the wages of German workers.... Targeted reforms, including for example increased tax incentives for private domestic investment; the removal of barriers to new housing construction; reforms in the retail and services sectors; and a review of financial regulations.... I hope participants in the Washington meetings this spring will recognize that global imbalances are not only a Chinese and American issue.
Liquidity Traps, Local and Global: "Bernanke correctly... criticizes Summers for insufficient attention to international capital flows...:
...but then argues that once you do allow for international capital movement it obviates many of the secular stagnation concerns, which I believe is wrong.... Suppose... [in] Europe... the Wicksellian natural rate of interest... [is] below zero. Can this happen if there are positive-return investments outside of Europe?... [Yes,] if the weakness in European demand is perceived as temporary.... The weakness of the euro will also be seen as temporary....
Bernanke... argues that the large current account surplus of the euro area as a whole is a temporary phenomenon driven by cyclical weakness in the euro periphery, and... not... persistent trouble. But look at what bond markets are saying! [The] German... 10-year rate is only 16 basis points.... Markets expect the euro area economy to be depressed, and ECB rates very low, for many years to come... flashing a secular stagnation warning.... Bernanke seems to be saying that if there is a problem, it can be solved by cracking down on currency manipulation.... [But] Europe’s trade and capital imbalances are the result of fundamental weakness of domestic demand, which is then exported to the rest of us, who aren’t that strong either.... We have a problem that must be solved with policies that boost demand...
On Secular Stagnation: A Response to Bernanke: "I have argued that the 2003-2007 recovery and quite possibly the late stages of the 1990s recovery were powered in significant part unsustainable financial conditions...:
...Ben is skeptical.... I think that it will be hard to escape the conclusion that household debt grew at an unsustainable pace in the decade before the great financial crisis and that this was an important spur to growth. And I am fairly confident that wealth effects associated with a booming stock market were important in the late 1990s.... Ben accepts the logic of my argument that if reducing rates to equate saving and investment at full employment is infeasible or likely to lead to financial instability, fiscal policy in general and public investment in particular is a natural instrument to promote growth. But he expresses the concern that permanently expansionary fiscal policy may not be possible, given that the government cannot indefinitely expand its debt.... I think Ben greatly understates the scope for feasible fiscal policy for reasons that Brad Delong and I have considered in our 2012 BPEA paper.... [In] a secular stagnation world... government debt service is very cheap. As long as a public investment project yields any positive return it will generate enough revenue to service the associated debt... magnified if there are any Keynesian fiscal stimulus effects of the project or if there are any hysteresis effects... [or] if there are reasons to doubt that the central bank can act on its own to raise inflation expectations.... This is not just a theoretical point. The October 2014 IMF World Economic Outlook suggests that public investments in countries where interest rates are near the zero lower bound are likely to significantly reduce debt-to-gdp ratios....
Ben and I are, I think, in agreement that it is important to think about the saving-investment balance not just for countries individually, but for the global economy. If there are more countries tending to have excess saving than there are tending towards excess investment, there will be a global shortage of demand.... Global mechanisms that concentrate on causing borrowing countries to adjust without seeking to shrink the surplus of surplus countries will tend to push the global economy towards contraction. Successful policy approaches... will involve not only stimulating public and private investment but will also involve encouraging countries with excess saving to reduce their saving or increase their investment....
I would like nothing better than to be wrong.... Those like Ben who judged slow recovery to be a reflection of temporary headwinds and misguided fiscal contractions will be vindicated.... But... revisions in growth forecasts have been downwards for many years.... It is worth taking seriously the possibility that we face a chronic problem of an excess of desired saving relative to investment...
: [Larry Summers and Ben Bernanke Are Having the Most Important Blog Fight Ever(http://www.washingtonpost.com/blogs/wonkblog/wp/2015/04/02/larry-summers-and-ben-bernanke-are-having-the-most-important-blog-fight-ever/): "The Fed can[not] keep rates lower than they 'should' be without fueling inflation--which there isn't...
...Rates are so low not because that's where the Fed wants them to be, but rather because that's where the economy needs them to be.... Everything the Fed has done has just been trying to... get rates closer to where they would be if they could be negative. Okay, but why does the economy still need such low rates? Good question.... It could be that only way for the economy to get enough investment spending would either be for the government to do it directly or to try to get the private sector to do it by increasing inflation so that real rates come down.
But Bernanke thinks this is overly pessimistic.... It isn't easy to tell a story about why people would need negative real rates to get them to invest.... So why does Bernanke think the economy needs low rates? Well, he doesn't really. Or at least he thinks it won't soon.... In 2005... he tried to explain the puzzle of long-term rates not rising.... The answer, Bernanke said, was that after the East Asian Financial Crisis in 1998, emerging markets like China and Saudi Arabia... started saving much, much more.... Asia's emerging markets aren't hoarding dollars like before, but Germany, as Paul Krugman puts it, is the new China when it comes to turning saving into a vice....
Secular stagnation says it's because there isn't enough demand for investment, while the global saving glut says, yes, it's because there's too much supply of savings.... Secular stagnation means the economy is broken and the government needs to fix it by giving us more inflation and more infrastructure spending. But the global saving glut means the economy wouldn't need any fixing if governments would stop breaking it by manipulating their currencies....
Europe's slump... means... there's... a glut of money leaving the continent looking for better returns abroad.... We used to have a global saving glut caused by other countries' policy decisions, but now we have a global saving glut caused by other countries' secular stagnation.... It's not going to be enough to browbeat countries that aren't spending a lot into spending more. They can't. Instead, we're going to have to fight the global saving glut by pushing the dollar down--maybe by raising the Fed's inflation target from 2 to 4 percent. The funny thing is that's also the way to fight secular stagnation here at home.... The real mystery, in other words, is why we're accepting a world where interest rates are staying so low.
Puzzles: The Global Secular Savings Stagnation Glut: "What sort of imbalance between saving and investment do we have here, anyway?...:
...[Does] the world has too much saving and too little investment? Or is it that the saving and the investment are stuck in different places?... Much of the world is very poor relative to America... overflowing with profitable investment opportunities.... There is a geographic imbalance between savings and investment. But this imbalance is persistent and structural. It also isn't new. It is hard to rate this as the cause of secular stagnation.... Mr Bernanke's solution, to lean on currency manipulators, is probably not going to do the trick.... Another option, which Mr Bernanke does not consider, is for America to do more monetary easing.... The world as a whole is not spending enough money. Large parts of the world economy are short-run incapable of spending more for political and economic reasons. Unless other parts take up the slack, then the too-little-spending problem will grow more serious and ever more of the world will slip into this monetary trap.
What else is there?... Deficit spending in rich countries.... Doing it adequately is almost certainly beyond the capability of the American political system. As Mr Summers repeatedly points out, the government has failed manifestly to tackle even the highest-return infrastructure projects available.... Secular stagnation isn't much of a puzzle. Rather, it is a dilemma. The ageing societies of the rich world want rapid income growth and low inflation and a decent return on safe investments and limited redistribution and low levels of immigration. Well you can't have all of that. And what they have decided is that what they're prepared to sacrifice is the rapid income growth.... Secular stagnation will come to an end when political and demographic shifts allow the losers from this arrangement to say: enough.
Tags: Ryan Avent, Matt O'Brien, Larry Summers, Paul Krugman, Ben Bernanke, Macroeconomics, Monetary Policy, Fiscal Policy, International Finance, Global Savings Glut, Bubbles, Lesser Depression