Citi’s Matt King has jumped on the secular stagnation bandwagon with a really nifty collection of charts that ties the whole story of how we got to this point together.
He starts off with the capex issue, noting that despite the cyclical recovery corporates don’t seem to be investing all that much. In fact, according to King, declining capex may be a key aspect of secular decline, which he suggests began in advanced economies and is now spreading to emerging markets as well.
The current level of income inequality in the U.S. is dampening GDP growth.
At least, that’s the conclusion of a new report from S&P Capital IQ. There’s a lot to digest in this exhaustive summary of existing research, including a bunch of interesting data on educational attainment and research on political frictions in times of extreme inequality. But the core argument is driven by a simple relationship: while many people tend to spend most of their earnings (and often more than they actually earn) on goods and services, those who make a lot of money spend a large share of their income on financial assets and property. As more and more of the country’s income shifts upwards to a smaller subset of the population, everyone else is deprived of spending power at the same time as more capital is available to invest. Read more
Larry Summers was interviewed by Chrystia Freeland at the INET conference in Toronto last week, in a conversation that very usefully expanded upon his thoughts about secular stagnation. (H/T Interfluidity)
It’s a reassuring interview for us because so many of the statements he made echo what we (and other bloggers such as Steve Randy Waldman) have been saying for some time. Namely, that there’s something more significant going on in the industrialised global economy than the effects of a banking crisis per se, and that that *something* is probably related to technological abundance. More so, that this phenomenon is having strange macro effects on capitalist incentives.
There was also a nod to the point we’ve made for a long time, that the financial intermediation industry loses its raison d’etre in such an environment, and worse than that, potentially becomes a malignant rather than constructive force on development and growth. In short, that negative rates are hardly the solution. Read more
If Larry Summers is correct about secular stagnation, the natural interest rate is negative and interest rates at current levels are too high to ensure that planned savings match planned investment in a way that generates full employment.
So what does one do about it?
In an op-ed for the Washington Post earlier this month Larry Summers identified three possible responses. Read more
Meet Trustbuddy, the cutesy face of financial innovation, where peer-to-peer lending collides with payday loans.
David Roche and Bob McKee at Independent Strategy have put out a strongly worded riposte to Larry Summers’ argument that the world may be beset by secular stagnation.
From the note, their main points are: Read more
One of the most talked about things in economic circles this weekend?
Larry Summers’ speech to the IMF Research Conference on November 8, the video of which started circulating at old fashioned money multiplier rates this Sunday. Read more
The Fed is his to lose, so here’s a useful service by Barclays rates analysts — quotes from Larry Summers on monetary policy, all the way from December 1986 to August 2013, all in one place. Click to enlarge.
For the commute home, we wish you a great weekend,
- Treasury + Fed = better QE. Read more
The bitching and moaning in Washington about a likely replacement for Obama economic adviser Larry Summers is all getting a bit — well, bitchy. Lex on Friday notes speculation about potential candidates to replace Summers, who will leave the White House after the November midterm election to return to Harvard.
And, horror of horrors, it says in breathless tones: Read more
The FOMC and Larry Summers have been dominating the headlines, but this is also a busy week of news for the US housing market — so here is a brief overview of what we’ve learned so far.
On Monday, the National Association of Home Builders announced that its national housing market index, which tracks the confidence of homebuilders, stayed flat in September and remains near its 25-year lows. Read more
President Obama’s chief economic adviser will step down after the midterm elections in November, the FT reports. Larry Summers’ exit marks another high-profile departure from the President’s economic team this year — and removes an advocate of short-term stimulus measures in the White House, the FT also adds. Not only is Treasury Secretary Tim Geithner staying on, but his influence on the President will probably grow once Summers leaves, the NYT says.
Names to replace Summers are already emerging. Former Xerox CEO and Obama adviser Anne Mulcahy is the WSJ’s pick for a leading candidate so far. Reuters names General Electric chairman Jeff Immelt and Citigroup chairman Richard Parsons as possible corporate choices — while Politico joins both Reuters and the WSJ in tipping Laura Tyson, who occupied Summers’ role during the Clinton administration, as another potential pick.
The White House said late on Tuesday that Lawrence Summers, chief architect of President Barack Obama’s economic policy, would leave his post at the end of the year, reports the NYT, noting that the move continues an exodus of top-level advisors at a time when voters are criticising Obama’s economic stewardship. MoneySupply says Summers’ exit is likely to rekindle concerns that the administration’s economic team is burned out, and reflects mounting pressure for the White House to refresh its approach to economic policy.
The Obama administration made a strong plea to Congress on Monday to grit its teeth and pass a new set of spending measures – dubbed the “second stimulus” by some economists – in order to help dig the economy “out of a deep valley”, the FT reports. Barack Obama’s senior economic adviser Lawrence Summers said that a move to fiscal discipline would be premature at this point in the cycle.
Weak demand from battered consumers will be a “major constraint” on the US economy for the foreseeable future, key White House adviser Lawrence Summers said on Monday. Mr Summers, the director of the National Economic Council, has been banging the drum for the $787bn stimulus package in the face of Republican criticism that it is not creating the jobs it promised, the FT said. Meanwhile, the WSJ reported the Obama administration shelved a plan to raise more than $200bn in new taxes on multinational companies after a blitz of complaints from businesses.
The Obama administration will target critical weaknesses in the US financial system, such as thin bank capital cushions and lax lending standards, in a proposed overhaul of financial regulation this week, reports the Washington Post. In the fullest summary to date of reform proposals, Treasury secretary Tim Geithner and White House economic adviser Larry Summers said the plan will also propose stronger investor protection and new powers for the Federal Reserve.
Casual observation du jour — but Lehman Brothers is a pretty big outlier.
The White House on Sunday expressed outrage at $165m of bonuses paid by AIG, as the troubled insurer revealed that European banks had benefited heavily from its government rescue. Larry Summers, Obama’s top economic adviser, said that AIG’s behaviour was “outrageous” but that the administration’s ability to force a bonus-cut was limited. AIG on Sunday published a list of counterparties to its derivatives contracts which showed that European banks including Deutsche Bank and Barclays benefited from the US government’s $160bn-plus rescue operation.
Barack Obama’s top economic adviser has urged world leaders to pump more public money into the economy in a co-ordinated effort to boost demand and lift the world out of recession. In an interview with the FT, Lawrence Summers said the US administration had no choice but to take strong public action to “save the market system from its own excesses”.
The autoparts supply sector, hit by the sharp drop in US car production, is to request at least $10bn of federal bail-out funds from the Tarp scheme. Industry representatives plan to formally request access to Tarp funds soon, according to the Original Equipment Suppliers Association, which represents parts suppliers. Separately, Larry Summers, head of the White House National Economic Council, said the new administration would use the second half of the $700bn bail-out funds to tackle the financial crisis. His comments came after Nancy Pelosi, the Democratic speaker of the House, suggested that Congress might have to provide more money for Tarp.
Barack Obama on Monday said his proposed stimulus package would be as big as necessary to shore up the economy and lay the foundations for renewed growth, amid predictions it could match the government’s $700bn financial sector bail-out for size. The US president-elect made the pledge as he unveiled his economic team, to be headed by Tim Geithner, New York Fed president, as Treasury secretary, and Larry Summers, former Treasury secretary under Bill Clinton, as chief White House economic adviser. Obama said Geithner would reach out to countries around the world to craft a “global response” to the financial turmoil and that Summers would also play a “critical role” co-ordinating economic policy as director of the National Economic Council. He gave few details of the wide-ranging stimulus plan but said it would be of a size and scope “necessary to get this economy back on track”. The ambition for Obama’s spending plan is “mind-blowing”, in Lex’s view. Combined with interest rates that are heading towards zero, this is surely the last roll of the “good news” dice.
The odds of a recession in the US must have increased after a very poor employment report, growing evidence of weak holiday spending, further increases in oil prices, more dismal housing data and further writedowns in the financial sector, writes former US treasury secretary Lawrence Summers in a comment article in Monday’s FT.
Summers, who is now Charles W. Eliot university professor at Harvard, notes that his judgement just six weeks ago was that predictions of a US recession seemed “extreme”. Read more
Misconceptions about the real meaning of moral hazard are the focus for Lawrence Summers (aka Larry, the former US treasure secretary and now Harvard professor) in an FT column on Monday.
The question of moral hazard is “central to every policy discussion in response to a financial crisis or the prospect of a crisis”. Yet, he notes, “there is great confusion in many quarters about the circumstances when moral hazard is, and is not, a problem. The world has at least as much to fear from a moral hazard fundamentalism that precludes actions that would enhance confidence and stability as it does from moral hazard itself.” Read more