Mario Seccareccia: Larry Summers, Secular Stagnation, and the Crisis of the New Consensus Model

By Mario Seccareccia, Professor of Economics, University of Ottawa

Over a week ago Lawrence Summers stunned the world of economics by the remarks he made at the IMF‘s 14th Annual Research Conference on the Economic Crisis, where he pronounced the dreaded “SS” words: “secular stagnation”. His comments seem to have shocked much of the mainstream that still believes that the economy will return to the pre-2008 potential growth. Indeed, he surprised many by stating that, after effectively preventing the complete collapse of the financial system in 2008 through the government bailout and liquidity measures undertaken by the US Fed, there is still no real evidence that there will be a restoration of “normal” growth and that the “new normal” may well be secular stagnation. According to Summers, the principal culprit is the simple fact that nominal interest rates cannot fall below zero and that this zero lower bound will remain “a chronic and systemic inhibitor” of growth. While agreeing that Western economies are headed towards long-term stagnation, in this commentary I would like to question the analysis of the cause of this problem, as well as the solution being offered to address it.

In listening to his speech, it is obvious how many economists, including not only Summers but also Paul Krugman, are still wedded to variants of the now not-so-new “New Consensus” framework that was so popular among economists before the financial crisis. Being in some ways a natural extension of the original Hicksian IS-LM model along the lines, for instance that David Romer reformulated over a decade ago, the New Consensus macro model of the economy suggested that the economy can get temporarily stuck in some sort of “liquidity trap”, a concept that Keynes never really made much of. One must say that the notion that the economy can remain trapped in a stagnant state because interest rates cannot fall below zero is hardly a new idea. Readers well versed in the history of economic thought would know that there had been much debate over this issue, especially during the 1940s, after the publication of Keynes’s General Theory.

The problem raised by Summers is perhaps best described in a famous article published in the American Economic Review by Don Patinkin in 1948 in which he adopted the old Wicksellian loanable funds model with the usual depiction of the neoclassical Investment/Saving relations. In this account, the investment relation is presumed downward sloping and the saving relation is upward sloping vis-à-vis the rate of interest. Patinkin pointed out that, in times of crisis, these investment/saving curves could cross only at negative interest rates. However, because of the zero lower bound in the nominal interest rate, the economy would find itself stuck in a non-market-clearing disequilibrium state, dubbed a liquidity trap. However, unlike Patinkin who sought a solution in terms of the workings of the real balance (or “Pigou”) effect, in which flexible wages and prices eventually generate deflation, which then shifts the saving function in such a way that eliminates the disequilibrium gap (as real balances rise), no one nowadays believes in the significance of the real balance effect in a world of an essentially endogenous “inside” money to which the New Consensus model formally subscribes. In terms of Patinkin’s vocabulary, “inside” money is simply private money that is created within the commercial banking system and appears in the economy in the form of bank (deposit) liability, while “outside” money was government money, that is to say, central bank-issued money, constituting the country’s monetary base. As Michal Kalecki had noted also in the 1940s, without the assumption of significant “outside” money, the real balance effect cannot work, leaving supporters of the New Consensus nothing to resort to that could bring the system back to “normal” growth.

Hence, the explanation offered by Summers, Krugman et al., is nothing more than what neoclassical economists were saying over half a century ago: because of the crisis, the expectations-determined Wicksellian “natural” rate remains persistently negative, but the money rate has a zero lower bound, which implies that the economy remains stuck in a Patinkinesque disequilibrium state. Indeed, one wonders what the controversy is really all about since, except for the use of the “secular stagnation” words, which, by the way, had been used by Great Depression economists, such as Alvin Hansen during the late 1930s, there is nothing new that Summers is saying. This is all déjà vu not only from before the financial crisis, but actually ever since the 1940s! Our economics profession appears to be stuck in a time warp or has succumbed to some sort of collective amnesia by continuing to repeat the same old controversies!

Within this neoclassical theoretical box, there is only one solution offered to move the economy out of secular stagnation. One must boost the Wicksellian “natural rate” by strengthening expectations of return. More precisely, the solution offered by both Summers and Krugman is to promote asset bubbles. Hence, instead of aborting the bubble that will ineluctably end in a crisis, we are told that we should be sustaining these bubbles and keeping them aloft. It is truly ironic that, while these economists would probably never recommend wage inflation (because it would supposedly cause unemployment), they have no problem in promoting sustained asset price inflation that would redistribute wealth towards those who already own too much of it! But even if one wanted seriously to contemplate this proposal, regardless of its equity considerations, how would you do it? Monetary policy has already been doing all that it can to sustain asset inflation via reducing interest rates and keeping them extremely low, and, as Summers and his allies recognize, the monetary authorities are constrained by the zero lower bound.

If this liquidity trap is really a problem and if they wish to be consistent with their loanable funds theory and remove the disequilibrium gap, why does the central bank not pay a premium to any bona fide borrower at banking institutions so that the effective real borrowing rates become negative even with a positive inflation rate? Instead of charging positive interest rates, borrowers would be receiving an interest transfer for borrowing until the bank rate reaches or falls even below the negative real natural rate. Such a policy of negative real interest rates would certainly be consistent with their hybrid Wicksellian framework and this type of policy could well trigger an asset bubble. However, in reality, instead of being a monetary policy, this would actually turn out to be a very peculiar, and rather perverse, type of fiscal policy measure. Surely one could think of much better measures than subsidizing across-the-board bank borrowing just because it would be consistent with their theory.

As I have argued elsewhere, if Summers et al., are really worried about secular stagnation and truly want to kick-start the economy, what is needed is an expansionary Keynesian fiscal policy of massive public investment, not as a temporary measure (as partly happened during the financial crisis with the disjointed implementation of fiscal stimulus packages internationally), but as a long-term measure that would sustain aggregate demand in the long term. This measure will support not only employment growth in more well-paying and highly skilled jobs, but also long-term productivity growth, thereby encouraging private investment as well. To a large extent, this is what happened during the early postwar period that produced a virtuous cycle of growth, now remembered as the “Golden Age” of western capitalism. Instead of secular stagnation, with the precise political commitment and policy mix in favor of activist fiscal policy cum public investment, we could actually be looking forward to a world of strong expansion and a truly full employment environment that had largely characterized much of the early postwar era.

It is time to abandon that outmoded New Consensus model that seems to be keeping even some of the brightest in the profession stuck in an intellectual cul-de-sac. The real inhibitor of growth is not the zero lower bound, but the lack of desire to venture outside the neoclassical box. This lack of desire to pursue new fiscal policy measures that would commit government to long-term spending and full employment is not because the latter is not a viable alternative, but perhaps because, as Kalecki had long surmised also in the 1940s, it is the political fears of the wealthy who would benefit from asset booms that overrides good common sense and prevents the enhancement of the welfare of the majority who, under the existing policies, are faced with the continued spectre of long-term austerity and secular stagnation.


Baker, D. (2013), “Bubbles Are Not Funny.” Center for Economic and Policy Research, (November 16);

Davies, G. (2013), “The Implications of Secular Stagnation.”, Financial Times, (November 17);

Hansen, A. (1939), “Economic Progress and Declining Population Growth.” American Economic Review, 29, no. 1(March), pp. 1- 15.

Kalecki, M. (1943), “Political Aspects of Full Employment.” Political Quarterly, 14, no. 4 (October),pp. 322-330.

Kalecki, M. (1944), “Professor Pigou on ‘The Classical Stationary State’ — A Comment.” Economic Journal, 54 , pp. 131-32.

Krugman, P. (2013), “Secular Stagnation, Coalmines, Bubbles, and Larry Summers.” New York Times, (Novemeber 16);

Patinkin, D. (1948), “Price Flexibility and Full Employment.” American Economic Review, 38, no. 3 (September), pp. 543-64.

Romer, D. (2000), “Keynesian Macroeconomics without the LM Curve.” Journal of Economic Perspectives, 14, no. 2 (Spring), pp. 149-69.

Seccareccia, M. (2011-12), “The Role of Public Investment as Principal Macroeconomic Tool to Promote Long-Term Growth: Keynes’s Legacy.” International Journal of Political Economy, 40, no. 4 (Winter), pp. 62-82.

Summers, L. (2013), Speech delivered at the 14th Annual IMF Research Conference: “Crises Yesterday and Today.” International Monetary Fund, (November 8);

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  1. JaaaaayCeeeee

    When you talk about how we should kick start the economy with massive Keynesian public investment, it’s what Krugman’s been saying all along. We can avoid this hellscape of an economy in a liquidity trap or secular stagnation, if Congress did its job of expansive fiscal policy, instead of bad politicians listening to bad economists, then legislating destructive fiscal policies like austerity. He calculates that if we raised federal debt from 72% to 76% of GDP, we’d recover.

    This is what worked so well after the depression. I’m not sure how it compares to your suggested strategy of the FED paying, ” … a premium to any bona fide borrower at banking institutions so that the effective real borrowing rates become negative even with a positive inflation rate.”

    1. David Lentini

      What’s interesting is why Krugman appears to have committed a volte face to abandon his arguments for Keynesian stimulus, and joined with his old buddy Summers to continue the casino. But if you follows Krugman’s commentary over the years (at least until I gave up on Krugman about a year ago), I think you’ll see that Summers has some special hold on Krugman. Krugman nearly always pulls his punches when it comes to Summers, and often acts as his apologist.

      And I think the article expresses, perhaps unintentionally, the intellectual weakness rampant in economics. Consider the author’s concluding argument:

      It is time to abandon that outmoded New Consensus model that seems to be keeping even some of the brightest in the profession stuck in an intellectual cul-de-sac.

      How smart can these men and women really be if they keep sticking (sincerely) to a broken model that’s over 70 years old? Why do we continue to tolerate academics who can’t seem to understand that models that create blatantly absurd conditions, like negative interest rates, are broken and therefore useless? Either economists are liars or fools.

      There is no law of nature that says we have to have economists running our lives. If the best economists, by their own selection through their phony “Nobel” prizes, can’t do better than this, then it’s time to abandon economists and leave economics to the ivory tower.

      1. Jose

        Summers has been much more successful than Krugman: Treasury, Harvard, Hedge Fund consultant, darling of Obama, etc.

        Maybe we should conclude that this “I envy Larry” performance put up by Krugman in the last couple of weeks simply shows that the NYT columnist is …human!

        1. Dan Kervick

          I don’t think he has done any volte face. In fact, he is simply declaring Summers a genius because Summers now agrees with Krugman on his “negative natural rate” diagnosis.

          I think the precipitating cause of this latest rhetorical intervention by Summers and Krugman is the impending accession of Yellen to Fed chair. They want her to consider some combination of either (i) a higher inflation target or (ii) negative nominal rate techniques. They also seem worried about tougher financial sector regulation and higher capital requirements.

          Remember that almost the entire Democratic Party brain trust from back in the day is intellectually and emotionally committed to defending the Clinton legacy. Part of that legacy is the dot-com bubble. Summers was one of the architects of the economic system that gave us that bubble and so all he’s doing now is defending it. He knows that his predilection toward loose regulation was a big part of what did in his nomination bid, and so he decided to use the Yellen hearings to hog the spotlight and defend his deregulation legacy.

          Krugman is sucking up a bit, because he knows Summers is a trusted global crony capitalist insider and Big Wheel who TPTB listen to, while they regard Krugman as a bit of a partisan gadfly.

    2. Dan Kervick

      Krugman supports temporary fiscal “stimulus” because he thinks we are in a liquidity trap where monetary policy effectiveness is turned off, so to speak, and where the arguments against government spending are temporarily inoperable. But he has been unwilling to advocate a longer term re-balancing of national investment in the direction of public investment.

      The problem is that the US has been experiencing a long term decline in government consumption and gross investment, as well as a destruction of labor bargaining power and political influence and a concurrent growth in predatory financialization. The result has been inequality, instability and stagnation.

      We are also facing a deep problem with the failure of political capacity to mobilize the country, its workforce and its resources to face a range of national and global challenges that cannot be handled by private sector entrepreneurialism alone. We’re destroying our planet, overpopulating it, and straining its capacity to support harmonious and decent societies.

      The socioeconomic challenge facing the US are much more serious than Krugman is wont to consider, and will require require much bolder innovations than those with which he seems willing to engage.

      Krugman is a middle-of-the-road, late 20th century neoliberal who thinks we can rely on the standard macroeconomic toolkit to get some kind of return to normalcy. Frankly, he has his head up his rear, and seems too frightened by the bigger problems to engage with them or even acknowledge their importance. He’s a dinosaur, obsessed with proving that the MIT dinosaurs were correct in their 1970’s and 1980’s battles with the Chicago dinosaurs.

      1. fresno dan

        “I still think that we need to fight inequality for long-run reasons, and that trying to shoehorn the post-financial-crisis weakness into the same framework just weakens our credibility. But it’s not a big deal.”

        Its a funny thing about economists – they talk about a lack of demand, but never a lack of money. Their solution is to give money to people who have a ton of it, and so much stuff, that the only use they have for the money is to engage in nano second trades.

        Forty years of all the GDP gains going to the 1% – maybe most people rightly conclude that its a fools game to work hard.

      2. craazyboy

        haha. Dinosaur economics. Maybe it will spawn a new field of study. Economic Paleontologists.

        I had a chance to study Krugman’s hind brain in motion with his negative interest rate nonsense.

        Back when the QE1 possibility came into existence, he was reminding everyone about the “liquidity trap” – which was first noticed by Marriner S. Eccles back in the 30’s.

        This led to a discussion about the Taylor Rule – which is supposed to be the Fed’s favorite decision making tool for interest rate policy. It is an empirically derived formula relating interest rates to capacity utilization. (and then to employment – by inference)

        But since this is empirically derived, any “scientific minded” person would acknowledge that there would be bounds on this relationship, and anyone with at least one toe in the real world would wonder if the relationship would change over time considering factors like automation, offshoring, and our reduced need for real estate agent and loan broker capacity.

        But no. He plotted the curve on a x-y chart of interest rate vs capacity utilization and then extrapolated the curve to the negative interest rate quadrants.

        A new world was born!!!

        Then he said that it would be silly to expect negative interest rates to happen. (now we are being silly) Then somehow asserted that QE has the same effect.

        I asked him at the time what the transmission mechanism was and got no response to my comment.

        Now the track record is in, we got asset inflation and lots more derivatives – not much capacity utilization – and what we did get could as well be attributed to some rebounding in the biz cycle.

        So now the big lizard people are waffling over to their next big explanation for the “stagnant economy”.

      3. John Yard

        I think you made a significant point here. Much of the progressive gains of the 20th century were a natural consequence of the need to mobilize the nation for WWI, WWII, and the Cold War . If you need to draft every young male – as opposed to a small volunteer army – the price to be paid is a certain level of social justice and equality for these young men and their families.
        With the end of the Cold War , we no longer need mass armies and their social consequences – at least till the next crisis.

        1. Roland

          Contemporary warfare is not labour-intensive–neither on the battlefield, nor along the supply chain.

          So if mass recruitment for the armies or the factories is the key to effectively forcing redistribution and winning concessions from the ruling class, then we are in a lot of trouble.

  2. Paul P

    Sustained growth will require redistribution. How that is going to occur under financial, monopoly capitalism is impossible for me to imagine.

    And, growth, were it to occur, had better be to create a solar economy.

    With gusto, our modern, educated civilization moves to cut down its last tree.

    Our politicians cannot imagine fiscal policy to build a solar economy or government as an employer of last resort, except for war, to employ people. What we have is Larry “He’s Smart” Summers and Nobel laureate Paul Krugman proposing bubbles.

    It’s funny.

    1. mansoor h. khan

      Paul P said:

      “Sustained growth will require redistribution.”

      More economic growth requires both “more demand” (as implied by the above comment from Paul P) and a “cheap” energy source ($93 barrel oil won’t cut it — need more like $20 barrel oil for growth).

      Also I don’t think a cheap energy source (with a high EROEI) has been found yet. So forget about growth for now.

      We should focus more on better “sharing” of the economic capacity we have left (and our economic capacity is mostly limited by availability of fossil fuels — for now anyway).

      We always have had a distribution problem when the rate of production of goods and services skyrocketed due to the use of fossil fuels (starting with the use of coal).

      This distribution problem was masked by economic growth. Economic Growth did provide opportunities for most in society to get enough money to not revolt and get too upset (at least in the industrialized countries).

      We now must solve this distribution problem and we must keep in mind the dwindling fossil fuel supplies which has powered our material production/modernity so far.

      I suggest the following:

      A) we should start a social credit/Social dividend/guaranteed income program and give every U.S. citizen $500 per month regardless of income or regardless of any public assistance they currently receive.

      B) Increase taxation to keep inflation in check. Increased taxation should include a stiff consumption tax to discourage too much consumption by the rich and upper middle classes. Social credit monthly stipend can be adjusted to account for the consumption tax. Also, “basic” goods can be made exempt from the consumption tax.

      D) Start stringent energy conservation and run a low-grade industrial civilization with less yearly fossil fuel consumption.

      C) This will buy us time to develop another cheap energy source and possibly resume growth or if we don’t find another another cheap energy source we will have time to learn how to live without machines, fertilizers and pesticides.

      more at:

      Mansoor H. Khan

      1. Dan Kervick

        One form of growth comes from improved efficiency at the existing level of resource use rather than from increased levels of resource exploitation.

        Also, redistribution will boost demand.

        1. Mansoor H. Khan


          That is why we need to agree on how to measure inflation? and then do a good job of measuring it.

          The rate of inflation gives us a good idea of whether we are below, at or above the capacity of the economy.

          Mansoor H. Khan

  3. Pelham

    Government spending would be great if it went way beyond the “shovel-ready” infrastructure projects that so many talk about. These jobs tend to employ the small minority of people with engineering skills who often already have work. And the knock-on effect from their further employment in bringing others back into the workforce is small.

    What we need is the kind of broad-based, low-skill and white-collar jobs that most of the unemployed can handle — even, and maybe especially, the proverbial English major.

  4. Perry Mehrling

    When Hansen used the phrase “secular stagnation” he was thinking about a model of dynamic growth that depended crucially on vigorous investment spending. Maturation of the American economy meant that the big wave of capital spending was over, and that posed a problem for growth. His preferred solution for stagnation was something he called the Dual Economy, in which public investment created a New Frontier for private investment to exploit. In other words, real investment opportunities not asset bubbles.

    As an economist, Hansen was the product of the distinctive school of American institutionalism. It was his students who made the so-called Keynesian revolution in America, including the neoclassical synthesis. I wonder what he would make of it all, were he to return today?

    1. Dan Kervick

      Hansen’s rationale for the Dual Economy sounds similar to Mariana Mazzucato’s recent arguments for mission-driven public investment: private sector investment is more efficient when there is a core national strategy and public investment backbone that reduces long-term uncertainty and around which the private sector can organize its activities.

  5. Jackrabbit

    Krugman-Summers TINA Trap

    Please don’t fall into this trap. The choice is not Deficits or Bubbles.

    What we need is to recoup bogus investment gains much as we now recognize that CEO pay should be clawed back.

    Bubbles are so lucrative because of tax policies like carried interest. Tax policies ‘fix’ the game and ensure that Wall Street wins every time.

    The notion that clawing back bogus gains is “redistribution” is just wealthy propaganda: these gains are more like stolen property and should be returned.

    Furthermore, if bogus gains are made unavailable, we would probably have few, if any bubbles, and when we do, the money that is recouped would pay for fiscal stimulus.

    Krugman and Sumemrs are quislings who speak for the monied interests that are stomping on our democracy. ‘Bubbles are good’ is TINA misdirection – nothing more.

    The Squirrel Party needs to publicize such systemic corruption and shame those who promote it.

      1. Yves Smith Post author

        They didn’t. It was defeated by a large margin last Sunday.

        A bigger ratio would have had better odds of passing. Switzerland does have some large mulitinationals headquartered there.

    1. Jackrabbit

      Bubbles are also lucrative to wall street because they artificially pump up trading volume.

      “Bubbles are good” (officially endorsing bubbles) helps to rope in the little guy with ‘momentum’ trading.

      And it gives Wall Street another reason to attack regulation. If small investor participation is explicitly recognized as speculative, then why protect them?

  6. Hugh

    I agree with Paul P. It is wealth inequality, the transfers of wealth to the rich over the last 35 years, that has stifled aggregate demand. High marginal tax rates, estate taxes, and even asset taxes need to be part of any solution. And to enact those, we need to take back the political system. It is only then that fiscal stimulus will work because the rich can no longer loot it, and with less money, and less power, they will have less incentive to blow bubbles.

    “It is truly ironic that, while these economists would probably never recommend wage inflation (because it would supposedly cause unemployment), they have no problem in promoting sustained asset price inflation that would redistribute wealth towards those who already own too much of it!”

    As we so often say here, this is a feature, not a bug.

    1. MikeNY

      I certainly agree with you and Paul P. that wealth concentration depresses growth and renders the Fed’s monetary stimulus largely ineffective. The absolute level of debt also plays a big role.

      I’ll repeat something I’ve said before, however: we must be wary of being enchanted by the growth talisman. It is probable that, even with more equal wealth distribution, the days of 3% real growth are behind us. The insistence on growth is often merely a distraction tactic to throw people off the insistence on wealth redistribution. It is also highly questionable whether the planet can sustain humanity’s quest for infinite growth.

      Today, it is heretical in politics to call for redistribution for redistribution’s sake. But it is morally right, and soon it will be seen as politically prudent, indeed, inescapable, if there is to remain a nation to govern. I believe progressives need to claim the high ground here, and stop bandying about tired Thatcherite calls for faster growth.

      1. Hugh

        There will be some opportunities for growth as we switch to a sustainable industrial base, communities, transportation, and energy. But we need to rethink the whole concept of labor. It needs to be defined more in terms of its social benefits. Being very productive doing things with lots of destructive externalities doesn’t cut it while low pay or unpaid labor of great social benefit, such as caregiving, needs to be treated and valued. At the same time, leisure should be destigmatized. If we can produce what we need for the society we want with less labor and more leisure, that should be viewed as a social good.

        As for redistribution, we have seen 35 years of unrelenting redistribution upward. Anything that government does or we allow as a society effects a distribution or redistribution of our society’s resources.

  7. Banger

    Economics, to the extent it ignores politics, is a crippled field at least in macro-economics. Markets, “economies” are chiefly influenced by the structures (determined by political processes) they operate in. The old models economists advocate are flim-flam arguments that make it appear that power-relations are inevitable (TINA) and the result of “natural” forces. This is an astonishing claim if you actually think about it. There is no rational reason why we have to allocate resources and wealth the way we currently do other than the fact the powerful want to continue to be in power.

    Until we can state that economics without politics has no rational basis we are going to be misled by people like Summers and Krugman. In defense of Krugman, I believe he favors policies he thinks have the best chance of benefitting people. He knows that stimulus is out of the question politically so his moderate support of “bubbles” makes sense. As I’ve said before, when a number of bubbles are going on at the same time when one crashes there is another or several others to take its place and the idea, as I understand it, is that these bubbles do encourage economic activity (crudely) by keeping money moving around and feeding the confidence fairy (I believe is very important). I believe that is Krugman’s motivation. We suffered, in 2008, from the bursting of ONE BIG BUBBLE, fueled by criminal fraud. My psychic antennae tell me that the system’s main actors have been persuaded not to pursue gross criminality but, rather, to be content with somewhat smaller gains mainly at the top through Fed-fueled speculative bubbles. We have to remember that the fraud-based real-estate bubble extended benefits and wealth not just to top execs on Wall Street but to loan originators, real-estate pros, Bank VPs, and so on. Bill Black has told us that half of all RE loans in 2007 (I think) were liar’s loans and that implicates all actors big and small in criminality. Today, the more petty actors have been, as I understand it, shut out of the party.

  8. tew

    Krugman has been pounding the tables for more fiscal response ever since the financial crisis hit five years ago.

    I guess turnabout is fair play: Krugman mischaracterizes his opponents all the time, so it should be that the same should happen to him.

    As for Summers, when I listened to his IMP speech I didn’t understand him to oppose aggressive fiscal policy. Maybe I didn’t listen closely enough.

    1. Yves Smith Post author

      No, he only “pounded the table” in 2009. He’s instead been saying that fiscal stimulus would be better but he has repeatedly endorsed the use of monetary policy as a “well, this is less good but still a step in the right direction.”

      This is wrongheaded politically and economically. The use of monetary policy as if it might actually be doing something for the real economy allows the political classes to claim they are doing the best they can

      If Krugman were really “pounding the table” he’d be saying there isn’t enough demand and we need more government spending, period. He would not be giving cover to the political classes and Dem party

      1. Dan Kervick

        Right. Nine out of ten Krugman articles are about monetary policy, QE, tapering, yada, yada.

        Krugman is a good soldier. The White House told the Dem opinion elite that further fiscal expansion or serious government activism was out of the question and the Prez was going to jump on the hand-wringing, debt-fixer bandwagon – so please beg the Fed to bail us out. Krugman, DeLong, Romer, Yglesias etc. have all carried the water for the White House since then, and still are.

  9. b2020

    I really like this summary. I do think that it is missing an important aspect that is analytically difficult as it is harder to prove, but crucial to understand why we moved away from postwar policies. What is missing is the intent of the perps.

    Summers, and even Krugman are not addressing “elites” that are interested in optimal/efficient etc., or interested in economy issues at all. These “elites” are interested in maximizing their own wealth and power. Everything else – including that much vaunted economy – are means to this end. Hence, while it is extremely relevant that the arguments of the retainers of those “elites” are inconsistent with solving economical problems, or that the current economy is dysfunctional due to policy choices, it is also irrelevant. The wealth and power of the “elites” has prospered not despite, but because everybody else has lost.

    Summers is providing those “elites” a new bussword-du-jour to continue the ad-hoc policies of the last decades and promote them to an explicit extension of the “model”. Krugman would like to count how many pennies can dance on a securitized loan. The elites will use the former, ignore the latter, and the conomy will not get fixed because any fix means that the beneficiaries of systemic dysfunction will have to “loose”, even if everybody wins. Unenlightened wealth is the ruin of civilization.

  10. bill schlos

    There is a very convincing argument that secular bull markets and bear markets alternate every 17-18 years. The 17.6 Year Stock Market Cycle: Connecting the … – The last secular bull market lasted from 1982 to 1990, and we are now in the closing years of a secular bear market. In the former, the stock market grows an average rate of 10.5%; in the latter, hardly at all. Despite author Kerry Balenthiran’s obviously wrong prediction of a crash in 2013, it’s a fine analysis.
    I realize that sounds fatalistic — after all, what really can be done in a period of “secular stagnation”, i.e. long-term bear market. But recognizing reality is always the first step to useful action. The bubbles of tech, real estate, and now QE have provided short-term lift, but the secular bear market remains, until 2018.

  11. Jim Shannon

    “…it is the political fears of the wealthy (aka the 1%) who would benefit from asset booms that overrides good common sense and prevents the enhancement of the welfare of the majority (aka the 99%) who, under the existing policies (aka corruption of governments by the 1%), are faced with the continued spectre of long-term austerity and secular stagnation.”
    ” Secular Stagnation” simply means the 1% continue to win!
    Everyone knows that to be a fact! The 1% have always used wealth extracted from society (the 99%) to ecomomically abuse and destroy the 99%, clearly content to see others starve and die, using all means necessay to stay wealthy! The 1% have now economically blown up our World and they will never allow the people to TAX them out of existence! No one even wants to think about that as an option for the benefit of the 99%. Greed reigns supreme!
    Americans have been rendered economically and politically powerless and the 1% and our educational system makes sure it stays that way.
    Politics in an Age of Casino Capitalism
    The proof we need to TAX CentaMillionaire$ and Billionaire$ out of existence is everywhere and it continues to grow! If we hope to ever see anything get better it needs to happen soon!
    Governments worldwide have simply become mouth organs for the only party – the business party – the 1% , that control all governments,ideas and thought.
    Divide and Conquer WORKS! The 1% know that to be a fact!
    So the 99% continue on divided by the 1% and whatever BS their Media wants to drum up. America Media is just like “Fight Club” – and what’s the first rule of “Capitalism for the 1% and Conquer and Divide”
    “Don’t talk about TAXING ALL CentaMllionaire$ and Billionaire$ out of existence!”

  12. kevinearick

    Marriage Monetary Policy

    Welcome to the Bay Area Mr. President. How’s that technology locking labor out to pump capital marginal utility working for you? Interesting job, confirming marginal morons as rocket scientists, to make a buck faster and faster. “It’s not what your country can do for you…” that builds a nation; it’s that shared vision thingamakabob.
    (Tell Admiral Traaen hi for me)

    Monopoly Monetary Theory may be fun a few times around the board, but it’s just a game, for those who think that money and property are something more than mere contrivances. Marriage is the imperative, every nation on this planet is bankrupt without it, and only labor can make it work, which is why the global middle class is caught in a liquidity trap and the old families are jockeying for survival.

    Gold is not the exit. That much you know. The reserve currency, the latest and greatest modern monetary theory to blow up, replaced gold when it blew up. Pick any MMT out of a hat you like, what you need is a technology that will raise the living standard globally, if you want to be the leader of the free world. In short, you have to get labor to show up.

    Money is not the root of all evil; stupid is. Unlike capital control and middle class entitlement, labor is quite capable of discounting money and property in real time without a meeting in Davos. Labor just moves away from stupid, into another technology. The lease is up on the war machine, which is why the US Navy is shooting itself.

    Regardless of the [hi]story you choose, they all tell you the same thing, that the source of “man’s inhumanity to man” is groupthink, empire scale gravity. Monopoly is just the least common denominator, the lowest energy. Corporations of middlemen are not good or evil; they are just stupid, aggregated. Those expensive gas consumers with loan payments beyond their utility weren’t a clue?

    Blaming corporations for outcomes is like blaming your training wheels for not being able to ride a bike without them. Money is a derivative of capital, which is a derivative of labor. Assuming capital is the integral, and wages must be saved to buy capital, is stupid, but “everybody does it.”

    The State of California has perfected the last-to-lose algorithm in the latest empire iteration, but to what end, critters on the outside looking inside, waiting for the next bulldozer, renting a perception of life? Bring on the next set of humanoids Bob; you gotta be stupid to bet against the Fed, an irrational market always beats a rational investor.

    OK, let’s do the math. The Fed is pumping $85B per month, so Cal, and others, can generate $2.5B per year on the margin…No problem Bob, next contestant please. Another transit iteration for San Francisco, at $10B+++ – great idea.

    Create demand for gold, which can then be leveraged into more paper, that’s givin’ it to the man. And buy your gal a big fat diamond ring from DeBeers while you’re at it.

    Money is a weapon. War breaks out when soft power no longer serves its purpose, when bedfellows become very strange in deed. And ends at labor’s doorstep. Careful which door you knock on; we are not all equal and under the law.

    Your own will throw you under the bus. That is an empire accounting certainty. Empire crap hasn’t changed in thousands of years; it’s always the same algorithm, with a different dress.

    Account: form of judgment; Helper: strength of guidance; Patience: labor of love; Walk: children of light

    “But I see a law in my members warning against the law of my mind, and bringing me into captivity to the law of sin which is in my members; But now after you have known God, how is it that you turn again to the weak and beggardly elements, to which you desire again to be in bondage? You observe days and months and seasons and years; For the desolute has many more children Than she who has a husband; Now the whole earth had one language and one speech; Come let Us go down and then confuse their language, that they may not understand one another’s speech; Know certainly that your descendents will be strangers in a land that is not theirs, and will serve them, and they will afflict them four hundred years; Come let us build ourselves a city, and a tower whose top is in the heavens; I will destroy them with the earth; But before faith came, we were kept under guard by law, kept for the faith which would afterward be revealed; My little children, for what I labor in birth again until Christ is formed in you…kindness…self control. Against such there is no law; But after faith has come, we are no longer under a tutor.”

    “God has a due season for all the seeds you plant, from bondwoman and freewoman. A woman’s effectiveness multiplies when she has a husband.”

    If you do not serve one master, faith in marriage, you will serve many, poverty by the law of diminishing returns. The 24 hour workweek is not a negotiation; it’s a frequency, the only one that will get you out of the mud. Watch out for the old man; he acts much faster than you can think. History is just a byproduct, repeated by self-serving politicians with observers prism.

  13. John_de_Vashon

    “The real inhibitor of growth is not the zero lower bound, but the lack of desire to venture outside the neoclassical box.”

    So let me see if I understand.

    The problem is not related to an [OK, relatively] objective measurement of a specific and widely-understood economic principle, but rather related to an abstract, nebulous, touchy-feely kind of generalization.

    Shorter: let’s not measure, let’s emote.

    Got it.

    1. Alejandro

      No…you didn’t “get it”. The point wasn’t to maneuver or debate within the “model” but to challenge the “model” itself. Maps are NOT the terrain.

    2. Yves Smith Post author

      HInt: if you are going to try straw manning, you need to be a lot better at it for anyone to buy it

  14. Min

    How ironic that Summers is predicting secular stagnation (IOW, Long Depression 2.0) when he is one of the architects of the inadequate Obama stimulus! Does he say anything about his role in producing this secular stagnation?

  15. Chauncey Gardiner

    Regardless of the reasons why or their merit, Mr. Summers et al and the policy makers they influence seem to be wedded to the former’s Saddle path phase diagrams and the mathematics behind them. (Sip of Lone Star – the national beer of Texas, while listening to that 1939 favorite “Back in the Saddle Again” in honor of Saddle path phase diagrams: )

    If such speculation is correct (and it may not be), a question arises as to what form bloodletting using leeches/taxation without representation might take?

    — Continued negative real interest rates?

    — Negative nominal interest rates?

    — Bail-in of domestic bank deposits?

    — Capital levy?

    … Other?

    … Gotta say, this is not a trick question. Like most of us, I really have no idea, but h/b wondering if this speculation isn’t in part driving the ramp in equities and a presumed bubble in offshore accounts among the kleptocracy.

    And speaking of 1939, wonder what it’s is going to be: The 1939 New York World’s Fair with all its “Welcome to Tomorrow” promise (See:, or some less desirable outcome? If it’s the Fair, I’m all-in of course.

    Btw, for those here like myself who favor Keynesian fiscal solutions, one of the IMF conference speakers mentioned that Miley Cyrus google hits outnumber Keynes by well over 200:1. He may have underestimated, but hope this is not reflective of the level of general interest.

    1. craazyboy

      Seeing as how there are so many millions on Medicare and food stamps already, and you can’t have more than $2000 in the bank to qualify for these programs, charging them negative interest on their accounts just won’t transfer all that much money to the banking system…so the banks can…y’know, make the economy better.

      So maybe a Blood Bank for the little folk? Regular donations and the proceeds can be traded on an exchange and hospitals can be end users of the commodity – after Wall Street plays with the pricing a bit and sets a market price for free blood?

      Then one problem I see with QE is that the banks have to sell the Fed a bond to get near zero interest money. If the Fed would just give money to the banks, then the banks…could…intermediate the funds…y’know, as they see fit?

      If things ever got really bad we could try it the old fashioned Keynes way and do fiscal spending where congress will…give money to a government contractor and then…y’know, do something that makes the economy better!

  16. RanDomino

    We could have long-term spending and full employment tomorrow if the government hired half the unemployed to dig holes and the other half to fill them in.
    Or maybe we need to reexamine a couple of assumptions, hm?

  17. bob goodwin

    Oh man, I was predicting that old guard would soon declare permanent stagnation, but it was a cynical prediction I actually didn’t believe would happen. The fed is signaling that it will slow QE, and yet the debt deflation that Yves taught us about is clearly not resolved. Non-corporatists wanted to liquidate wall street during the crisis, and build a new financial system from scratch with government money. Instant resolution, faster stimulus effect. Lots of dead bodies, but mostly the right ones. The corporatists wanted to funnel capital via back-channels. So a narrative was created by them. Now that fictitious employment data is signaling a fictitious recovery, they need a new narrative to keep the back channels flowing. Now the economy is all better, except permanently ill, and in need of more extraordinary measures.


  18. steven jennings

    Someone pointed out earlier in the comments that the real problem is oil (our major “free” energy source that drives all economic growth) or the lack of it, combined with the fact that we can’t keep burning it. Everything else is really just moving the deck chairs on the Titanic. Redistributing paper-money wealth would boost demand (I would spend more money if I had it) but that will just push up the cost of oil (energy price inflation is unavoidable in a world of limited energy and increasing demand for that energy) thus damping down demand.
    There is no way out of this loop, the best that we can do is share resources better to make life more equitable (zero growth economy). However I see no chance of this happening.
    As the Eagles said back in 1976 “There is no more new frontier, we have got to make it here”.

  19. Teejay

    Asset bubbles keep the rich getting richer and the poor getting poorer. That’s why the plutocrats want to “solve”
    our financial problem with yet another bubble. Next up the
    auto loan backed security.

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