Secular Stagnation and Capital Flows

Lambert here: Just to drive a stake through the heart of Sully’s “blogging is dead” meme, this battle is being fought on Bernanke’s blog, Summers’s blog, Krugman’s blog, Cowen’s blog, Matt O’Brien’s blog, and Ryan Avent’s blog.

By Jérémie Cohen-Setton, PhD candidate in Economics at U.C. Berkeley and a summer associate intern at Goldman Sachs Global Economic Research. Originally published at Breugel.

What’s at stake: Former Chairman of the Federal Reserve and new blogger Ben Bernanke has generated many discussions this week by challenging the secular stagnation idea. Bernanke argues, in particular, that the stagnationists have failed to properly take into account how capital flows can mitigate or even eliminate the problems generated by secular stagnation at home.

The global secular stagnation hypothesis

Ben Bernanke writes that secular stagnation requires that the returns to capital investment be permanently low everywhere, not just in the home economy. All else equal, the availability of profitable capital investments anywhere in the world should help defeat secular stagnation at home. The foreign exchange value of the dollar is one channel through which this could work: If US households and firms invest abroad, the resulting outflows of financial capital would be expected to weaken the dollar, which in turn would promote US exports. Increased exports would raise production and employment at home, helping the economy reach full employment.

Ben Bernanke writes that many of the factors cited by secular stagnationists (such as slowing population growth) may be less relevant for other countries. Currently, many major economies are in cyclically weak positions, so that foreign investment opportunities for US households and firms are limited. But unless the whole world is in the grip of secular stagnation, at some point attractive investment opportunities abroad will reappear. If that’s so, then any tendency to secular stagnation in the US alone should be mitigated or eliminated by foreign investment and trade.

Paul Krugman writes that international capital mobility makes a liquidity trap in just one country less likely, but it by no means rules that possibility out. You might think that you can’t have a liquidity trap in just one country, as long as capital is mobile. As long as there are positive-return investments abroad, capital will flow out. This will drive down the value of the home currency, increasing net exports, and raising the Wicksellian natural rate. But this isn’t right if the weakness in demand is perceived as temporary. For in that case the weakness of the home currency will also be seen as temporary: the further it falls, the faster investors will expect it to rise back to a “normal” level in the future. And this expected appreciation back toward normality will equalize expected returns after a decline in the home currency that is well short of being enough to raise the natural rate of interest all the way to its level abroad.

Tyler Cowen writes that it’s the wrong comparison of interest rates and the wrong metric of expected currency appreciation. Rather than looking at real interest rate differentials, take the market’s implied prediction for the euro to be the forward-futures exchange rates.  These futures rates match the differences in nominal rates on each currency across the relevant time horizons.  Those equilibrium relationships hold true with or without secular stagnation, whether in one country or in “n” countries, and from those relationships you cannot derive the claim that expected currency movements offset cross-border differences in real rates of return. The best way to speak of the non-ss countries, for international economics, is that their corporate sectors offer nominal expected rates of return which are relatively high, compared to their nominal government bond rates.  Once you see this as the correct terminology, it is obvious that capital still will flow outwards to the non-ss countries, even with expected exchange rate movements. 

Negative interest rates in theory and practice

Ben Bernanke writes that if the real interest rate were expected to be negative indefinitely, almost any investment is profitable. For example, at a negative (or even zero) interest rate, it would pay to level the Rocky Mountains to save even the small amount of fuel expended by trains and cars that currently must climb steep grades. It’s therefore questionable that the economy’s equilibrium real rate can really be negative for an extended period. Bernanke concedes that there are some counterarguments to this point; for example, because of credit risk or uncertainty, firms and households may have to pay positive interest rates to borrow even if the real return to safe assets is negative. Also, Eggertson and Mehrotra (2014) offers a model for how credit constraints can lead to persistent negative returns.

Larry Summers writes that negative real rates are a phenomenon that we observe in practice if not always in theory. The essence of secular stagnation is a chronic excess of saving over investment. Ben Bernanke grudgingly acknowledges that there are many theoretical mechanisms that could give rise to zero rates. To name a few: credit markets do not work perfectly, property rights are not secure over infinite horizons, property taxes that are explicit or implicit, liquidity service yields on debt, and investors with finite horizons.

Secular stagnation vs. global savings glut: the policy implications

Matt O’Brien writes that even though secular stagnation and the global saving glut are distinct economic stories, it’s easy to confuse them since they look the same. Output is below potential and interest rates are low in both, which is just another way of saying that people want to save more than they want to invest. 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. Now why does it matter which it is? Well, as Bernanke points out, different problems have different solutions. 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 down to run bigger and bigger surpluses and amass bigger and bigger piles of dollars.

Ben Bernanke writes that there is some similarity between the global saving glut and secular stagnation ideas. An important difference, however, is that stagnationists tend to attribute weakness in capital investment to fundamental factors, like slow population growth, the low capital needs of many new industries, and the declining relative price of capital. In contrast, with a few exceptions, the savings glut hypothesis attributes the excess of desired saving over desired investment to government policy decisions, such as the concerted efforts of the Asian EMEs to reduce borrowing and build international reserves after the Asian financial crisis of the late 1990s.

Ben Bernanke writes that of course, there are barriers to the international flow of capital or goods that may prevent profitable foreign investments from being made. But if that’s so, then we should include the lowering or elimination of those barriers as a potentially useful antidote to secular stagnation in the US. Matt O’Brien writes that we used to have a global saving glut caused by other country’s policy decisions, but now we have a global saving glut caused by other country’s secular stagnation. If that’s right, then it’s not going to be enough to browbeat countries that aren’t spending a lot into spending more. 

Ryan Avent writes secular stagnation creates 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. The rich world could address the imbalance within its economies while simultaneously addressing the geographic imbalance by allowing much more immigration. Investing in people in developing countries in hard and risky. But if those people wanted to come to America and were allowed to, then lots of things change. Investing in those people would not then require that money be sent abroad, to a different financial system in a different currency overseen by a different government. If the savings are in rich countries and the most productive investments are in poor ones, then the savings can move or the investments can move. 

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. sd

    Wow, this really pissed me off. Maybe it’s just me, but its beyond insulting to listen to a bunch of clearly pampered prince economists argue over the pixels in their semantics while on the street, the number of tents housing the homeless in formerly middle class communities keeps going up.

    It’s an unbelievable disconnect from reality.

    Like I Said, maybe it’s just me and cooler heads will comment intelligently.

    1. Demeter

      I support your view. I fail to see how strangling and starving and dispossessing the workers will EVER bring about an economic recovery. Just so the 1% can add to their hoards? Spare me!

  2. Ben Johannson

    Bernanke’s argument that great investment opportunities somewhere will always reverse stagnation assumes the validity of Say’s Law, that money is neutral in the long run, people have no preference for maintaining savings unless forced to do so and that money capital is always invested productively.

    Krugman is again confused regarding the definition of a liquidity trap, in which no one wants to buy bonds and holds cash.

    Cowen is so bogged down in theorizing about hot money he can’t see past the failed supply-side nonsense he regularly peddles.

    Summer’s argument in favor of existence of a global savings glut in which saving exceeds investment ignores that as a matter of accounting saving must equal investment. Keynes made this point eighty years ago but it’s amazing how many “Keynesian” economists appear not to have read it. Not to mention the global economy is a closed system in which financial assets always equal financial liabilities. You can have a savings glut in a given sector but not across an entire planet.

    Matt O’brien is locked into a banking model 150 years obsolete, assuming savings is lent out by banks, that countries are acquiring too much currency and creating a shortage of loanable funds, which is impossible.

    Avent wants the U.S. to “import” humans, known in previous eras as slave trading, and then “invest” in the slaves/immigrants. Beyond the extraordinarily offensive phrasing and a thought process which reduces humans to the status of a metal stamping machine, implicit in this argument is the current American population isn’t worth any particular effort.

    1. digi_owl

      These days importing humans can likely be interpreted to a massive H-1B expansion…

    2. MyLessThanPrimeBeef

      New banking models are no less scary.

      “When I see an investment bank, I immediately reach for my mattress.”

    1. Kyle

      Yes, thanks for the link. Inbred indeed. Secular Stagnation, Capital Flows – Glittering Objects. I don’t get Lambert’s purpose in wasting blog white space so that the Inbreds can further waste our time by foisting more of their BS on us. Isn’t Secular Stagnation just ideologic prettification for larding up the economy with excess debt? Does anyone have any doubt that that is what’s pinching off capital flows? The only reason I’d ever click on the links provided would be to say “STFU idiot” in the comments section of their respective blogs. Perhaps that’s what it will take for them to actually get it, a hundred thousand comments saying “Just Stop It!”

  3. dcb

    I don’t like to call someone names, but I can say for certain Ben Bernanke is not a smart man. In fact he’s stupid
    what perpetual negative real interest rates do is make speculation always profitable. There is less of an incentive to actually use capital for capital investments. Which is what has actually happened. It alters the metrics of how growth is achieved, and is counter productive. The rich don’t have to get rich via products, innovation, making sure the middle class is strong. You just buy assets and make your returns, The guy is living in some kind of fantasy land. Then of course there is the matter of who gets to borrow at negative real interest rates. I wish I had the citations, and I’m not an economist. But if I recall they “assume” all borrowed money goes to capital Plus it assumes frictionless transmission mechanism (banking sector). The guy is a real jerk!!

    1. NotTimothyGeithner

      Bernanke is a Republican after all. I was astounded when Obama appointed a man who was an architect of the Dubya economy despite my disdain of Obama even then. Getting back to Bernanke’s views, Republicans are stupid, kept relevant by the Democrats.

    2. craazyboy

      “frictionless transmission mechanism (banking sector).”

      Flows like shit thru a goose!

      After the crappy underwriting and fee extraction, off to “securitization” it goes and comes round to your 401k or pension fund. Might even be low interest return with AAA rated risk too!

  4. Pete

    To rob the savers and older retirees for as long as possible to pay for the bankers with reckless risk appetite. To justify the mistake being made by the decision makers before the crisis.
    To penalize the prudent and reward the reckless.
    To keep the debt from clearing cuz the debt is someone’s asset.

    It is the direct result of their policy. No difference from Japanese experience.

    1. John Yard

      That’s the ‘Japanization thesis’. Basically a state capitalism makes non productive investments to prop up elite interests, but the investments don’t have the cash flow to repay the debt. Crisis ensues, repeat loop.

      1. MyLessThanPrimeBeef

        Once upon a time, Japan copied us.

        Now, we copy Japan.

        Maybe we are on our way to a better, universal brotherhood world…E. Pluribus Unum.

        “We are pegging our currency to yours. It’s OK we can’t print at will any more. We’re trading places. “

  5. craazyboy

    Bernanke: “If pigs fly, everyone can bring home the bacon.”
    Adding – “I did NOT suggest capital controls back in 2011-2012 when other countries complained about my QE.”

    Missing Economist: “I’ve got a foreign bond mutual fund to sell you. They own half the Ukraine.”

    The Ghost of Milton Friedman: ” A Central Bank cannot control the policy interest rate and the FX exchange rate at the same time.”

    Missing Economist: “Currency Wars???”

    Missing Economist: “Savings glut??? – How ’bout a global central bank balance sheet glut as a result 6 years of QE by all major central banks???????????”

    Missing Economist: “I gotta go now. I’ve got some Earthling news to stay abreast of.”

  6. susan the other

    Thanks for this post Lambert. It confirms my suspicions that everything really is as clear as mud intentionally. The Steve Keen graph (from extra link above @ digi) shows that all they are talking about is the degree to which you inflate the economy – for the rich guys. Today Summers said in an interview on CNBC that it is dangerous to control inflation preemptively. What a comment! It’s all infighting now. Nothing left but shouting. So we know that some very special interests are getting hurt by the fact that there is no economy left to do any growing anywhere. And it truly doesn’t matter if it is chicken or egg. I think Steve Keen is going to recommend QE to the people next. Which would have been a good idea 30 years ago. I’m not so sure now.

  7. Yata

    The financial community already have our money, so they can prattle endlessly and politely on economic theory.
    Here’s a thought, how many of the economic theories espoused are predicated on a rigged market ?
    It’s a tasteless and trite question to be sure, it doesn’t make for polite dinner conversation, and is likely an affront to the sage and well-informed commentors who have, and still continue to, provide some of the most interesting conversation on the subject of the financial sector. There are times though that the insanity disseminated, from on up high, reaches a level of such seemingly absurd proportions it renders discussion worthless.
    These, of course, are simply ruminations from the peanut gallery and the true conversation likely a bit more esoteric than common knowledge would provide for.
    What i’m able to see from this perspective is three decades of expansion in the FIRE sector that have brought with it enough leverage and deregulation to create what is essentially a social trap of epic proportion. The scope of which has so inextricably entwined the future of our financial sector with national security interests that threats to the current state of leverage are mitigated by accomodation by the federal government as was seen when years back financial institutions were able to wrap derivitives exposure with an FDIC guarantee, which allowed them to escape margins calls on a credit downgrade. Add to this the now current hierarchy of derivitive contracts in a bankruptcy, breakers being put on the unwinding time of these contracts, and the role of the central bank, MERS, Treasury, and a reprehensible set of legislators in facilitating what is esssentially a world full of over-leveraged bad positions.

    You’ll have to appreciate this is why it is that conversations on more capital flow don’t quite reach the level of panacea others have envisioned.

  8. Yata

    I don’t believe the comment moderation practice is very helpful. I spent quite a few minutes composing, what I thought, was a worthwhile comment, only to have it evaporate in the black hole of the moderation process.

    1. Lambert Strether Post author

      You wouldn’t want to see the comment section without it. Sadly or not, we don’t exert a great deal of control over what goes into the moderation queues; Akismet, our filtering software, is like Skynet.

      So, I pulled your comment out of the queue, and approved it. I also deleted your duplicate comment. Then I deleted two or three short test commments. Please don’t do that. Not only is it more work for us, you have also just trained Akismet that you are a spammer, since that’s what spammers do.

      It would be nice to have 24/7 real-time moderation of the comments section, but somebody needs to write a big fat check to cover that. And it’s in any case questionable whether a check that fat should go to moderation, as opposed to, say, actual reporting.

      Adding, no need to respond here. This interesting post sorely needs on-topic comments, not meta. Thank you!
      So, carry on.

      1. Yata

        Thank you for the glimpse into the moderation abyss. It’s the gluon-like appearance-disappearance-reappearance of the initial comment that baffled me, which lead to numerous duplicate attempts.
        I’ve taken notice, and now have a cursory understanding of the process. Thank you.

  9. craazyman

    I can look out the window and see capital flowing — or it might be the East River. I’ll see if I can count it and get back to youze guys later.

  10. kevinearick

    If you can wrap your mind around the fact that the only difference between time and distance is the construct in your mind, which is largely controlled by media for the herds, on the basis of credit/debt compliance (walking to work versus taking the bus or a car), you can begin to understand gravity and anti-gravity, which are compliments or opposites, depending upon perspective. A great deal of work has isolated those protons into the nucleus.

    Similarly, while the price of RE has gone up, its value has fallen, dramatically. A 30-year mortgage is a prison, locking the users into their habits, with increasing anxiety, the output of which is make-work economic activity in a positive feedback loop, measured as GDP. The critters are afraid of children themselves, but are more than happy to breed children on welfare as insurance against change, to keep the ponzi going.

    That’s California/Chimerica, which has been copied globally as best business practice, extortion with arbitrary debt. That cop didn’t think twice about shooting a black, “dead beat dad” in the back, because his habits didn’t yet incorporate an uncontrolled camera. In the future, you will probably be able to bet on the cop while watching in real time.

    The Internet is worse than TV because it is better at hiding the difference between what the critters say and what they do. Regardless of development, gravity is going to develop, which is why you let the critters steal your second derivative.

    If either of the Pauls were serious, they would be talking about the monstrosity which is healthcare, which now embeds the State surveillance system cradle to grave, to the end of breeding economic slaves. Which temporary beneficiary of the resulting ‘equality and affirmative action’ is currently feeding the banks is of no concern to labor.

    The Apple watch is just one step closer to embedding a chip at birth, for critters that want to be noticed in a crowd, because they lack identity and are willing to pay for one, competing for the privilege of credit. Of course liquidity is drying up, on the assumption that you can’t fight central banking.

  11. craazyman

    Is this post supposed to be funny? i don’t mean to be snarky or “meta” — whatever that means. i frankly don’t know. Aren’t these supposed sources of economic erudition the same mind clowns who get lampooned every week here? I think they are. So what are they doing beinng quoted here like they’re supposed to be worth reading? it’s weird. it makes me wonder whether we were all abducted and transferred to another dimension of the noosphere. A dimension where NC is a Goldman Sachs blog. Didn’t they have some dude yesterday from Goldman Sachs posting here. This is frankly an anxiety producing experience. i see all the familiar peanut gallery people but Goldman Sachs has taken over the blog! What?? i’m wondering if we have missing time if we checked our watches.. Does anybody have memories that can be recalled under hypnosis? Is Lambert laying out on a table unconscious getting probed while Goldman Sachs runs the blog? Do we all have memories of strange insect like eyes? How about you CB? Were you abducted too or is it just me? LOL

      1. Kyle

        Know your enemy….

        Yes Lambert, absolutely. And…I think that ridicule, such that Steve Keen did in his article calling them inbred, is conducive to stealing some of their thunder. This, while also giving the other schools of economic thought equal opportunity to be heard.

    1. craazyboy

      You’re taking this much too seriously, craazyman. We’re now in the entertainment phase – the PhD technocrats dribble out their knowledge right in front us and it’s like shooting fish in a barrel!

      Not that it’s cheap entertainment, ’cause we’ve certainly paid our dues. But you collect your jollies however you can. Like when in Koncentration Kamp – flip ’em the bird and scream “No Stockholm Syndrome From Me”.

  12. ewmayer

    Wow, all that hifalutin blather about “global savings gluts” – Al “Mr. Bubble” Greenspan loved that trope, as ell. That’s right, the biggest problem the world faces is that people have too much money and too few “productive uses” to make of it! The global financial crisis wasn’t about too-EZ-credit leading to colossal speculative misallocations, mountains of unpayable debt, and an epidemic of fraud – the real problem was too much savings not being deployed in furtherance of “groaf”!

    Owing to the same myopia by our economic elites — whereby they only see the ‘destructive deflation’ and ‘hoarding of capital’ that accompany the implosion of speculative bubbles they so like to promote — we read precious little about “massive debt accumulations”, “evisceration of national productive economies” or “excessive financialization and elite frauds as deliberate and predictable policy outcomes.” Policies espoused by precisely the odious ilk of “economic experts” represented by this noxious convocation of “bloggers”.

    These ‘savants’ are frighteningly – but predictably – out of touch with the awful reality their life’s work has been to bring about. A pox on the lot of ’em.

    1. craazyboy

      Truth be told, I don’t think Greenspan would even embarrass himself using the term today.

      The Worlds’ biggest savers right now are the Fed and ECB (balance sheet $4 Trillion for each of ’em, even before the latest $1 Trillion of official “QE” announced by Draghi. They must have been using a word Germans don’t understand for the $4 trillion) and Japan and China (don’t have numbers – but it may be even bigger) and Britain is trying pretty good for a little guy.

      They have bought up all our “savings” bonds and put many trillions to “work” in the economy, or pretty close to the economy the way they do it. So we don’t need to. But you can still be an idiot savant with your money and “chase yield”, er, “take risk” or whatever you usually do with your mad money…like buy junk bonds or a mutual fund of securitized consumer debt made up subprime auto loans and credit card debt. Maybe student loans too, if there are any left after the smart money has their fill. Can’t default on those. Unless students find a way to run out of money. hahahaha

  13. Jackrabbit

    A stagnating stock market is never good for those who enjoy the ‘carried interest’ boondoogle tax deduction.

    Only bought-and-paid-for economists would argue for blowing bubbles.

    H O P

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