Developed Economies in Secular Stagnation?

Larry Summers made waves with his short speech suggesting we may be stuck in secular stagnation.


As he was speaking to members of the priesthood of economists, perhaps FT's Gavyn Davies is useful for making it more digestible.

You need only one radar to look for incoming missiles but with the economy you would need several and still be unsure what is coming.

One glaring omission which was already in the works since I started working: the erosion of the middle class. They were the great consumers but as they lose their jobs, the gradual disappearance of demand must surely show up. For too long debt had substituted for income.

I just wrote to my friend the following.

To me what they fail to mention and this is because it will open a can of worms is the destruction of demand arising from the widening income gap. The economy even if left on its own will always return as long as people do not give up. However the path it takes will leave many casualties behind and that is why we need economic leadership. And tapering is part of that leadership, so is the decision to delay doing that. Whatever it is, we will run out of time because QE cannot go on forever. Note the remarks by Mervyn King before he retired from the BoE.

And what did King say:

Sir Mervyn King pointed this out shortly before he retired from the BoE, but few people paid much attention. Sooner or later, central bankers are bound to become concerned about asset bubbles (rightly), or the risk of losses on their bond holdings, and give up this path. The consequences for asset prices could be very painful when this happens, not because the asset purchases themselves are crucial, but because the markets might decide that there is no other means of keeping growth going.

The day of reckoning is not tomorrow but it will come. The same three legs and only one is needed to create a conundrum: market direction, timing and money management. Timing is that leg. Direction is easy and money management is for decisive risk management.

The blip on the radar screen? Whither growth and confidence. Whatever there will be no tapering if it takes us back to where we came from. We don't even need to go all the way back, just heading the wrong way is enough to give central bankers cold feet.

Update: 10:30am

It was noticeable because like cosmetics, debt had plastered over the true situation. Now that you can't pile on debt like before, the truer picture emerge. Demand is eroding an in a consumption based economy this is a slow cancer. Ageing demographics is also making recovery difficult....but I am still optimistic about the USA when you look at the many other silver linings.