See the latest Gavekal book Avoiding the Punch: Investing in Uncertain Times

Click here Close
Gavekal Research

The Myth Of Secular Stagnation

When the European Central Bank meets today, discussion will center on whether it should expand quantitative easing in an attempt to stave off deflation and support the eurozone’s painfully slow growth. In Japan too, talk is about whether the Bank of Japan needs to step up its stimulus efforts. And in the US, the Federal Reserve last month decided to delay calling an end to its own zero interest rate policy amid evidence that US growth is in danger of wilting away. It seems the signs of “secular stagnation” are all around us, and that the developed economies are destined never again to regain the growth rates of the past.  Certainly that is the narrative being peddled by any number of eminent economic luminaries. Yet despite what Larry Summers, Paul Krugman, Joseph Stiglitz, Jacques Attali, Thomas Piketty and others may say, there is no such thing as secular stagnation. It is a myth.

So why do all these famous “economists” insist secular stagnation is real?  Simple: they are all convinced that if left to its own devices, the economy would lurch inescapably from crisis to disaster and back again. Fortunately, they are smarter than the “market” and have the solution. Although they are pessimistic about the ability of the world’s entrepreneurs to go about their businesses, they are bullishly optimistic about their own competence when it comes to setting other misguided individuals straight. Although none of them has ever created a business themselves, they have no shortage of ideas about how the wealth created by businesses should be distributed,  and specialize in advising governments (usually from the left, but not always, as we have seen in France and Japan) on how to improve things—as if governments needed any encouragement to interfere.

After the fall of the Berlin Wall, these proponents of the “managed” economy had to retreat to their universities. As a result, the world enjoyed almost 10 years of spectacular growth rates (a cynic might say that growth rates were inversely proportional to the numbers of these economists in government). But then, after keeping a low profile for several years, around the turn of the century our interventionist economists regrouped, and—knowing that voters have short memories—made their move.

  • In the US, having captured Fed policy, they proceeded to the euthanasia of the rentier through negative real rates, an idea which led to “wealth creation” through the rise in price of existing assets. Their policy was based on the notion that maintaining a false price for money would favor growth—one of the stupidest ideas ever put forward in economics. Unsurprisingly, this led to a collapse in the US dollar, making US consumers poorer, not richer.
  • In Europe, they pursued the single currency, a political project designed, as François Mitterrand put it, to “nail Germany’s hands to the table’’. The result, as we warned in 2002, was “too many houses in Spain, too many factories in Germany, and too many civil servants in France”. More than half of Europe went “ex-growth”. As exports from the affected countries collapsed, imports had to collapse too to avoid balance of payments crises. So European consumers—with the exception of the Germans, who have a very low propensity to consume—are now poorer than 10 years ago, while trade within Europe has declined, and imports from the rest of the world into the stricken countries have cratered.  
  • In Asia, just as China decided to turn its back on mercantilist policies, Japan decided to embrace them. So although the Chinese consumer is much better off than 10 years ago, the Japanese consumer is worse off.
  • All of these policies were financed by massive increases in debt, which led to huge misallocations of capital encouraged by false prices. The result is that productivity growth is collapsing around the world, because of the shortage of viable investment created by zero rates.

This is exactly what Joseph Schumpeter, foresaw in Capitalism, Socialism and Democracy: capitalism would lead to a massive increase in standards of living, which in turn would lead to a huge increase in spending on education. The education system would then be captured by the implacable enemies of the creative destruction inherent in capitalism, who would set out to prevent market forces ever from destroying anything again. But of course no destruction would mean no creation, and therefore no growth.

In short, the notion of secular stagnation advanced by Summers et al. has no merit. It is simply the natural result of the policies followed by those whom Thomas Sowell calls the “anointed”, that class of economic high priests who expect the rest of us to pay for their living while they dance round the fire in an attempt to summon rain. The reality is that growth is failing because we have abandoned rational thought in favor of economic myth, and as a result are execrably poorly managed.

1 Comment

  • >Anonymous



    No side is right, since both sides believe in some other horrible myths:

    (1) Earth is a subsystem of the economic system (this is an epistemological sin related to mechanical laws embedded in all economic fields);

    (2) Given (1), there is no ecological boundaries for the economic system;

    (3) Given (1) and (2), Nature is inexhaustible;

    (4) Since all axioms and conservations princibles are based on Mechanics, all economic processez are neutral to the environment or Nature;

    (5) The separation assumption does not hurt any theoretical conclusion (separation is the assumption that our economic system and Nature are totally separated).

    To solve some misteries, economists created the concept of "externalities".  Economists until today still believes Nature and natural resources like water are completely irrelevant for the economic process.  The cost of transforming Amazon forest in a monoculture is null, for instance. Another example: no economic model has a variable to account for the contribution of any natural resource or ecological service, including drinking water.

    Economists believe in infinite exponential growth in a finite planet. And they say economic growth is needed to create jobs and wealth for everyone, but reality is completely different from that.

    It is time for every single economist to put the reality in our theories. Let´s start putting the economic system as the subsystem of Earth. Let´s start to see ecological boundaries to our system. 

    So, maybe secular stagnation is not a real problem. The real problem is the mass extinction and the end of irreplicable ecological services that sustain all forms of life on Earth.

    Just to enrich the discussion...