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Thursday, November 28, 2013

Links: Secular Stagnation

Here are a couple longer responses to this speech by Larry Summers on secular stagnation:

  • In "Secular Stagnation, Progress in Economics", JW Mason looks at the points raised by Summers in detail. He views this as a positive step in the dialogue within mainstream economics.
  • In "Larry Summers, Secular Stagnation, and the Crisis of the New Consensus Model", Mario Seccareccia is less charitable. He argues that most of Larry Summer's speech is a re-hash of controversies within economics that were largely  dealt with just after the end of World War II. He feels that the "New Consensus" economic models (DSGE models) have locked mainstream economists into a misleading interest rate-centric world view.
From the point of view of the bond markets, this is an important subject. The possibility that economic stagnation will keep the policy rate at zero well past 2015 has important implications for the pricing of Treasury bonds.

I just want to comment here on one smaller point of Larry Summers' speech - the necessity of bubbles for the economy to grow.  In the 1950's, Hyman Minsky argued that financial instability was a side-effect of growth in capitalist economies. It was only special circumstances in the early postwar era that allowed growth then to occur without financial instability. (I discussed this very recently in another context in this post.) As such, there should be no surprise that more recent economic expansions have coincided with bubbles.

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