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95 Foreign Aff. 2 (2016)
The Age of Secular Stagnation: What It Is and What to Do about It

handle is hein.journals/fora95 and id is 234 raw text is: 

The Age of Secular


What It Is and What to Do
About It

Lawrence H. Summers
  s surprising as the recent
        financial crisis and recession
        were, the behavior of the world's
industrialized economies and financial
markets during the recovery has been
even more so.
   Most observers expected the unusu-
ally deep recession to be followed by an
unusually rapid recovery, with output and
employment returning to trend levels
relatively quickly. Yet even with the U.S.
Federal Reserve's aggressive monetary
policies, the recovery (both in the United
States and around the globe) has fallen
significantly short of predictions and
has been far weaker than its predecessors.
Had the American economy performed
as the Congressional Budget Office
forecast in August 2009-after the
stimulus had been passed and the recov-
ery had started-U.S. GDP today would
be about $1.3 trillion higher than it is.
   Almost no one in 2009 imagined that
U.S. interest rates would stay near zero for
six years, that key interest rates in Europe
would turn negative, and that central
banks in the G-7 would collectively

Emeritus and Charles W. Eliot University
Professor of Economics at Harvard University.
He served as U.S. Secretary of the Treasury
from 1999 to 2001 and Director of the National
Economic Council from 2009 to 2010.

expand their balance sheets by more
than $5 trillion. Had economists been
told such monetary policies lay ahead,
moreover, they would have confidently
predicted that inflation would become a
serious problem-and would have been
shocked to find out that across the United
States, Europe, and Japan, it has gener-
ally remained well below two percent.
   In the wake of the crisis, governments'
debt-to-GDP ratios have risen sharply, from
41 percent in 2008 to 74 percent today in
the United States, from 47 percent to
70 percent in Europe, and from 95 percent
to 126 percent in Japan. Yet long-term
interest rates are still remarkably low, with
ten-year government bond rates at around
two percent in the United States, around
0.5 percent in Germany, and around
0.2 percent in Japan as of the beginning
of 2016. Such low long-term rates suggest
that markets currently expect both low
inflation and low real interest rates to
continue for many years. With appropriate
caveats about the complexities of drawing
inferences from indexed bond markets,
it is fair to say that inflation for the
entire industrial world is expected to be
close to one percent for another decade
and that real interest rates are expected
to be around zero over that time frame.
In other words, nearly seven years into
the U.S. recovery, markets are not
expecting normal conditions to return
anytime soon.
   The key to understanding this
situation lies in the concept of secular
stagnation, first put forward by the
economist Alvin Hansen in the 1930s.
The economies of the industrial world,
in this view, suffer from an imbalance
resulting from an increasing propensity
to save and a decreasing propensity to
invest. The result is that excessive saving


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