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Larry Summers And The Stagnating Economy

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He’s far from some kook scribbling on the walls.

Larry was once Secretary of the Treasury.

At one time he was even in charge of the National Economic Council.

 

The man who could have been king

Larry Summers was once on the shortlist to be the chairperson of the Federal Reserve.

The president remarked that there was little real policy difference between him and the eventual choice.

But Janet Yellen, current holder of the job, has not necessarily followed along with the conclusions Summers has since reached.


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One way or another, things are wacky

Whether Larry is right or not, there’s a lot of weird activity for speculation.

  • Japan is using negative interest
  • Europe saw Japan and emulated the idea
  • No one even understands what the heck is happening to China
  • Workers in America are slowing their output catastrophically

And that’s just a handpicked selection.

Negative what? Say again?

Negative interest. As in, central banks pay other parties to take their loans.

The Negative Interest concept and other parties involvement are the equivalent of your car dealer paying you a check every month for acquiring the car on credit. Pretty much nobody would go that far to put you in that car.

The plan was to encourage money to pour into the economy.

So far, it’s been most successful at convincing analysts that the world is turning inside out.

Cue protagonist, stage left

Here is where Larry Summers comes in.

The economy is not going to get better, per se, according to him.

He’s embarked on a long lecture circuit to explain this to anyone on the planet who will listen.

Given that he used to run Harvard, that’s a substantial audience.

His worst threat? The specter of secular stagnation, which he says might soon be what the world is facing. To an economist, this feared term is as apocalyptic as Napoleon rising from the grave to re-fight Waterloo.

Is this better or worse than spiritual putrefaction?

The “secular” in secular stagnation means in the sense of “worldly” or “large-scale.” It indicates a permanent or enduring slump in the economy.

Traditionally, the markets are assumed to be a roller coaster, up today, down tomorrow.

Summers implies that you might need to consider a new possibility. What if the coaster is just plain broken?

It isn’t a new phrase he coined. People in the ’30s made similar claims about the Depression. It’s hard to deny that they had more cause to wonder if the misery would ever end.

But everything’s fine, last time I checked, I mean…

All that aside, as the Fed’s Janet Yellen would perhaps point out, even the Depression eventually reversed itself. And maybe this will too.

That brings about the question of what exactly the market’s status is.

What are we trying to understand? You’re not quite still in the recession. On the other hand, things aren’t in any hurry to improve themselves either.

Yellen dispels the most dramatic fears by relying on present data to indicate the state of the economy. At least one commentator pointed out that this gives almost no ability to predict the future of the market.

Thus, the Fed may be adversely reacting to tomorrow’s needs based on the present situation. Or, it might have its feet planted on good old bedrock, free from speculation.

Is the Fed enough?

At the heart of the debate lies more than whether interest rates should ascend or drop. Summers talks about a situation where negative interest remains relevant for years to come.

But to say he wants negative interest would be oversimplifying the concept.

His argument is to try and get into your head that you’re living in a world where something that direly is real. Most people assumed that negative rates were a brief emergency tactic.

Larry contends that monetary policy, the control the Fed specializes in, is not up to the task of rescuing you from the quagmire. Government investment infrastructure is one of his favored silver bullets.

Stimulus, according to him, should be brought back. Or else, he gives good odds of slipping into another recession.

Getting to the root of it

Whether that’s a viable answer is a political question. It is and ought to be separate from whether he’s right about the status quo you’re in.

After all, you can see that something is not very straight without knowing how to straighten it. Then again, it’s a fair point that your local infrastructure could use some upgrades.

The primary conclusion reached by so many bright minds who have heard Summers is this: Right or wrong, he is of such a caliber that real energy should be spent answering his intriguing questions.

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