In response to an FT Blog piece by Larry Summers on 18th February 2016, entitled 'The case for secular stagnation is more convincing than ever'
Secular stagnation? There is no ‘secular stagnation’. There is no ‘natural rate of interest’ either, except the imaginary one that exists within the ‘equilibrium’ model of the economy, which doesn’t exist either. This is economics not mathematics – two non-existences don’t make an existence.
It is true, however, that we are approaching poo-poo creek without a paddle. And at the helm of our vessel we have possibly the most clueless collection of economic ‘experts’ since John Law set up the Banque General and sold his paper Ponzi scheme to the Duke of Orleans.
There is far more than a 33% chance of a recession in the next year and 50% in the next two. There is a global slowdown underway, which the Fed is in denial about and for which you are hedging your bets Professor Summers. The US is not and will not be immune to this. Even if there were not plenty of downward pointing leading indicators, there is the most reliable contrarian indicator in the western world. Dr. Bernanke recently provided us with a harbinger of China/US contagion. Here's what he said at the Asian Financial Forum in January:
"I don't think China's economic slowdown is that severe to threaten the global economy… the U.S. and China are not as closely tied as the market thinks”
Are we lucky he is not at the Fed? No. It gets worse. Janet Yellen is a labour economist who has spent her entire career in five institutions – Harvard, Berkeley, the London School of Economics, the White House and the Fed. She knows nothing about business, nothing about trade. Short of spending fifty years meditating on a Tibetan mountain she couldn’t be worse prepared for a global economic slowdown. Looking at lagging indicators is like driving a car looking in the rear view mirror – when the crash comes, Dr. Yellen will be looking behind her.
Your position is no surprise either. You seem to be in favour of negative interest rates, more QE, the removal of cash, helicopter money, and another massive fiscal expansion to deal with the ‘demand problem’. Here’s the problem though – people who are up to their eyes in debt don’t go out buying crap they don’t need with money they haven’t got. Ah, but that’s what governments are for you say – governments are great at buying crap we don’t need with money we haven’t got:
a) Japanese roads to nowhere
b) The latest trend in China – blowing up buildings that have stood empty since they were built, which are now considered uninhabitable for that reason
c) The old favourite – weapons of war, especially popular with the neocons politicians in Washington, their friends and family in the kill and maim industry, and those pet generals at the Pentagon who’ve got nice little jobs to go to when they hang up their gold braid.
Ah, but there’s lots of really good stuff we DO need you say –
d) Replacing crumbling infrastructure and investing in public goods
I will grant you item d) makes some sense...some. But here’s what you will not grant me – you do not have a plan to pay for it…ever. Your plan is to kick the can down the road…for…ever.
The same equilibrium models that guided you and your clueless colleagues to where we’ve got to today, will continue to lead us down the same path, because you are obsessed with demand, but you ignore debt. One day, Professor Summers, the greater fool who keeps showing up at the Fed’s auctions is not going to be there – it happened in Japan a few weeks ago – please don’t tell me it couldn’t happen in the US – that’s what the Romans said, along with every other empire that sank under the weight of its own debt and hubris.
You want to spend more money we haven’t got? You want people to trust you know what you're talking about? Deal with this:
1. In the twenty years from 1994 to 2014, global debt rose from $40 trillion to $225 trillion; an increase of over 5.5 times; twice the rate of GDP, which rose from $28 trillion to $78 trillion. Debt has been rising at a compound rate of 9.0% whilst GDP has been rising at 5.3%.
2. Since 1994 US debt outstanding is up by $45 trillion compared to an $11 trillion gain in GDP
3. The latest forecast from the Congressional Budget Office latest forecast is that the budget deficit will rise from 2.5 percent of GDP in 2015 to 3.7 percent by 2020. The bulk of the budget deficit increases will be consumed by increased costs of servicing the U.S. federal debt. Debt servicing costs are expected to rise from 1.3 percent of GDP in 2015 to 2.3 percent in 2020. This is even worse than it sounds when you consider that excluding spending on the entitlement programs (Medicaid, Medicare and Social Security) discretionary spend is already slated to go down - from 6.5 percent of GDP in 2015 to 5.7 percent of GDP by 2020.
4. Fast forward another twenty years from now, incorporate the demographic changes and the entitlements currently hidden off balance sheet…and do the math – this is utterly unsustainable
So in summary Professor Summers – if you want to convince people that you can be trusted, that you’ve got it all figured out, that we should listen to you – come back here with an analysis that contains the word DEBT. Come back here with a solution that addresses the problem that you and your colleagues have been running away from for decades. Come back with an article that addresses the problem that politicians avoid because they think we're too dumb to vote for someone who tells the truth. Otherwise you just sound like a guy who's applying for a job.