Larry Summers on SecStag

He writes,

With very low real interest rates and with low inflation, this also means very low nominal interest rates, so one would expect increasing risk-seeking by investors. As such, one would expect greater reliance on Ponzi
finance and increased financial instability.

Pointer from Tyler Cowen.

Larry thinks that if the government spends more money, it will work on improving JFK airport. If government does not spend more, then the private sector will take crazy risks.

I mean, if you think that government spends money wisely and the private sector does not, you do not need a whole theory of secular stagnation. To me, it looks like an opinion masquerading as a theory.

Maybe I am being too grumpy. The actual grumpy economist™, John Cochrane, has this to say.

The natural rate is per Laubach and Williams, about -0.5%. But we still have 2% inflation, so the actual real interest rate is -1.5%, well above -0.5%. With 2% inflation, we need something like a 4-5% negative “natural rate” to cause a serious zero bound problem. While Summers’ discussion points to low interest rates, it is awfully hard to get any sensible economic model that has a sharply negative long run real rate.

And he adds this:

From my point of view, the focus on and evident emptiness of the “demand” solution — its reliance on magic — just emphasizes where the real hard problems are.

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5 Responses to Larry Summers on SecStag

  1. Lord says:

    The bust already occurred and the retrenchment in lending by the private shows it is unlikely to reoccur any time soon. The increase in borrowing since then has been modest, so while there may be some froth in equities, it will likely stay there. Better to rely on the magic that actually occurs than to blind oneself with models in which recessions are inconceivable.

  2. Matt Young says:

    The interest rate really cannot go to zero because the Fed needs expenses to print the dollars. Making printed dollars work is not just running the printing press and recycling worn out bills. Printed money works because the hoard of Fed economists do a pretty good job of defining where the money goes. That work by the economists in estimating money distribution allows money, even printed money, to be reasonably accurate in counting. Fed expenses are about 1% of the money printed and sets the lower bound on interest rates.

  3. Matt Young says:

    I had trouble figuring out the natural rate of interest being negative. As near as I can tell, the negative natural rate is the rate at which the folks in DC destroy the economy.

    • Matt Young says:

      Just to finish up. Thomas Laubach. John C. Williams. Board of Governors of the Federal Reserve System. OK, these seem to be the economists employed by the Fed. The fact that they are willing to tells us how fast DC is destroying the economy shows why money still works. So money and a 1% interest that makes money honest are a necessary requirement.

  4. cfh says:

    Economists are queer fish; they use the word “real” to mean “imaginary” and “natural” to mean “not found in nature”. If central banks have proved anything in the last 5 years, it’s that capital -in money form- is not scarce, the supply is infinite. Any theory of interest founded on time preference, scarcity, purchasing power, or “real” rates of return is just not applicable anymore. What we call an interest rate is really a gate fee for access to the infinite capital. And banks are the gatekeepers. They will charge whatever the market will bear. The banks live and die by the ledger book, if the ink stays black, they are happy; there is no line entry for purchasing power in the ledger book and there is no truth outside the ledger book.
    Put another way, Mises’ calculation problem, which long ago infected the defense industry, then education and medicine, has now overrun finance. So much so that there may not be enough variety or mass in the rump economy to provide decent price information on anything. So why worry about a possible but undiscoverable 1.5% loss somewhere or other?

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