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Four Reasons Larry Summers Is Worried About Secular Stagnation

Dec 16, 2013, 05:45 IST

REUTERS/Jonathan Ernst

In early November, Larry Summers gave a major speech at the IMF that outlined his fear that the United States could be entering a period of secular stagnation where the economy fails to create enough demand and bubbles are necessary to achieve full employment. In an article in the Financial Times today, Summers expounded on that belief.

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He laid out four pieces of evidence for where his fear comes from:

  1. The recovery has been slow in the U.S. and even slower in the rest of the world.
  2. Even during the housing bubble, loose money and reduced credit standards only created moderate growth.
  3. Interest rates are up against the zero-lower bound and real rates may be unable to go low enough to get back to full employment.
  4. Falling prices could lead to deflation.

However, Summers is quick to point out that these four data points do not mean that we have entered a period of secular stagnation. They simply are reasons to be concerned.

"Today, secular stagnation should be viewed as a contingency to be insured against - not a fate to which we ought to be resigned," he writes.

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