Monday, August 18, 2014
SECULAR STAGNATION - comment on Olivier Blanchard et al
I'm now reading Blanchard's section in the Vox EU book on secular stagnation, and a slightly tangential idea popped into my head:
Blanchard presents a chart that shows the real interest rate has been in decline since 1985, with a bit of a stutter in the mid-90s.
To me, this does not jibe with changes in world growth trends: the decline happens uniformly across a US secular bull and an EM secular bull. It also is too damn long, I think, for the decline to be produced by a US demographic trend. Too much has happened over those 3 decades, and we've only started whining recently.
Also, if I remember correctly, the US demographic trend in working-age population is apparently about to change back to positive for the next while.
So has any economist anywhere given any thought whatsoever to the idea that the real interest rate secular decline over the past 30 years was directly the result of the Volcker shock doctrine? Maybe Volcker was so damn good at slaying inflation that he permanently changed the market's long-term expectations for inflation?
I mean, if Krugman's right that expectations of inflation generate inflation, then perhaps Volcker is the one single factor that has changed that feedback mechanism. I mean, was there ever a Volcker-style anti-inflationary attack ever before, anywhere, in the history of economies? (Would it even have been possible in the age of the gold standard?) Maybe the shocking extremity of his monetary policy permanently changed the perceived extent of the interest rate playing field.
If you're going to question stuff, then why not question what new thing happened when the origin of the present trend is identifiable in a chart? And if the world of interest expectations was permanently different after Volcker, then maybe that explains why interest rates have been different?
Because I sincerely doubt that the 2000s/2010s have been the first time in human history that people began to live longer and save more money. I'm sorry, Kruggers, that's a bullshit narrative right there.
To radically change the setpoint of a feedback-governed system and set it on a long drift away from the setpoint, you need a massively large new input. Volcker's shock doctrine looks to me like a good candidate.
The interesting upshot of this is that "secular stagnation", if you want it to stop, might need an Antivolcker of equal but opposite radicalism to counteract it.
But do you want permanently higher interest rates, Krugger? Is that a good thing? Or is it only good for the rentier class?
Or do you simply want growth rates above interest rates? If so, don't you think you should be paying more attention to Piketty?