Whatever happened to secular stagnation?
By: Gavyn Davies
A year ago, Lawrence Summers’ perceptive warnings about the possibility of secular stagnation in the world economy were dominating global markets. China, Japan and the Eurozone were in deflation, and the US was being dragged into the mess by the rising dollar. Global recession risks were elevated, and commodity prices continued to fall. Fixed investment had slumped. Productivity growth and demographic growth looked to be increasingly anemic everywhere.
Estimates of the equilibrium real interest rate in many economies were being marked down. It seemed possible that the world economy would fall into a “Japanese trap”, in which nominal interest rates would be permanently stuck at the zero lower bound, and would therefore not be able to fall enough to stimulate economic activity.
Just when the sky seemed to be at its darkest, the outlook suddenly began to improve. Global reflation replaced secular stagnation as the theme that dominated investor psychology, especially after Donald Trump’s election in November. Why has secular stagnation lost its mass appeal, and has it disappeared forever? Was it all a case of crying wolf?
Lawrence Summers has always made it clear that in his mind secular stagnation was a hypothesis, not a proven reality, especially in the US. He and others have argued that the combination of very low global GDP growth, alongside falling real interest rates, could be caused by two factors: (i) inadequate global demand, stemming from low business investment, high savings rates in Asia, wide disparity in income distribution and rising risk aversion; and (ii) inadequate global supply, stemming from falling productivity growth, and slowing growth in the labour force.
With fears of deflation on the increase until early in 2016, it seemed that the weakness in demand was the more powerful force, although there was plenty of evidence of slowing growth in supply as well. Since inadequate demand growth seemed to be the main problem, and since the efficacy of monetary stimulus was being widely questioned, those economists who believed in secular stagnation frequently argued that fiscal stimulus was needed to rectify the problem.
What has happened since to change the market’s level of concern about secular stagnation? The flow of incoming economic data has clearly changed a lot, as shown in our monthly update of the Fulcrum nowcast models, attached here.
Global activity growth has rebounded sharply, and recession risks have plummeted. Growth in real output is now running at higher levels than anything seen since the temporary rebound from the financial crash in 2009/10. Importantly, recent data suggest that the growth rate of fixed investment is beginning to recover, which is a body blow to one of the central tenets of the secular stagnation school, though much of this may simply be due the end of the slump in the commodity sector.
This recovery in real activity has not yet led to any rebound in long run underlying growth, according to the models. There has been no improvement in the growth of the labour force, and little rise in labour productivity growth, in the advanced economies in the last year. It therefore seems reasonable to conclude that the vast majority of the rise in real output growth has been due to improving aggregate demand, not aggregate supply.
The conclusion that global data have improved because of demand factors is also supported by the rise in inflation expectations that has occurred in all the main economies in the past 12 months. The increases in US and UK inflation expectations are not surprising, since both of these economies are operating very close to full employment. But the increases in Japan and the Eurozone are more impressive. These were the two economies that seemed to be completely stuck in secular stagnation due to excess capacity a year ago. Now, they seem to be escaping.
Up to a point, these escapes seem to be due to the success of macro-economic policies that were aimed to correct secular stagnation. The Fed postponed its plan to raise interest rates, so US short rates are about 75 basis points below the levels threatened a year ago. The Bank of Japan introduced a 10 basis points ceiling on 10 year government bond yields, an initiative that has appeared more successful than some of its earlier efforts to stimulate the economy. The ECB maintained and extended its programme of quantitative easing, and this has succeeded in normalising monetary conditions throughout the euro area.
On fiscal policy, the changes were not huge, but they were definitely in the direction of expansion. According to the IMF, the stance of fiscal policy in the advanced economies in 2016 was 0.7 percent of GDP more stimulatory than planned a year ago. Furthermore, the election of Donald Trump greatly increased expectations of future easing in US fiscal policy, boosting business and household optimism about growth prospects.
All this suggests that stimulatory macro-economic policy may finally be working and that the secular stagnation scare might now be over. But that is probably too optimistic. Although there has been a cyclical improvement in demand in the advanced economies, there is no reason yet to believe that the supply side of the global economy is performing any better than it was a year ago. The secular speed limit on growth in the advanced economies is still much lower than it was in earlier decades. This speed limit has yet to be seriously tested but that may happen soon in the US and the UK.
In any case, the recent spurt in growth in the advanced economies may turn out to be another false dawn, rather than the achievement of “escape velocity”. Even if escape velocity is achieved, and proves sustainable, it would need to prove that it can be maintained in the face of the policy tightening that would surely follow.
Last week, the President of the San Fancisco Fed, John Williams, released a paper on the decline in the equilibrium real interest rate in the US (r*), the concept that has been at the heart of the secular stagnation debate. This paper concluded that low r-star is a global phenomenon, is likely to be very persistent, and is not confined only to safe assets.
In other words, a cyclical recovery in demand, especially if confined mainly to the US, is unlikely to banish the problem of secular stagnation for very long.
A Tax on Robots?
ATHENS – Ken makes a decent living operating a large harvester on behalf of farmer Luke. Ken’s salary generates income tax and social security payments that help finance government programs for less fortunate members of his community. Alas, Luke is about to replace Ken with Nexus, a robot that can operate the harvester longer, more safely, in any weather, and without lunch breaks, holidays, or sick pay.
How We Got Here In One Sentence
History has of course proven this argument to be idiotic, but because it moves the pain of living within our means into the indefinite future, it always manages to attract enough votes to win the day.
The following article, published today by a major news outlet, spells it out in one sentence, in the title no less:
Why federal debt may have to explode before it shrinks
(CBS) – On Tuesday night, President Donald Trump will address a joint session of Congress for the first time. For a country still suffering from bitter political divisions after a contentious election, it’s doubtful his speech will heal still-raw emotions. Especially since Mr. Trump has hinted that he’ll discuss his budget plan, including a big statement on infrastructure spending and sharp cuts to federal agencies.
No matter what you think of President Trump — whether you see him as a buffoon, a wannabe despot or the savior who’ll finally Make America Great Again — here’s one big reason you should have some sympathy for him: He faces the worst fiscal outlook of any recent president.
He has taken office with the national debt nearing $20 trillion and debt held by the public above $14 trillion. According to the Committee for a Responsible Federal Budget (CRFB), debt is at a higher levels as a share of the economy than for any incoming president since Harry Truman in 1945 (chart below). Yet unlike Truman, who was handed an economy demobilizing from the fight against the Japan and Nazi Germany, the national debt is expected to continue to rise during Trump’s presidency and beyond.
Moreover, federal spending on entitlements and interest payments represents a larger share of the budget than under any other president, leaving Mr. Trump with far less room on the “discretionary” side of the budget. Adding a sense of urgency to all of this, three federal trust funds — covering highways, Social Security Disability and Medicare Hospital Insurance — are headed for insolvency over the next eight years, with a fourth set for depletion in 2030 (Social Security Old-Age Trust).
That complicates the tax reform effort the president championed on the campaign trail and touted again recently, saying his tax plan would be something “phenomenal,” with details to come within weeks. What we already know: Mr. Trump and Republicans in Congress want a simplification of the tax code and a cut in overall tax rates for households and corporations.
A tax cut will surely worsen the deficit over the near term. Yet it could also be necessary for invigorating the economy and quickening the growth needed to fix the long-term fiscal outlook. However, the efficacy of a tax cut providing fiscal stimulus is a matter of intense debate, to put it lightly, with economists evenly split on the subject according to a recent survey.
For Mr. Trump, perhaps the only way out of this fiscal bind is by worsening it temporarily, mixing a well-designed tax reduction and reform plan with targeted spending cuts and entitlement reform. No easy task. But a survey of the literature, including this 2014 paper from the Brookings Institution, suggests benefits can result from simplifying the tax code, lowering rates, and cutting “unproductive” federal spending.
According to Deutsche Bank economist Joseph LaVorgna, although the current economic expansion has been feeble and is now in its eighth year, there “remains considerable room for cyclical gains in consumption.”
With the unemployment rate below 5 percent, LaVorgna doesn’t believe job growth alone can do the trick. But a combination of personal tax cuts and wage inflation — driven by corporate tax reforms like full expensing that encourages capital spending and labor productivity gains — could do it.
Notice how the analysis begins by acknowledging the problem of soaring debt in order to soften up fiscal conservatives for the big reveal: That even right-wing think tanks and major banks agree on the need to generate “wage inflation” and “cyclical gains in consumption” via much higher government borrowing.
Since growth is always seen as anemic by those who crave higher tax revenues, this is an ever-green argument that always seems to fit the times and so always ends up being enacted, not just in the US but pretty much everywhere.
Which explains how, 40 years in, we find ourselves here:
Global sovereign debt to hit new all-time high – S&P
(Reuters) – Worldwide sovereign debt is set to reach a new record high of $44 trillion this year despite a slight reduction in governments’ annual borrowings, an estimate from credit ratings agency S&P Global said on Friday.
The United States at $2.2 trillion and Japan at over $1.8 trillion, will again be the most prolific borrowers this year, accounting for 60 percent of the total, followed by China, Italy, and France. Britain’s post-Brexit double downgrade will mean the percentage of world debt now with a top grade ‘triple-A’ rating will fall to an all-time low of just 7 percent down from around 13 percent a year ago. S&P’s calculations also showed
Japan faces by far the highest debt rollover ratio this year, reaching a sum equivalent to 66 percent or two thirds of the size its economy.
The solution? More borrowing, of course — with, as always, bipartisan support.
Will Gold Prices Finally Pull Back or Continue Marching Ahead?
By: Stefan Gleason
Gold prices are up more than 11% since bottoming last December. Their gains last week took the gold market right up to its 50-week moving average. In 2015, attempted rallies reversed at the 50-week moving average. Could this level once again serve as a barrier to further price advances?
Either way, long-term gold bulls shouldn't sweat this particular technical level. Major bull markets need to pull back and reconsolidate periodically.
Whether that starts happening this week, or later on at higher price levels, a downturn of some magnitude is inevitable.
One indicator that may be pointing toward a pullback sooner rather than later is the negative divergence in gold mining stocks which are often leading indicators for the yellow metal.
Despite gold spot prices rallying along with the broader U.S. equity market last week, the HUI Gold BUGS (Basket of Unhedged Gold Stocks) Index fell by 3.8%. That suggests that some big institutional speculators are turning bearish on gold near term.
If you're looking to accumulate bullion, a pullback should be welcomed as an opportunity to get in at lower levels. Long-term bulls will not want to see anything as severe as the drawdown that occurred in the second half of 2016, however. They will be looking for any coming correction to bottom out above the $1,125/oz low hit in December.
Higher highs and higher lows characterize a major bull market. The December 2016 low was a higher low than the one from 2015. A higher high will occur when gold prices can move above $1,375. At that point, the public might start taking notice of precious metals markets - which so far this year have been overshadowed by the series of record highs in the U.S. stock market.
President Donald Trump has taken credit for the rally in stocks. His vows to cut taxes and regulations have, no doubt, driven buying by investors.
Over the weekend, Trump sent out this tweet: "Great optimism for future of U.S. business, AND JOBS, with the DOW having an 11th straight record close. Big tax & regulation cuts coming!"
Trump also wants a weaker dollar to help boost U.S. manufacturing. That could put him in conflict with the Janet Yellen Fed if it moves to raise interest rates.
Trump will have the opportunity to appoint multiple new members to the Federal Reserve Board. It's one of the reasons why top financial and geopolitical analyst Jim Rickards is so bullish on gold.
"If Trump follows through on the logic of the cheaper dollar, he's going to appoint doves to the Board. The market's going to get the signal immediately and the price of gold is going to soar," Rickards said in a recent Money Metals podcast interview. "We've got some very short run headwinds, maybe between now and April, but for certainly the second half, even the last three quarters of the year, I'm extremely bullish on gold."
There will be some bumps along the way. But those who hang on tight for the ride in gold and silver markets stand to be rewarded.
Trumpflation vs Negative Rates: The Battle Endures
Monetary policy continues to determine the path for bond markets
By Richard Barley
The big focus for bond markets is on U.S. fiscal policy under President Donald Trump. But investors need to keep in mind that global monetary policy remains a potent force, even if it isn’t grabbing the headlines like it used to. The bond bear trade has a gravitational drag outside the U.S.
To see that, just look at Germany, which Tuesday issued a new two-year note at a record low yield of minus 0.92%—a remarkable development given rising eurozone inflation and continued growth momentum. Investors posted bids of nearly €7.3 billion for the €5 billion note.
German yields have declined in part because of jitters about elections in the eurozone, particularly in France, that could pose a threat to the currency bloc’s survival. Those fears have ebbed a little in recent days, with the gap between French and German yields narrowing.
But German yields have also been driven lower by changes made to the European Central Bank’s bond-purchasing program. In particular, the decision to allow purchases of bonds yielding less than the ECB’s deposit rate of minus 0.4% has put sharp downward pressure on yields on short-dated German bonds that were previously excluded from purchases. This is potentially a more powerful and longer-lasting force than election nerves: a real debate about the ECB tightening policy looks a way off in the eurozone. Some strategists, such as those at Citigroup and ING, think two-year German yields could push to minus 1% or below.
That has ripple effects. The German yield curve steepened sharply last year but the move has lost momentum. Two-year yields are helping to anchor 10-year yields, which stand at just 0.2%. Along with yield curve control in Japan —where the Bank of Japan Tuesday set out a detailed schedule of purchases in an effort to reduce volatility in bond yields—that is fuel for a continuing search for yield elsewhere in global markets. That may help explain why the U.S. Treasury bond bear trade has been stuck in a rut, with yields moving broadly sideways for three months.
Central banks may have reached the end of the road in terms of loosening policy further. But as long as they are in no hurry to tighten policy, these bond-market tensions look likely to persist.
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Las convicciones son mas peligrosos enemigos de la verdad que las mentiras.
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
No soy alguien que sabe, sino alguien que busca.
Only Gold is money. Everything else is debt.
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Quien no lo ha dado todo no ha dado nada.
History repeats itself, first as tragedy, second as farce.
We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.
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