Opinion

Nicholas Wapshott

Does Japan show us the way out of secular stagnation?

Nicholas Wapshott
Dec 2, 2013 16:46 UTC

Is America’s economy adrift in the doldrums? Lawrence Summers, perhaps the nation’s most inventive applied economist, thinks so. Speaking to an IMF forum last month, he described America’s current condition as “secular stagnation” in which we are stuck in a rut of weak demand, low growth, and low employment. This is the “L-shaped” recovery, or — strictly speaking, non-recovery — some warned about after the financial freeze of 2008. It is also sometimes dubbed “the new normal.”

“We may well need in the years ahead to think about how we manage an economy in which the zero nominal interest rate is a chronic and systemic inhibitor of economic activities, holding our economies back below their potential,” Summers said. The phenomenon is not new; after all, before 2008, when Alan Greenspan had ensured endless cheap money through low interest rates, leading to asset bubbles, the real economy did not respond.

“Even a great bubble wasn’t enough to produce any excess of aggregate demand,” Summers said. “Even with artificial stimulus to demand, coming from all this financial imprudence, you wouldn’t see any excess.”

Summers explained that monetary policy is inadequate in trying to deal with our predicament because the “natural rate of interest” to ensure full employment and growth is now negative. When you take into account inflation, it is even lower. Central banks can hardly offer below 0 percent interest rates, because anyone holding cash would rather hoard it under the mattress rather than be charged for its safekeeping.

Quantitative easing may have served a purpose, but now it is an impotent policy. Worse, even though it is redundant, markets have come to depend on it and go into a tailspin whenever Fed Chairman Ben Bernanke mentions the T word — tapering. It seems unless we are careful, Summers warns, we are going Japanese, meaning that, like Japan’s economy in the last two decades, we could find ourselves caught in a downward spiral in which falling growth chases falling prices chasing falling demand chasing falling employment.

Can Tea Party afford the shutdown cost?

Nicholas Wapshott
Oct 23, 2013 20:35 UTC

Victories come in many sizes. The Battle of the Little Bighorn, for example, at first seemed an overwhelming win for the Sioux. But it soon became clear their success would not last. Who really won the Alamo? The Mexicans? Try telling that to a Texan. So, who won the Battle of the Shutdown 2013? The conventional view is that the Tea Party Republicans were seen off by the congressional leadership in both parties. Having made their protest, disrupted the nation and cost Americans a great deal in anxiety, time and treasure, they lost the battle — but promise to resume the war another day. Perhaps as early as January.

While moderation appears to have triumphed and dogmatic extremism held at bay, the 800,000 federal workers and those who need their services were the obvious losers of the budget and debt ceiling battle. But so were those who hoped to derail the Affordable Care Act, freeze federal government spending and balance the budget.

A complete audit of the shutdown, however, shows the Tea Partiers suffered a more profound setback than they would like to admit — or perhaps even know. The exact philosophy of the Tea Party is hardly clear, but in as much as there is a manifesto it states: the government is too big and should shrink; government borrowing is out of control and the nation should live within its means; big business executives are unfairly propped up by government even when they make sizable mistakes; the government should stop manipulating the dollar through quantitative easing, and taxes should be reduced but never be raised.

Despite flaws, Summers is the best candidate for Fed chair

Nicholas Wapshott
Jul 30, 2013 14:40 UTC

The two-horse race to replace Ben Bernanke as the Fed chairman appears to have come down to gender. In a letter to the president, about a third of Senate Democrats have made clear they would like Bernanke’s deputy Janet Yellen to replace him, primarily — though they do not openly say it — because she is a woman.

The White House, it seems, would prefer Larry Summers, Bill Clinton’s Treasury Secretary who was also director of Barack Obama’s National Economic Council. Summers is a distinguished economist, a former chief economist of the World Bank and briefly, until he was subsumed by controversy, president of Harvard University. (Summers writes a monthly column for Reuters.)

It is true there are not enough women in top positions. It is true, too, that Janet Yellen is a distinguished economist with considerable reserve bank experience. But her gender should not in itself be enough qualification for her to be awarded with one of the most important jobs in the nation.

Fed the wrong line

Nicholas Wapshott
Jun 28, 2013 18:09 UTC

In his baccalaureate address at Princeton this year, the Fed chairman Ben Bernanke defined economics as “a highly sophisticated field of thought that is superb at explaining to policymakers precisely why the choices they made in the past were wrong.” He added, “About the future, not so much.” Put another way, economics is a science that can mean what economists want it to mean. As W.C. Fields replied when asked whether poker was a game of chance: “Not the way I play it.”

Within two weeks of proffering advice to new Princeton graduates trying to find a job in a hesitant economy, Bernanke may have wished he had taken his own counsel. After issuing a cautiously worded statement about the Fed members’ current thinking on quantitative easing, the chairman gave a press conference and, contrary to his predecessor Alan Greenspan, made the mistake of speaking in plain English.

“The committee currently anticipates that it would be appropriate to moderate the pace of purchases later this year,” he said. “We would continue to reduce the pace of purchases in measured steps through the first half of next year ending purchases around midyear.” Like most financial reporters, and almost every analyst, I have omitted the many conditions Bernanke carefully placed on such an eventuality. Bernanke’s loose tongue tripped mayhem in stock markets, interest rates, bond yields, and currency prices around the world.

Bernanke sets major challenges for his successor

Nicholas Wapshott
Jun 20, 2013 16:40 UTC

Now comes the hard part. Fed Chairman Ben Bernanke’s announcement that if the conditions are right he will wean the U.S. economy off quantitative easing within a year has already caused consternation in the stock market. Pumping money into the system by buying back government bonds at the rate of $85 billion a month has lately done little good, which is a persuasive reason to wind it down. But getting from here to there without incident is not going to be easy. It was simpler for Howard Hughes to land his gargantuan super-plane, the Spruce Goose.

Flooding the economy with easy money was meant to encourage businesses to borrow and invest. Instead, banks and businesses have ended up hoarding cash, waiting for a recovery to start before they take the plunge. Or the surplus money has been parked in stocks, lifting the market to an unprecedented, unsustainable high. That is what happens when you have a one-trick economic policy, dickering with the money supply and little else. As Keynes liked to say, you can’t get fat by buying a bigger belt. But stopping the flow of cheap money and hinting at an eventual increase in interest rates has consequences and they may be uncomfortable.

The first to get the jitters is the stock market. Even before Bernanke’s announcement, his previous hint that QE would be “tapered” sent a shiver through Wall Street. Now that he is turning off the juice for good, there is general trepidation. The eventual rise in interest rates is making the real estate market nervous, too, which is troublesome as home purchases are driving the still fragile recovery. On the other hand, there is no better time to buy a home. Mortgages will never be as cheap again, unless there is another slump-inducing financial meltdown, so now is the time to buy, or to refinance while interest rates are on the floor. And as the Fed withdraws from the government bonds market, yields are going to soar.

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