Nouriel Roubini, the American economist made a doomsday prediction of the US housing and mortgage market long before the tidal wave of sub-prime crisis hit global markets which inevitably led to the Great Recession. His prophetic words on the housing bubble were, “People believed in the nonsense that home prices could rise every year by 20%. If that’s not a bubble, what’s a bubble? It doesn’t take a genius”. The world is witnessing a paradigm shift in the boom and bust economic cycles that traditionally ranged between 6 to 24 months for revival. Instead prolonged periods of economic downturn and stagnation has become the norm. Globally, is “Secular Stagnation” the new economic reality? Secular denotes longer term recession in contrast to temporary cyclical situation. The Great Recession of 2008, exacerbated by the housing bubble in the sub-prime mortgage sector in the United States had devastating ripple effects on world economies while at the same time, providing an opportunity for a radical rethink of the economic fundamentals. But despite stimulus packages by governments across the world and central banks radical monetary policies have failed to revive global demand through increased investments and therefore stunted global output and growth. Covid-19 pandemic inflicted a double jeopardy to the global economy, shrinking it by more than 4%, the resulting “Great Lockdown” causing a cumulative loss of more than 4 trillion dollars of global economic output in 2020-’21 according to an IMF report.

Japan is grappling with low nominal GDP and slower growth for more than 20 years, most of European economies are deflating, the bond markets in G-7 nations are marked by a downward spiral in the ten year, risk-free interest rates, the interest rates in the United States have remained Zero Lower Bound for almost 13 years since the recession, causing a Liquidity Trap,  despite the stimulus package by the U.S Federal Reserve through Quantitative Easing (QE), approved by the Congressional Budget office and has then defied all predictions of growth. Consequently, most of the developed countries Debt-GDP ratio has increased significantly. All these crises plaguing global economies point to a phenomenon called “Secular Stagnation”, speculated and re-introduced in contemporary economic and socio-political parlance by Lawrence Summers, the professor Emeritus of Harvard University and former US Treasury Secretary in a keynote speech given at the International Monetary Fund in the autumn of 2013. 

The term “Secular Stagnation” was first coined by economist Alvin Harvey Hansen in the 1930’s during the Great Depression Era. Secular stagnation happens when there is an abnormally high propensity for chronic excesses in savings over investment that in turn adversely impacts demand, thus reducing inflation and growth at trend levels. This will disastrously lower interest rates to zero lower bound that no measure of monetary policies by the central banks will become an effective tool to revive interest rates, increase investments and thereby stimulate demand, enhance output and economic growth. Historically rapid recessions are followed by rapid recoveries, but Secular Stagnation extends to longer periods of time, probably a decade or more and to cite a classic case, almost twenty-five years running, manifest in the Japanese economy.

There are variety of reasons attributed for increasing propensity for savings, the most critical are growing inequality in wealth and income distribution due to technological change, apprehensions over the length of retirement time, curtailing of social security benefits, stringent borrowing standards especially for housing and mortgages, substantial investments in guilt edged securities like US Treasury Bills by foreign central banks and immensely rich sovereign wealth funds. The shortfall in investments stems largely from cheaper availability of capital, increased unemployment translating into slower growth in labor force and non-availability of credit due to exacting standards of individual and corporate credit ratings. Investments as a percentage of GDP decline by slow growth in labor force due to shift in demographics in advanced economies resulting from slow population growth and cheaper capital goods.

Businesses have less incentive for fresh capital investments if the number of prime-age workers in an economy is decreasing that jeopardizes consumption and demand for goods and services. Longer life expectancy coupled with declining population growth pushes up the average age of the population, and therefore the “demographic dividend” of a youthful population in employment, spending and spurring demand is lost. There is a reversal of trend in the US where most employed people wish to live in small apartments in cities than big houses in the suburbs which, depresses the housing and mortgage markets. A law firm that customarily required 1300 square feet of space per lawyer, now requires a paltry 600 square feet due to savings in space for filing cabinets as there is a shift to digital storage solutions and cloud technology.    

“Demassification of the economy” spearheaded by new age digital corporations are another factor for decreasing investments. For example, a traditional company like Sony Corporation that has worldwide manufacturing, R&D and warehousing facilities, brick and mortar offices and branches in all continents and in almost all world cities, employing almost 110,000 and that heavily borrows from banks for its expansion was valued at 23 billion dollars in 2014. By contrast, WhatsApp, a digital communications company that could fit all its employees and systems into a two storied building was worth 19 billion dollars in 2014 when Mark Zuckerberg of Facebook acquired it. Consider the impact of Airbnb on hotel constructions, Uber’s impact on automobile production and Amazon’s impact on construction of malls! The rise of hybrid/remote work culture in the wake of Covid-19 pandemic will adversely impact real estate developers and may further diminish real estate investments. Such sweeping technological and socio-cultural changes will put downward pressure on interest rates to stimulate private borrowings and investments.

Organizations will become circumspect and subsequently defer investments for the fear of rapid technological advancements causing shorter obsolescence and product life cycles. Does New Age economy tend to conserve capital? In the last 25 years, real wages, adjusted to inflation in the US has eroded substantially for the middle-income worker, while his productivity increased 74%, the real wage increased only 9%, thus reaching an inflection point for the worse in his average purchasing power. The top 1 percentile of the workforce currently owns 60% of the wealth in the US! Income and social inequalities engender uncertainty, further depressing domestic spending and shifting consumption patterns. Middle income households will have marginal propensity to save for a rainy day than to spent during periods of economic and financial uncertainties.   

While monetary policies are little effective in combating Secular Stagnation, economists, the intelligentsia and policy makers around the world are becoming increasingly aware of the role of sound, expansionary fiscal policies to ameliorate this crisis. Increases in public investment, especially in infrastructure projects and renewable energy replacing fossil fuels are a recommendation to reduce savings and to revive investments, stimulate growth and output, increase demand and interest rates to stabilize the economy. When the Federal Infrastructure Investment is close to zero in the United States and other developed economies, net of depreciation, such policy initiatives leave much to be desired…since “confidence building is the cheapest form of stimulus”. The governance has to be quick and effective to address issues that affects the average citizen and not as in the pessimistic words of the great American economist and public intellectual of the 20th century, Milton Friedman “If you put the federal government in charge of the Sahara Desert, in 5 years there’d be a shortage of sand.”

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