
The ‘suprasecular’ stagnation - lkrubner
https://voxeu.org/article/suprasecular-stagnation
======
rossdavidh
Hypothesis (for which I have zero supporting data): the long term trend
towards lower interest rates is the result of the disappearance of a risk
premium for lack of liquidity. In other words, you used to have to worry about
both losing your money in a long-term way (e.g. the government you loaned it
to defaulted, the business you loaned it to went bust) and not having access
at the moment you need it (the government/business is solvent, but it's not
come due yet, and nobody wants to buy your bond). As financial markets have
gotten bigger and more sophisticated, the risk of the latter has diminished.
So, eventually the dropping of interest rates will plateau at a non-zero
value, reflecting only the risk of outright default, since the risk of nobody
wanting to buy just now becomes vanishingly small as the market gets broader
and broader (perhaps as broad as the entire planet's saving population).

Again, zero supporting data, just a hypothesis.

~~~
twic
A related theory i've heard is that of the "central bank bid": the idea that
we now know that if asset prices collapse, central banks will step in and buy
enough to prop prices up. That means the downside risk of those assets is much
less than it would seem, and investors therefore demand lower returns from
them.

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Hermel
Real interest rates are basically the "price of capital". The question is: is
it the demand side that is weakening (i.e. there are fewer and fewer
worthwhile projects with reasonable returns) or is it the supply of capital
that has grown (i.e. more and more people seeking to invest their capital)?

~~~
nabla9
It's a good question.

Capital intensity (aka "capital deepening") is the is the ratio of capital
needed in relation to other factors of production. The long term trend seems
to be that capital intensity is growing.

Increasing capital intensity increases the the productivity of labor even if
the worker is not "more productive" in the sense the term is commonly
understood. Factory that replaces 1000 workers in a manufacturing line with 10
workers looking monitors all day long higher labor productivity because they
produce more GDP per hour worked. This is probably one of the reasons why
productivity increase is not transferring fully into wage increase (wage share
is decreasing).

Capital intensity growing would increase the return of capital if everything
else would stay the same. But if people are paid less, they consume less. If
the household final consumption expenditure deceases, government final
consumption expenditure (or NGO's) must take the slack or final demand
decreases and capital gains decrease.

In a closed economy (or import export balance): wages + other benefits + taxes
=> demand that produces capital gains in the private sectors.

It's impossible to say how it turns to be unless you know the relevant
coefficients.

~~~
dnomad
There's no reason to choose. This is the logical conclusion of runaway
inequality: less consumption and oversupply of capital (aka financialization).
In real terms, outside of the big three (education, real estate, and
healthcare) we're seeing a great deal of demand destruction. Millennials are
buying less of everything -- food, entertainment, clothing, transportation,
and even babies. All the while the labor pool shrinks and shrinks ensuring the
low demand becomes structural. On the supply side increasingly concentrated
capital has no choice but to chase after any and every growth opportunity no
matter how wacky. The whole thing is self-reinforcing in a kind of three body
problem: low effective wages and big debts (student loans, mortgages) drive
less consumption and low interest rate drive increasing asset prices drive
wacky investments in bitcoin/real estate/education/healthcare ... which drive
low effective wages and big debts.

All of this was predicted by Marx and isn't terribly surprising. The
surprising thing here is that the new peasants are able to consume so little
without owning land. The price of food and clothing and a lot of consumer
technology has collapsed. Seems like most entertainment is either free or
Netflix-style subscription (too cheap to meter). By some estimates [0]
Millenials are spending just $20/day! The crashing birth rates are the
future's problem and the growing political unrest and populism is unlikely to
lead to anything but twitter fights. (It's possible it might lead to
thermonuclear war but we're assuming nobody's stupid enough to press the
button.) In the end there's really no need for global communist revolution if
we can all get fat off junk food and keep each other entertained with youtube.

[0] [http://www.businessinsider.com/millennials-genz-spending-
les...](http://www.businessinsider.com/millennials-genz-spending-less-2017-9)

~~~
otoburb
>> _By some estimates [0] Millenials are spending just $20 /day!_

You may have missed the word "less": "By some estimates, Millenials are
spending $20/day _less_ than they were in 2016." The Gallop Poll[1] referenced
in the Business Insider article shows that avg. spending by adults aged 18-29
was $93 in 2008 and $74 in 2016.

[1] [http://news.gallup.com/poll/215618/young-adults-report-
spend...](http://news.gallup.com/poll/215618/young-adults-report-spending-
less-past.aspx)

------
tomrod
My $0.02: equilibrium interest rates represent the risk market participants
are willing to pay for/be paid for funds to be locked up in other ventures.

Two factors probably drive a long-term overall decrease in this rate:
improvements to the standard of living in people able to engage in that market
drives additional funds into that market (possible in times of extreme
inequality or in times of equality), and external decreases in risk (trust in
the rule of law, insurance, etc.).

If we can consume both at better quality and more quantity now, there is less
incentive to invest in the future, and thus economic growth matches
population.

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raverbashing
Economic growth usually means a combination of:

\- You're selling products/services to more people (either internal growth or
exporting more)

\- You're being more efficient

Localized growths might happen as in a new product that people buy (or is
replacing an old product)

Now, in a world that seems to be hitting a population limit in the next years,
forecasted real growth is anything but obvious. Efficiency can improve but
there's a ceiling.

~~~
Zigurd
Higher consumption seems locked in since everyone wants, and believes they can
get, a middle class life.

Efficiency has to go into overdrive or we overheat the planet. But, by
conventional measures of output, efficiency can be recessionary. Phones and
phone service will continue to decline in cost long after the market is
saturated.

We are headed for either a marvelous soft landing enabled by efficiency and
population stability, or we are headed for a crunch with a return to mass
starvation, an energy crisis, and economic crisis in general. It's really not
obvious which will happen.

~~~
eru
> Efficiency has to go into overdrive or we overheat the planet.

Just the efficiency of burning fossil fuels. We can afford to be wasteful with
eg solar energy. (Efficiency is still great, but not required to avoid
overheating.)

~~~
jaggederest
We need to actually be net negative in total with usage of all energy sources
at this point. We're already well into the overshoot, so we need to be
actively cooling the planet.

Either sinking carbon, converting other atmospheric GHGs to less harmful
forms, or radiating energy into space outside the absorption bands of the
atmosphere.

~~~
Zigurd
Or geoengineering, with the incredibly high risks that entails.

------
kcorbitt
TL;DR: real interest rates have been falling for as long as we have records
(going back to the 15th century) once you average out some cyclical
volatility. Implication is that people waiting for interest rates to bounce
back up significantly from their post-great-recession, post-QE lows should
probably not expect them to return to anywhere near their historical levels.

As a personal saver/investor, the upshot for me is that just because a certain
level of retirement savings would have been enough to generate a comfortable
income in historical simulations, doesn't mean that it will necessarily be
enough to support me in the ultra-low-interest-rates future. So I should
probably save _more_ before retiring than I otherwise might.

~~~
garmaine
Or you should be investing in stocks rather than collecting usury.

~~~
garmaine
I'm not sure why I'm being downvoted? This article is about real the return
component, aka usury, of interest rates on T-bills, and by extension savings
accounts. The return rates of private equities (stocks) is not tied to this
number.

~~~
paganel
I didn’t downvote you, but reading your comment it looked like you treated
interest-based incomes as somehow morally “bad” (at least judging by your use
of the term “usury”) and you contrasted that with stock-exchanged-based
incomes which, as a result, were painted in a morally “better” light. There
were probably some HN-ers who didn’t like that emotional approach.

Now, your opinion in itself isn’t wrong, it’s what the majority of long-term
investors suggest, afaik, but I personally think that those investors
(including Buffet) have been “blinded” by the exceptional economical and
political run of the US as a country in the last 70 or so years. Had they been
active at the start of the 20th century and had they invested in the Russian,
Chinese or even German stock-exchange their funds would have been completely
wiped out by now, after they themselves would have probably died horrific
deaths because of the capitals they held (the case in Russia after 1917 and
China after 1948).

~~~
garmaine
It is unfortunate that the term has both moral character but also a precise
meaning that is correct here -- excessive interest in excess of the risk
premium. There is unfortunately no common / non-technical word that conveys
that meaning (excessive interest beyond risks).

The savings account interest rate is collected usury--as an FDIC insured
deposit account the risk to the account holder is precisely zero, yet a return
is nevertheless extracted. That's usury as the term was coined to mean, minus
the historical moralistic baggage.

~~~
mikeash
My dictionary defines it as "the illegal action or practice of lending money
at unreasonably high rates of interest." It gives no alternate definition. If
that isn't what you meant then I think you should use a different word.

~~~
garmaine
it Is what I meant, except for the illegal part which I believe is a bad
definition here, and emphasis on the fact that “unreasonable” is up for
debate. In many circles any real interest rate (meaning beyond the risk
premium) is an economic rent and therefore unreasonable and correctly
described as usury. Whether it is legal or not depends on the jurisdiction.

~~~
mikeash
If it’s not illegal then it’s not usury, sort of like how it’s not murder if
it’s legal to kill that person.

~~~
garmaine
The term usury has religious origins predating the modern concept of law. It
is a term used by law not invented for it.

~~~
mikeash
The meaning of a word is not guaranteed to track its origins.

Communication is a two-player cooperative game with a complicated set of
shared rules. If you want to win, follow those rules, don’t try to come up
with better ones.

------
phreeza
I wonder what Thomas Pickety would say about this. If I understand correctly,
this would mean that r is tending towards zero, while g may or may not be
affected, but it could conceivably lead to a long term r<g situation, meaning
more equality in society.

~~~
danharaj
It's hard to imagine how. I think more likely g<r but it will also stagnate,
leading to instability of the entire system. I suppose r<g could be the case
if economic growth is no longer driven by capital investment, perhaps because
it is too costly to figure out where to allocate capital to get returns. But
such a situation is so different from the past that you ought not call it
capitalism anymore.

I don't think capitalism is at it's structural limit quite yet. The world is
still yet big enough that there are markets to develop and capture.

~~~
cinquemb
Yeah, I think "r > g" is more likely. The article talks about the "risk-free
rate" (ie. bonds/CD's etc) which is not really "r" (which could vary widely
for individuals/groups/institutions). The "risk-free rate" seems like it has
alot more in common with g than r.

I think the problem is that our nations are having globally is that "g"
(refers to the growth in the national income) is declining, which to me says
that governments/nations are becoming increasingly inefficient at allocating
capital overall compared to the likes of rentec, two-sigma, etc.(especially as
capital becomes less sticky to a particular nation).

------
adventured
The stagnation represents the end of peak globalism, right before it flips
back to growing nationalism (underway now). This cycle will continue to
repeat. Increased nationalism will bring about more war, general national
conflict and invention. The easy gains from globalism for this cycle have been
mostly tapped out. Tension and competition between nations will spur a new
wave of innovation. Just as one example, the US and China will increasingly
race each other for every advantage they can manage. Globalism is increased
tranquility and a lowering of friction at a cost of dynamism, nationalism is a
nasty irritant that produces pearls at a cost of stability and peacefulness.
Despite the desire by some to view nationalism as evil, it's as natural a part
of the cycle as globalism, and just as required. The nationalism flip occurs
because as you get toward the end of the globalism expansion cycle, the
entropy hits lows, the possible gains from the globalism cycle get exhausted,
and the people that were comforted by the prior gains, grow restless in the
stagnation. High levels of entropy are a requirement for great technological
leaps forward and great societal change, as people prefer to go to sleep in
their comfort otherwise, stagnating. Globalism spreads comfort (distributes
gains - technological, process, etc - made by some nations across most
nations), nationalism riles survival responses and increases desperation.

~~~
JimboOmega
The argument is for a trend far beyond that; that perhaps those cycles do
matter but there is a 700 year trend in one direction.

Even the globalism to nationalism trends that drove both world wars (after
common wisdom thought them impossible since economies were too linked) is
really a small factor, at least in the analysis of the article.

I don't even think that your analysis is correct in a broader context. The
fall of the Roman Empire and the rise of manoralism (and constant conflict in
Europe) was not innovation and didn't particularly drive it. The staunch
nationalism of the Chinese empire didn't drive innovation (though it did mean
less conflict).

WWII may have held in it (or pushed forward) the seeds of much great
innovation - rocket science, computing, plastics, antibiotics, nuclear
science, etc. But what innovation would have occurred without it? What would
the lives lost have contributed?

I don't think it's fair to say that rapid change is only possible in such an
environment of conflict. Great advances occurred in the interwar years, too.

~~~
adventured
It's not just the active wars of nationalism that unleash waves of invention,
it's the cultural atmosphere, the lingering of such over all nations. At high
levels of nationalism you can feel the tension in the air across the globe, it
alters how people behave and how they think.

Nations stop cooperating as much, and start competing with each other in an
aggressive manner more. That's the core of what spurs the increased invention,
rather than war specifically. War plausibly can prompt and enable a short,
unsustainable, burst of heightened levels of invention.

WW2, as an atmospheric, a cultural change agent, didn't just go away when WW2
ended. It's reasonable to consider that the impact it had on people would last
for decades. For the generation or two that primarily lived it, it permanently
changed how they think and view the world.

Most of the great advances we've enjoyed post WW2, were sparked in the 20 or
30 years after WW2. Globalism spread those advances and refined them; which is
what we've been mostly doing since the collapse of the USSR in the early 1980s
after oil imploded. This cycle of globalism began somewhere between the late
1970s and mid 1980s.

edit: to add to my opinion here - I view the invention that occurs under
nationalism vs globalism, as tall spikes vs low gentle waves. Invention
doesn't cease under globalism, the nature of it changes. Nationalism will
deliver intense blunt trauma invention, that may be impossible under other
circumstances and or require a far longer timeline. If it's 1960-1965 and you
tell the US Government they can acquire an immense leg up on the USSR by
plowing $10 billion into some focused great technological leap forward
attempt, they're probably going to do it. That's the application of blunt
trauma to technological progress. The difference between: we should consider
doing XYZ thing, versus: we must do XYZ thing and do it now. Would the modern
superpower version of the US Government - eg in ~1994-2004 at the height of
its superpower status vs other nations - do projects like that? I'm skeptical
the solitary superpower version of the US would create the Internet or go to
the moon. In the next 20 years, in heightened nationalistic competition with
China, I think you're going to see a revival of that spirit.

------
tomxor
I totally read that as "the superscalar stagnation"!... unsatisfied, :(

