This controversial theory is starting to scare the Fed
You may have not heard of 'secular stagnation,' but regulators and other economists are growing increasingly worried about it.
Is there something seriously wrong with the economy?
It's a scary prospect, and a concern that's gotten louder and louder over the past year. In economic circles, it goes by the alliterative name of "secular stagnation." And it's a phrase that Fed watchers are likely to hear more and more in the months ahead.
Recent comments by the vice chairman of the Federal Reserve, Stanley Fischer, indicate questions within the central bank about whether the slow growth that has followed the recent recession could reflect, or at least could potentially morph into, longer-term issues within the economy.
And while Fischer avoided the phrase "secular stagnation" in his Monday speech, Minneapolis Fed President Narayana Kocherlakota is planning to host a November symposium that directly addresses the issue of secular stagnation by name, CNBC has learned.
"I think there's a lot of concern about how long this will last, and I think that's certainly high on the agenda right now. At least people are entertaining that possibility now that it could drag on for longer," said Brown University associate professor of economics Gauti Eggertsson, who authored (along with fellow Brown economist Neil Mehrotra) the landmark paper "A Model of Secular Stagnation," which provides an in-depth explanation of how a long period of low growth could come about.
The theory of secular stagnation was first developed by Alvin Hansen, who wondered in the midst of the Great Depression whether diminishing investment opportunities in a maturing economy would stunt economic growth and permanently prevent full employment -- at least in the absence of robust government intervention, which soon came in the form of the second world war.
These theories have found a new life in the aftermath of the so-called Great Recession, as the U.S. is experiencing (albeit to a much less dramatic degree) slow growth over a relatively long time period.
In November 2013, noted economist Larry Summers (who was considered, alongside current Chair Janet Yellen, a leading candidate to head the Fed) began to invoke the same phrase in arguing that the interest rate that the economy requires has fallen below zero.
The problem is that it is very difficult for nominal interest rates to fall below zero due to a constraint known as the zero lower bound. The upshot? Even with the Fed keeping short-term rates just above zero, market interest rates cannot possibly create adequate demand for loans, and thus the economy stagnates.
Without embracing the secular stagnation thesis, in Sweden on Monday, second highest-ranking Fed official Fischer gestured toward those concerns.
Noting slow growth in "labor supply, capital investment and productivity," Fischer warned that "This may well reflect factors related to or predating the recession that are also holding down growth" and noted: "How much of this weakness on the supply side will turn out to be structural -- perhaps contributing to a secular slowdown -- and how much is temporary but longer than usual lasting remains a crucial and open question."
"There was a level of concern on that point that I don't think we generally hear," said Nicholas Colas, chief market strategist at ConvergEx, referring to Fischer's speech.
The stagnation debate will also be addressed by a new eBook entitled "Secular Decline," which is due to be published on Aug. 18, and hosts contributions from Paul Krugman and Nomura's Richard Koo, in addition to Summers, Eggertsson and Mehotra, and others.
But for those who take issue with the secular stagnation theory, these dour questions are a natural consequence of recession-era thinking.
"I think it's inevitable that when you're in a slump for this long, people will start looking for answers. It's completely understandable but I think we're being way too pessimistic," said David Beckworth, assistant professor of economics at Western Kentucky University, who recently wrote an opinion piece on The Washington Post's Wonkblog entitled "Here's why Larry Summers is wrong about secular stagnation."
Beckworth is with the stagnation thinkers in believing that "the Fed has not aligned its rate with where the market-clearing rate is. And until that takes off, the economy will still be in a slump," he said. "But to me, maybe I'm an optimist, but I see demographics and technology pointing in the direction" of sustained growth.
And when it comes to what the markets ultimately care about in the short term -- Fed policy -- there's one thing nearly everyone can agree on: fresh concerns about secular stagnation are likely to make the Fed even more nervous about reducing accommodation too soon.
"What Fischer is saying is that the economy's growth rate is slow, we're not sure how much is structural, and unfortunately the cyclical can become structural," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank. "Reading between the lines, it seems he would be sympathetic to Yellen's view that monetary policy has a serious role to play," in avoiding economic stagnation.
Fischer's speech "did suggest that he's not in any rush. There's no indication that he wanted to end any of these policies or even put the brakes on, which I thought was encouraging," Eggertsson said.
That has clear ramifications for investors everywhere.
"If they're worried about growth, then rate hikes will be kicked further down the road, and rates will trend lower and the equity market stays somewhat bid," said Rich Ilczyszyn of iiTrader, who added: "But I'm hoping that he's wrong."
While the issues Fischer bring up are serious, however, the economist also struck a hopeful chord.
"It is unwise to underestimate human ingenuity," Fischer said.
More from CNBC
Well yes, for well over a Decade now, the WAGE Gap has soared from 40 to 1 to now over 400 to 1. Now you can call that Free Markets or whatever. However, that fact of the matter is this, when Real Consumer aren't making enough in Wages to support the overall economy, Companies have to resort to Financial Engineering to Cook the books.
Henry Ford stated it best, If I don't pay my workers a Fair Wage, whose going to buy my products. Nothing has changed.
Please they knew when they put all that printed money in every month they were faking a recovery to make Obozo look good.
And now look a bigger mess..
Hope all you Obozo voters are happy........ I'm not......
Just think if they took that money to build new roads, dams, schools they would have made jobs and helped the economy but no Obozo just handed the rich the money and screwed the middle class. The poor don't care they still get their free stuff.....
Larry Summers, Krugman, and the like: These Keynsians and their bubbles were the cause of the recession in the first place. The only things larger than the massive financial bubbles they've created, are their egos. Certainly, their giant inflated egos would never allow them to admit that it's their fault, that they could be wrong, or that their policies failed. No, no, no. So all they can do is double down, and of course now they are saying we need even lower interest rates, lower than zero? What pay people to borrow money and gamble it in the stock markets, so they can blow an even bigger bubble?
We've tried their way for many years. It's not working. Try the opposite approach. Maybe it will work. But the only thing more important to them than fixing the economy, is that they be right. They are nuts!
Let's see...household incomes have dropped, we still have fairly high unemployment, the debacle known as the ACA is exactly the opposite of affordable, The Fed has trashed the US dollar, and the country's debt is predicted to hit $20 trillion when Obama leaves office...nahhhhh! Things are just hunky dory!
"Secular stagnation"? I'd prefer to believe what grandma always said about leading a horse to water.
You can stimulate the supply side all you want, but if enough people are too worried to commit, you get nothing.
We are in a slow or zero growth phase for one reason only: NO ONE with money to spend or invest has any confidence that this current administration knows what it is doing. Uncertainty abounds (note number of TV shows about hoarding, prepping, or general doomsday scenarios).
We need another Reagan soon; the current occupant of the White House knows absolutely nothing about leadership.
so by rights we should have slid into a deflationary period rather than a manipulated recovery.
instead the average person slid backwards anyway (old jobs gone, new jobs are weak), while product prices and inflation continued upward. and don't even mention CEO pay (but i'll mention it anyway).
"""The problem is that it is very difficult for nominal interest rates to fall below zero due to a constraint known as the zero lower bound. The upshot? Even with the Fed keeping short-term rates just above zero, market interest rates cannot possibly create adequate demand for loans, and thus the economy stagnates."""
The Crony Capitalism that Congress has embrased has terrible side effects.
Airlines had their lobbyist pay off Congress so they could consolidate. The end product is no more competition for the 4 major U.S airlines. Airfares go up over 50% in a couple of years. . Congress institutionalize bad airline service while increasing airfares from the lack of competition.
The result the airlines fly their crappy little planes around at crazy prices. $858.00 coach from Chicago to Newark that I saw today.
Hotels, car rentals restauarant and eveyone tied to the travel industry suffer because people cannot fly. It is just too expensive. So the travel industry suffers because Congress (the most organized criminal operation in the world) allowed after being paid off for the airlines to eliminate competition.
Congress and the 4 airlines make a ton of money. The rest of lose. I think the mafai term is "racketterring".
Congress is now the newest form of organized crime. Pay off Congress and you win. Everyone else can lose, but Congress sells out America for their own personal gain.
Congress is doing the same thing with cable companies, banks, insurance companies and a ton of other industries.
Get rid of Crony Capitalism, Term limits for Congress. Publically paid elections for Congress. Versus privately owned criminals AKA Congress and their billionaire buddies and big corporation now have.
The Criminals are killing our economy. The demand is there.
Here's what's wrong with this economy
1. In 1971 1 out of 49 americans were on food stamps...today 1 out of 6 americans on food stamps.
2. High energy prices
3. High food prices
4. High health care cost
5. High taxes
6. Skyrocketing College tution
7. Most full time jobs gone
8. Most manufacturing jobs gone to Asia
9. Wages not keeping up with inflation
And you think anything is going to change?
Copyright © 2014 Microsoft. All rights reserved.
Traders might want to bite on BABA, but long-term investors have reasons to wait.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.