Larry Summers On Why "Stagnation Might Be The New Normal"... And Bubbles

Tyler Durden's picture

Larry Summers, who was nearly picked by Obama as the next Fed Chairman before for some inexplicable reason the Economist lobby deemed him "hawkish" and that he would put a halt to the Fed-Treasury cross monetization complex, is no stranger to providing hours of entertainment with his aphoristic quotes. Recall from October 2011, where he said that the solution to record debt is more debt:

"The central irony of financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending." Larry Summers, source

Or his follow up from June 2012, where he submitted that insolvent governments can "improve their creditworthiness" by becoming more insolvent:

"Rather than focusing on lowering already epically low rates, governments that enjoy such low borrowing costs can improve their creditworthiness by borrowing more not less.Larry Summers, source.

This of course led to his pronouncement last month that the US economy needs "bubbles" to "grow", which promptly won him accolades from none other than his former basher Paul Krugman, best known for this line from 2002: "To fight this recession the Fed needs…soaring household spending to offset moribund business investment. Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble." Yes, somehow this person was seen as hawkish.

Either way, it seems Larry was modestly disgruntled with the prevailing assessment of the media world ascribing to him the title of the next Krugs, in proposing a policy of endless bubble booms and busts, and as a result, he decided to take to the pages of that hallowed bastion of "free and efficient markets", the FT, to explain what he really meant. His full essay is below but the punchline is as follows:

Some have suggested that a belief in secular stagnation implies the desirability of bubbles to support demand. This idea confuses prediction with recommendation. It is, of course, better to support demand by supporting productive investment or highly valued consumption than by artificially inflating bubbles. On the other hand, it is only rational to recognize that low interest rates raise asset values and drive investors to take greater risks, making bubbles more likely. So the risk of financial instability provides yet another reason why preempting structural stagnation is so profoundly important.

Apparently "some" does not include Larry, but what his clarification seems to clarify, is that while proposing bubbles as a policy tool is short-sighted, should they indeed arrive (and many have stated that the current "stock market" on the back of $10 trillion in central bank liquidity and another $25 trillion in Chinese bank asset increases is nothing else), well then - we'll cross that bridge when we come to it. In the meantime, "stagnation may be the new normal." Stagnation for the 90% mind you - not the 10% whoe actually benefit day in and day out from the Fed's ceaseless attempt to get the world to said bridge as fast as possible...

From Larry Summers:

In the past decade, before the crisis, bubbles and loose credit were only sufficient to drive moderate growth

Is it possible that the US and other major global economies might not return to full employment and strong growth without the help of unconventional policy support? I raised that notion – the old idea of “secular stagnation” – recently in a talk hosted by the International Monetary Fund.

My concern rests on a number of considerations. First, even though financial repair had largely taken place four years ago, recovery has only kept up with population growth and normal productivity growth in the US, and has been worse elsewhere in the industrial world.

Second, manifestly unsustainable bubbles and loosening of credit standards during the middle of the past decade, along with very easy money, were sufficient to drive only moderate economic growth.

Third, short-term interest rates are severely constrained by the zero lower bound: real rates may not be able to fall far enough to spur enough investment to lead to full employment.

Fourth, in such situations falling wages and prices or lower-than-expected are likely to worsen performance by encouraging consumers and investors to delay spending, and to redistribute income and wealth from high-spending debtors to low-spending creditors.

The implication of these thoughts is that the presumption that normal economic and policy conditions will return at some point cannot be maintained. Look at Japan, where gross domestic product today is less than two-thirds of what most observers predicted a generation ago, even though interest rates have been at zero for many years. It is worth emphasizing that Japanese GDP was less disappointing in the five years after the bubbles burst at the end of the 1980s than the US GDP has since 2008. In America today, GDP is more than 10 per cent below what was predicted before the financial crisis.

If secular stagnation concerns are relevant to our current economic situation, there are obviously profound policy implications. But before turning to policy, there are two central issues regarding the secular stagnation thesis that have to be addressed.

First, is not a growth acceleration in the works in the US and beyond? There are certainly grounds for optimism: note recent statistics, the strong stock markets and the end at last of sharp fiscal contraction. One should also recall that fears of secular stagnation were common at the end of the second world war and were proved wrong. Today, secular stagnation should be viewed as a contingency to be insured against – not a fate to which we ought to be resigned. Yet, it should be recalled that the achievement of escape velocity has been around the corner in consensus forecasts for several years and we have seen several false dawns – just as Japan did in the 1990s. More fundamentally, even if the economy accelerates next year, this provides no assurance that it is capable of sustained growth at normal real interest rates. Europe and Japan are forecast to have grown at levels well below the US. Across the industrial world, inflation is below target levels and shows no signs of picking up – suggesting a chronic demand shortfall.

Second, why should the economy not return to normal after the effects of the financial crisis are worked off? Is there a basis for believing that equilibrium real interest rates have declined? There are many a prior reasons why the level of spending at any given set of interest rates is likely to have declined. Investment demand may have been reduced due to slower growth of the labor force and perhaps slower productivity growth. Consumption may be lower due to a sharp increase in the share of income held by the very wealthy and the rising share of income accruing to capital. Risk aversion has risen as a consequence of the crisis and as saving – by both states and consumers – has risen. The crisis increased the costs of financial intermediation and left major debt overhangs. Declines in the cost of durable goods, especially those associated with information technology, mean that the same level of saving purchases more capital every year. Lower inflation means any interest rate translates into a higher after-tax rate than it did when inflation rates were higher; logic is supported by evidence. For many years now indexed bond yields have been on a downward trend. Indeed, US real rates are substantially negative at a five year horizon.

Some have suggested that a belief in secular stagnation implies the desirability of bubbles to support demand. This idea confuses prediction with recommendation. It is, of course, better to support demand by supporting productive investment or highly valued consumption than by artificially inflating bubbles. On the other hand, it is only rational to recognize that low interest rates raise asset values and drive investors to take greater risks, making bubbles more likely. So the risk of financial instability provides yet another reason why preempting structural stagnation is so profoundly important.

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Dewey Cheatum Howe's picture

What does Larry have his own comedy writer now. He seems to be acting like a jilted lover.

Popo's picture

Mark your calendars. He just made the old "stable plateau" argument. That's what they said about housing shortly before the bottom dropped out.

SafelyGraze's picture

the enlightened worldview of bankers's daughters, expressed by two very articulate young ladies

"give us a nation's youth to train, and I care not what morals you may teach"
-oscar mayer 

Stackers's picture

I'm always amazed how someone can talk out of their ass and mouth at the same time.

safe as milk's picture

great clip. i love that they're both drinking starbucks ice somethings. we are doomed!

nightshiftsucks's picture

 All that for $150,shit I'll give them $200 and we can have a threesome.

aVileRat's picture

Nah, Larry is just aligning to the next chance of opportunity. Talking head economists like him are a dime a dozen. Before Larry it was Stiglitz.

Before the taper trial run, he will change his tune again when Hawkish comments become faux pas pre-election cycle.


The Big Ching-aso's picture

I don't see where all the Larry bashing here makes sense. Essentially he admits current economic policy is full of risks, that staying on the current path gives stagnation at best and bubble busts at worst. Beyond that aphorism and the reality that any big economic shock such as a surge in fuel prices or the impact of a hike in interest rates upon a debt dependent consumer will yield stability is absurd.

He doesn't have any magic bullet answers and neither does anyone here, there, or anywhere. We're dealing with the foibles of the human psyche primarily driven by unrestrained greed which is one of the most basically inhumane of all human traits, augmented by the survival instincts of the political machine, and finally enhanced by the gravitation of achieving the easiest path to being in a state of comfort possible.

What do we really expect to happen? That We start acting like angels all of a sudden and in concert reverse course for the ultimate betterment of mankind?

C'mon. The normal state of economic reality is instability because as humans we are intrinsically too greedy to have it any other way for other than very brief periods of playing nice towards one another.

How's that for an aphorism?

Thisson's picture

There are answers - we can stop subsidizing and enabling additional debt.

The Big Ching-aso's picture

Well there are answers that don't answer resetting a system in place for the last 100 years without a lot of pain. If you expect people en-masse to volunteer with enthusiasm for a whole lot of economic pain then you will be disappointed. It isn't going to happen unless it's involuntarily imposed.

Either way the immediate result will have unpleasant repercussions for the high majority. Furthermore politically it's unrealistic for this to fluidly happen nowadays with special interests so involved in our way of governance. This is one hell of a big ship. Once it has been set on a certain course it takes one hell of a lot to change it.

That's reality.

SDShack's picture

I don't expect people to behave like angels, because people are, like you say, greedy at heart. And sociopaths are the most greedy of all, and left unchecked, eventually become TPTB. The only way you stop a sociopath is with the rule of law. I expect the rule of law to be applied uniformly for all citizens. There can be no separate rule of law for TPTB and the rest of society. That is the heart of the problem. The abortion of the rule of law by TPTB to benefit themselves at the expense of the masses. The masses are almost as much to blame because they have been seduced by the "free" govt. goodies and have morphed into the FSA that perpetuates the system. The only way this turns is if the masses revolt, and that will only happen when they are starving in the streets. We are a long way from that. The New Feudal Age is starting. The only question is what will usher in the new Dark Age that eventually overthrows the Feudal Lords and re-establishes the rule of law.

overmedicatedundersexed's picture

sds? seems law schools have not provided a group who protects the founding documents, rather a group that finds ways to circumvent ignore or rewrite the meaning of the words written there ...long time since a law prof has kicked up any fuss about our current fed gov and courts.

ZH Snob's picture

so instead of an honest price discovery driven by good old supply and demand and a free market we are now supposed to live and die by the whim of a bubble-blowing fed?  we are instead to watch their every move, every gesture to anticipate and get the edge.  instead of charts financial pundits can speculate on the color of Bernanke's tie, look back at what he did in the past when he wore that particular tie.

what larry fails to recognize is that this new normal is going is only one direction, despite the bubbles (and because of them too).


daxtonbrown's picture

"The central irony of financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending."


That is perhaps the most idiotic statement I've ever heard, made scary by the fact he is taken account of as some sage.

If it were that easy, just print a quadrillion monopoly bucks.

I'm going long lamp posts.

novictim's picture


"The central irony of financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending, it can only be resolved with more confidence, more borrowing and lending, and more spending."

That statement is an acknowledgement that our economic system is a giant ponzi scheme.  Only the government is keeping it going.

But our key economic problem is not the deficit or the debt.  Spending is not the problem.  Wealth inequality is the problem.  The impoverishment of the consumer/worker is the problem.


The private sector is not paying enough to employees to maintain consumer spending.  It is as simple as that.  And it cannot be any other way.  Employers only pay what they have to pay.  As a result of these natural patterns, capitalism always runs into a consumer crisis.

NihilistZero's picture

And this is why despite my libertarian / anarchist leanings I support a raise in the minimum wage.  Accepting the system we have for what it is, the only way you can spare SERIOUS pain for the most people is to give consumers back some purchasing power.  Subsidize the smallest businesses with a negative income tax, better QE be used for this purpose than juicing the stock market.  Let Walmart and the others take the hit and pay their employees enough to subsist.  If they Don't like it let government stop enforcing all their trade marks, protecting their assets and subsidizing their workers poverty.

sgt_doom's picture

Paul Krugman's best buddy and colleague, Larry Summers, spews forth nonsense and propaganda 'cause that's what his uncle, Paul Samuelson, taught him to do.

Now, the reason stagnation and worse will continue is because the douchetards of Amerika, the banksters, the overclass, the derivatives dealers (Paulson, Greenspan et al.) sold billions and trillions of dollars of financial instruments based upon debt, then shifted said debt onto the public sector, proclaiming one and all requires austerity!

For every $1.00 of debt, they sold from $100.00 to over $100,000 worth of financial instruments (various categories of credit derivatives) based upon said debt.  Plus, they rigged everything, so they would optimize their financial fraud (i.e., unlimited commodity futures contracts against said item, unlimited credit default swaps, or naked swaps, against said item, unlimited number of investors per hedge fund, use of phantom or virtual stock to naked short sell publicly-traded companies [DTCC's Stock Borrow Program], and the Internalization business of the top banksters and hedge funds, whereby they purchase almost 100% of stock trades from the top public brokerages --- e*trade, Schwab's, etc. --- and do the matching internally on their own computer systems, etc.).

Let us never forget that Summers and Krugman, along with Obama's latest top pick for fed vice-chairman, Stanley Fischer, former head of the Bank of Israel, are members of the Group of Thirty, established by the Rockefeller Foundation in 1978 to speak on behalf of the central banksters and speculators.


Antifederalist's picture

This man is a tenured professor and an economic scholar?

BandGap's picture

I saw this shit all the time in academia. No one questions a guy the New York Times uses as it's "expert" for all things about the economy. And the other asshole, Krugman, will never be tested for his views because they gave him a Nobel Prize. These soft sciences are enmeshed with politics far beyond other area of academics. And if the bullshit stampede lead to "Global Warming" (A COMPLETE JOKE) be touted, I can only imagine the forces at work when Lar or Pauly present their missives.

The thing is their egos are so enormous they are very easy to manipulate. They are in love with themselves.

falak pema's picture

so global warming is like derivative doped finance? 

Ok, You've bought into one reality but not the other. 

Complete joke will be on the next generation...and it'll be painful. 

Tim_'s picture

Lawrence Henry "Larry" Summers is a jew.

Kina's picture

Well it is clear they know exactly what is going on.

Flakmeister's picture

No, it is a matter of the truth finally starting to sink in...

Unintended consequences in spades as a matter of speaking...

Sudden Debt's picture

Like Edward Smith once said: I think we hit something...

Sudden Debt's picture

For those who don't fully understand what he's saying: WE'RE ALL FUCKED AND YOUR KIDS WILL ALL BE RICKSHA DRIVERS!!!

BigJim's picture

PS - Your angry waffle avatar never fails to bring a smile to my face.

eucalyptus's picture

that's not even an option given that automated vehiciles will be here in 10 years and widespread in 20.

venturen's picture

Ya what could wrong with giving unlimited free printed cash to a criminal mafia of souless bankers?

buzzsaw99's picture

blah blah blah

the man is in love with the sound of his own voice

d edwards's picture

Yeah, everytime he opens his mouth he shows he's a fool.

Janice's picture

The reason that Larry Summers has declined the FED position is because he is going to be offered the IMF position. Wait and see.

fockewulf190's picture

Nah, he´s just too much of a coward to go down with the ship.

Wilcox1's picture

It seems like stagnation, or even a managed decline, would be better than unsustainable growth.

BandGap's picture

The problem is everyone can't stagnate all at once. That is precisely what has happened.

This is just another rung in the ladder on the way down. All that matters is who get shoved lower first. I'm thinking the Japanese, who are already hurting big time, will get the nod. I am no Japanese culture expert so someone please enlighten me to as how they will feel when their older generation has to eat cat food.

This is really going to be spectacularly shitty.

Marco's picture

At least during unsustainable growth we all are better off, during stagnation or decline only the very top continues to get better off (in fiat money valuation terms they lose too, but in amount of land owned they win).

adr's picture

We don't have stagnation, we have obliteration. The only people getting by are the people on both ends that don't have to work for thier money. Earned income is a thing of the past, it is almost impossible to earn a good living today.

I earn the same as I did ten years ago, but nearly everthing has doubled in price. Some people blame the dollar losing value, I blame Wall Street. Once the commodity markets were handed over to speculators, banks using customer deposits for speculative purposes, the commodity markets exploded. Everything went up in price. When you raise base costs, the ripple spreads throughout the entire chain. End consumer costs increase the most. 

The second phase is almost complete. The obliteration of private business. Middle class business. Unless younare publicly traded it is almost impossible to gain traction in this economy. Michael Dell's bid to take his company private was being blocked at every turn because he would no longer be paying protection money to the Wall Street Mafia.

Carl Ichan is a mobster, a crime lord of The Tribe. Extorting business and punishing all who dare to cross him. If you play on Wall Street you owe The Tribe thier cut. They provide nothing of value, but with thier permission you can make a lot of money, as long as they get to make more. Like any criminal organization they bought off the politicians, the cops, and anyone else who could cause them trouble. They have no allegiance to the USA or the people. Only The Tribe matters. They created a Federal Reserve system staffed almost exclusively by members of The Tribe that controls all money.

The real story of the 20th century is how a criminal syndicate manuevered itself into power and took control of the world. They have made the world a phenominal place for them to live, but obliterated it for the rest.

SDShack's picture

Right on ADR. Your last 2 paragraphs are a definition of a sociopath and their creed.

Marco's picture

Technology is running out of steam, the cornucopians had it wrong ... the dawn of the age of Malthus is at hand.

22winmag's picture

I like Summers on one issue... we agree that women belong barefoot in the kitchen.

SheepDog-One's picture

The mutterings of a washed-up old drunk on a barstool.

Peter Pan's picture

Larry is deluded if he thinks that we will be lucky enough to simply be stagnant. 

yogibear's picture

Larry is whacky just like Paul Krugman.

Give him one of those Nobel Memorial Prizes in Economic Science like Krugman has.

He can be so vain as  to wear the Nobel Memorial Prize every time he's interviewed on television.


WTFUD's picture

There you have it in black and white Obama is indeed a true visionary.
Fighting tooth and nail to place Summers at the summit of his economic miracle only to be thwarted at every turn was indeed a lost opportunity which could yet have deep consequences for the future well being of the country.


A corrupt revolving door of proven fucking incompetence most of the folks here on Z/H might throw back at me and I would be inclined to agree.

AynRandFan's picture

Just like Krugman and the rest of the economic utopians, their explanations are circular.  To cure less debt we must have more debt.  Uh huh.  I remember when the Soviets used to say in order for their citizens to have more freedom, first they must have less freedom.  Eventually this nonsense crossed the Atlantic because to have less racism we need first to have more racism and call it affirmative action.  Used to, people had a bullshit filter.  Nowadays, we have nothing but this kind of crap reasoning in control of the major issues of the day.

falak pema's picture

Hey Larry, you're on an ICy ski slope run on your own; you can't come down and you can't climb back 'cos you are too far down. You have ONLY ONE CHOICE : take your skis off and walk down to the village.

Very humiliatiing 'cos you'll lose your bet and your shirt and your underwear and your wife's jewels; you're such a betting guy!  

That's where the Oligarchy is : in between a hard rock and an icy gully where its all downhill Schusssss.

And they want to change the rules and they want to spray the slope with tons of fresh snow all provided by the tax payer so he can ski down and win his bet! 

Hahaha; sounds like Sotchi to stop !



Pareto's picture

This statement: 

his idea confuses prediction with recommendation. It is, of course, better to support demand by supporting productive investment or highly valued consumption than by artificially inflating bubbles.

Stands by itself as the only thing he has said that makes any sense - implying that interest rates have to rise to spur the "productive" investment that he talks about.  But, since we know that will NEVER happen or be allowed to happen, given the FED is at a minimum 30% of the bond market (where price discovery on rates cannot actually ever occur), suggests Larry is essentially full of shit.  Its, therefore, impossible for the FED to pursue any measure other than fiat expansion and other balance sheet accumulation of toxic debt exercises.


Thanks for coming out Larry.

safe as milk's picture

isn't it clear that he's in cya mode? you know, "my friends are trying but i can see that it's doomed to fail. maybe next time they will let me be in charge."

geewhiz's picture

Without reading this I say who cares what this disingenuous moron has to say. Then I noticed the low reader number and realized not too many people.

Tic tock's picture

'major debt overhang, risk aversion, chronic Demand shortfall (plus) likely to...delay spending, in an era where 'real rates may not be able to fall far enough to spur enough investment to lead to full employment.' equals, there is no direct monetary solution.

The good news is that after several years, this is now becoming clearer.

i. Debt overhang is a concern for Wall St. and its FED, only.

ii.Risk aversion is the issue confronting savers, investors and business-activity.

iii. Demand shortfall, is symptomatic of a so-called free-market failing to clear. Any hope that the economy may turn is largely predicated upon endogenous factors acting to adjust this mismatch. It isn't merely lower prices, it is fuel, red-tape, utility and other prices, income distribution,...none of which will clear while lobbyists write policy. And I'll say it again, The Supreme Court is not supposed to make mistakes and certainly never of this magnitude.

iv. Excess liquidity and a the inadequacy of a zero-bound interest environment: or, in other words, Structural Insolvency. ...where Credit cannot be used to purchase Economic activity. There are several different ways in which this manifests itself, Crowding-out is one, Giffen-good orientation is another, but the main reason is paucity in the working-class incomes. A pervasive characteristic of this situation is term-restriction/risk in lending arrangements, which may or may not be correlated to the actual financial risk. is even quite likely that there may not be sufficient entrepreneur level private savings to facilitate new growth, leaving modal incomes as the absolute key; but necessarily without accompanying inflation in say, about 100 products.   

To allieviate term-associated risk, simply follow the example of North Dakota.