Friday, 24 January 2014

What Secular Stagnation?

Note: this is probably the shortest post I've ever written

According to Larry Summers, secular stagnation is supposed to be reflected in the continuous decrease of bond yields since the early 1980's (the increase before can be explained in a simple way-inflation):
Yet, we usually forge to have a look at these:

Now remember where bank capital and most of the funds of the pension funds industry are (most times forced by legislation) invested: Bonds. I'd also like to remind some of the supply and demand premise in economics: when supply of funds increases then price increases and thus the yield decreases. And we are on a continuous search for safe assets to invest in. As the safest of all are government bonds (explained here) the increase in life expectancy has forced pension funds to invest more and more assets in the bond market (for a more detailed view of pension systems and population read this).

Concluding, I do not believe that stagnation can be inferred from bond yields. Declining returns just mean that the supply of funds for bonds has been stronger than demand and this is what's driving yields down. Now if that can affect the economy is a different story (one which I do not really trust to be honest since the US has been growing steadily since the 1980's), yet it does not indicate stagnation on its own. It just shows that when times are bad, people come up with a lot of explanations about what's at fault. But then again, I might be wrong and Summers could be right; time will tell.

1 comment:

  1. Great post - thank you for bringing this case into the open.

    I agree with your analysis and attribute it to what you say and the growth of the finance sector 'hollowing out' the industrial sectors. Big banks now own far more of industry than they used to. I think its something like 14% to, now, 40%.
    Its nowadays increasingly less about charismatic entrepreneurs leading the way and more about large globs of money being applied to more-or-less commoditized industries.

    Of course, globalization and tech innovation (e.g. computers, email etc) are huge players in the overall narrative as well.

    Your pension investments increase is one that I had missed and is a huge contributor as I can see from the charts above.