An exhausted economy – EconomyMorning



Secular stagnation is a long-term notion. It designates a state of weak or even no economic growth, induced by an increase in savings and a chronic lack of investment. Secular stagnation sets in as soon as the government’s fiscal policies (spending and investments) lack aggressiveness. In this case, we should not look at the aggressive fiscal programs in place or the growth estimates for 2021, 2022 or even 2023. It is the outcome of the next decade that is at stake. It is clear that fiscal policies and Unconventional currencies are needed to combat the effects of a global health crisis. An accommodating monetary policy is needed to close output gaps and prevent the disinflationary forces at work over the past two decades from resuming. But the secular stagnation thesis is measured over decades, not years. However, it limits the scope of the possible scenarios and prevents a return to the levels of long-term interest rates observed before the great financial crisis of 2008-2009. The Japanese exception The main indicator of secular stagnation is the presence and persistence of negative long-term real rates. Developed market government bond rates show secular stagnation with real 10-year rates of around -1.60% in Germany, -0.90% in the United States, -1.50% in Sweden and -2.66% in the United Kingdom. The real long-term rates of these markets are an important factor in the valuation models of the different asset classes. Inflation expectations can be seen as residual. As soon as quantitative easing was widely applied as the main instrument of monetary policy (around 2015), the move towards strongly negative long-term real rates accelerated and became persistent. The only exception so far: Japan. The build-up of aggressive fiscal programs greatly improved the infrastructure and general well-being of the Japanese, but ultimately led to the disappearance of inflation expectations and low inflation footprints remained close to the zero line. Japan’s indebtedness (debt / GDP exceeding 225%) was not and is not a major concern, as most of Japan’s debt is held in the domestic market. The introduction of explicit yield curve control in September 2016 pushed 10-year inflation expectations down from an already low level of 50 basis points to zero, reaching a low of -0 , 35% in March 2020. Today, like most developed markets, 10-year inflation expectations in Japan have recovered by around 65 basis points, but remain at a disappointing level of 30 basis points. In a scenario where the Bank of Japan succeeds in pushing inflation up to 2.00%, we could observe a convergence of Japanese 10-year real rates towards the levels currently reached in Germany (i.e. -1 , 60%). The point is that Japan has certainly improved its infrastructure by investing heavily, but it has not resulted in improved inflation data. It is worth wondering how the base effects will manifest in the second and third quarters of 2022 … Hopefully the impression will still be around 2% in the United States. The surprise would be a result closer to 0%. Agrave; At this stage of the economic recovery, the demand for blue chip stocks remains intact. Savings always find their way into risk-free government bonds and high quality credit, whether they are investment grade or high yield bonds. The share allocated to private debt and infrastructure debt is constantly increasing. Regulation has an impact and directs the investment books of banks towards zero risk government bonds. Regulation has cemented (re) insurers’ fixed income allowances well above 90%. Sovereign wealth funds hedge each other by allocating significant assets to sovereign and supranational debt issues in local and hard currencies. The current combination of geopolitical, climatic and societal threats reinforces risk aversion. Shifting from a secular stage of stagnation to a longer-term, more investor-friendly and growth-oriented business cycle will take a lot of effort. Critics or skeptics of secular stagnation take issue with the disproportionate savings argument and point to government regulation and fiscal intervention as the main causes of secular stagnation. Apparently all roads lead to Rome.