Larry Summers vs Ben Bernanke on secular stagnation. Point Counterpoint.
a good list of arguments for each side.
I tend to be more on Summers side
.While few things are ever simple in economics it seems that due to the exponential nature of technology change will come ever faster. Faster than the rate most governments or people can adapt to. The first industrial revolution worked out well for most but it took many years of disruption to do so. I see no reason why it will be different this time.
These guys argue as if economics were physics. Interest rates do not respond to inflation directly but to the perception by the agents of inflation during the loan period. These guys can’t even agree on how to measure inflation! Add in fuel, take out food, adjust for the firmness of the mattress and for the hedonic quality of retina displays on consumer electronics. In a word, a whole bunch of bull.
I have a simpler explanation: the cost of money (in reply to Bernanke’a blog post)
¿Why are interest rates so low?
Interest rates are the cost of money which has three components:
1.- The intrinsic value of money
2.- The rate of inflation
3.- The risk of not getting repaid
Since lending to the government is “risk free” component three is zero. If you take out inflation the real rate of interest is zero. That means that fiat money is worthless, it can be had for nothing.
That makes perfect sense. Why should money be a burden on trade, it’s supposed to be a facilitator. Money is nothing but marks in a clay tablet or a recording on a magnetic medium. It’s just an accounting of trade. That was not always the case. Gold was expensive to mine and mint so component one had to have some positive value. But fiat money is made with a magic wand at zero (or close to zero) expense.
My conclusion is that FIAT MONEY IS THE PERFECT MONEY.
The only real use for a central bank is to have them print enough of the worthless stuff.
The one problem here is that you cannot eliminate the risk of not being repaid without potentially effecting the inflation rate and the intrinsic value of money.
You know the amount you lent will be repaid (#3), but you cannot be sure that it will have the same value as when you lent it (#1), which is a problem with that then can lead to #2.
So it really still becomes a circular thing, especially when you consider the global economy and that we in the US have some of the highest interest rates in the developed world.
I am not suggesting a return to gold, but it seems to me like central banks around the world are in a race to see who can devalue their currency the fastest. All the more reason why I like faster growing small/mid caps with less international exposure.
I am not suggesting a return to gold,
but it seems to me like central banks around the world are in a race to see who can devalue their currency the fastest. All the more reason why I like faster growing small/mid caps with less international exposure.
I do agree that stocks, a proxy for production, are the best hedge against inflation/devaluation. I also tend to avoid foreign stocks but not US stocks with international exposure.
Agree on not necessarily avoiding US stocks with international exposure. The strong dollar may be a temporary headwind, but long term the good companies will still grow.
Recently I came across some ETFs like HEDJ that offer exposure to European companies with global businesses that hedges the impact of the dollar strengthening. I rarely invest in ETFs, but this one is in interesting play to ride this trend in the near term. FYI in case it interests anyone.