Their central banks are being forced to keep interest rates close to zero.
“We are experiencing not only an economic crisis but also a crisis in
economics,” he writes. “Most economists failed to predict the current
crisis and the economics profession itself has fallen into a state of
complete disarray in its attempt to answer the question of what should
balance-sheet recession: This occurs when the private sector has borrowed heavily to invest in
assets (particularly property); when asset prices decline, the nominal
value of the debt remains. Cutting interest rates helps a bit (by
reducing the cost of servicing the debt) but it does not persuade people
to borrow more money, because they are still trying to repair their
Private sectors in most countries in the West today are minimising debt
or maximising savings in spite of zero interest rates, behaviour that is
at total odds with traditional theory.
The policy of quantitative easing (QE), the creation of money to buy
assets, succeeded in expanding the balance-sheets of central banks but
did not push up bank lending or boost the amount of money circulating
among companies and consumers.
There was a burst of stimulus in 2009 but, alarmed by the size of their
deficits, governments started to cut back too quickly. They should have
paid attention to the examples of Japan in 1997 (or America in 1937)
when premature fiscal tightening derailed recoveries.
A side-effect of QE is that asset prices have risen sharply in value;
that should have repaired corporate and personal balance-sheets but the
private sector is still not borrowing. Why not? And he probably does not
take the arguments for secular stagnation seriously enough:
deteriorating demographics and sluggish productivity growth are