In 2008, the satirical newspaper The Onion published an article titled “Recession-Plagued Nation Demands New Bubble to Invest In.” Was it just a joke, or is there perhaps some truth in it?
How Is This Article Useful to Practitioners?
The idea first took hold in the 1930s that perhaps investing in asset bubbles is the only way for rich economies to achieve rising growth and low unemployment. Although long neglected as a viable economic theory, it has recently gained some popularity. There are a number of underlying theories about why secular stagnation occurs—for example, one possibility is too much savings pursuing too few investment opportunities. But this theory is refuted by the fact that private investment in the United States seems to have recovered reasonably well since the financial crisis and because technology industries are booming.
Different theories that focus on structural economic changes (such as an aging population), management compensation schemes that create incentives to invest in buying back shares instead of productive investments, and significant inflows of foreign capital resulting from a current account surplus in emerging countries have some merit but can also be refuted by other data.
Forced reductions in private debt, however, appear to have had the most significant impact on the recent sluggish growth. Big post-war banking crises have historically been followed by weak recoveries. Although there are some indicators pointing in the direction of secular stagnation, the current problems appear to be a lot less severe.
Abstractor’s Viewpoint
The article brings together a number of related theories to show that the theory of secular stagnation may not be as applicable as popular belief would indicate. Although the title refers to stagnancy in economic thinking, implying that it is a bad thing, the article unfortunately does not provide any new economic thought.