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Some Economists Argue That Industrialized Nations Have Now Entered into a Phase of Secular Stagnation

Autor:   •  July 12, 2018  •  Research Paper  •  829 Words (4 Pages)  •  517 Views

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Topic:

“Some economists argue that industrialized nations have now entered into a phase of secular stagnation”

What is secular stagnation?

The secular stagnation theory was originally put forth by Alvin Hansen in 1938 to "describe what he feared was the fate of the American economy following the Great Depression of the early 1930s: a check to economic progress as investment opportunities were stunted by the closing of the frontier and the collapse of immigration". Secular stagnation refers to "a condition of negligible or no economic growth in a market-based economy" and suggests a change of fundamental dynamics which would play out only in its own time.[1]

As of today, Secular stagnation theory is mainly referred to the situation that after the last financial crisis in 2008, world economic is experience long-term of high saving and low investment behavior, which results in long-term low real interest rates (Fig.1) and, however, also well under controlled low inflations (Fig.2).The effect secular stagnation is chronic economic weakness: low growth, low inflation, low real interest rate, constant threat of recession. Policy makers are losing control of the market with their monetary policies.

Fig.1

Fig.2

Why it happens?

Based on the previous history, warnings similar to secular stagnation theory have been issued after all deep recessions, but they usually turned out to be wrong because they underestimated the potential of existing technologies.

However, this time, situation is more complicated than before.

World population is facing a significant structure change after the Second World War (Fig.3). In most countries, peak employment will occur within 50 years. The strong demographic tailwind that powered GDP growth has come to an end and is starting to turn into a headwind in some countries (Fig.4). In developed countries, large population is moving close to retirement age with high increase of income and low needs of spending. This result in major change of consumption behaves and reduces of demand. On the other hand, the continually declining of birth rate also results in continue decreasing of demand.

Fig.3

Fig.4 [2]

High income inequality also results in major capital captured by rich people with low need of spending and low concern of investing. The good news is the global income inequality it is now falling and moving to more equal distribution (Fig.5). [3]

Fig.5 [3]

Slow growth in labor force, cheaper

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