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The Road to Full Investment

As capital becomes more abundant, the expected return on new investment, allowing for risk, falls to zero, which appears to be the case now. But this does not mean that all investment should come to an end: If the risk can be eliminated, the investment engine can be kept going, at least temporarily, by having the state step in.

LONDON – A specter is haunting the treasuries and central banks of the West – the specter of secular stagnation. What if there is no sustainable recovery from the economic slump of 2008-2013? What if the sources of economic growth have dried up – not temporarily, but permanently?

The new pessimism comes not from Marxists, who have always looked for telltale signs of capitalism’s collapse, but from the heart of the policymaking establishment: Larry Summers, former US President Bill Clinton’s Secretary of the Treasury, and chief economist of almost everything at one time or another.

Summers’s argument, in a nutshell, is that if the expected profitability of investment is falling, interest rates need to fall to the same extent. But interest rates cannot fall below zero (in fact, they may be stuck above zero if there is a strong desire to build up cash balances). This could result in profit expectations falling below the cost of borrowing.

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