LONDON – The developed world is slowly emerging from the Great Recession, but a question lingers: How fast and how far will the recovery go? One big source of pessimism has been the idea that we are running out of investment opportunities – and have been since before the 2008 crash. But is that true?
The last big surge of innovation was the Internet revolution, whose products came onstream in the 1990’s. Following the dot-com collapse of the early 2000’s, speculation in real estate and financial assets – enabled by cheap money – kept Western economies going. The post-2008 slump merely exposed the unsoundness of the preceding boom; the mediocrity of the recovery reflects the mediocrity of previous prospects, coolly considered. The risk now is that a debt-fueled asset spike merely perpetuates the boom-bust cycle.
The economist Larry Summers has reintroduced the term “secular stagnation” to describe what awaits us. By the mid-2000’s, Summers argued at a recent International Monetary Fund conference, the average prospective return on new investment in the United States had fallen below any feasible reduction in the Federal Reserve’s benchmark interest rate.
That remains true today. We may be in a permanent liquidity trap, in which nominal interest rates cannot fall below zero, but the expected rate of return to investment remains negative. Unconventional monetary policies like quantitative easing may inflate a new generation of asset bubbles, but the underlying problem – negative returns to new investment – will not have been solved by the time the next crash comes.