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Prepare for secular stagnation

by Meghnad Desai

Prepare for secular stagnation

This time last year secular stagnation was a new idea. In fact, it dates back to the Harvard doyen of American Keynesianism, Alvin Hansen. He was pessimistic about US growth prospects beyond the mid-1950s.

John Maynard Keynes himself had been worried that in rich countries there would be excess savings and investment opportunities would dry up.

Hansen agreed with this. He used the notion of Kondratieff cycles, which are 50-year cycles named after the Soviet economist Nikolai Kondratieff (see OMFIF Bulletin, September 2013). The US, Hansen conjectured, was on the down-swing of a Kondratieff cycle, which would mean low growth and low inflation for 25 years.


He was wrong then. When Larry Summers, former director of the US National Economic Council, revived the idea couple of years ago, no one thought it would catch on.

Yet Christine Lagarde, managing director of the International Monetary Fund, has confirmed that 'the new normal' will be lower growth than we had got used to.

Low rates of inflation or 'lo-flation' are becoming reality. Around the world, central bankers are trying to increase the rate of inflation to their target of 2%. No one would have dreamt during the 1970s when Keynesians were battling Monetarists on the issue of inflation that central bankers would be praying for higher inflation. Low inflation is here to stay.

Anaemic growth

For 75 years between 1939-2014, we had persistent inflation. Now the cycle has reversed itself.

Oil prices, which have been a persistent worry since 1973, have fallen. Despite quantitative easing there seems to be negligible inflation, whatever the monetarists told us during the 1970s.

But growth is also low. In the euro area growth has been anaemic. The depreciation of the euro may revive European economies a bit, but no one expects growth at the old rates.

Of the Brics countries, Brazil, Russia and South Africa are foundering. China is slowing down. India, under Prime Miniuster Narendra Modi, is the only Brics economy people are looking at hopefully to accelerate growth.

The US and UK have recovered from the recession to growth rates comparable International monetary policy Meghnad Desai is Emeritus Professor of Economics at the London School of Economics and Politics, Chairman Source: longwaveanalyst.ca of the OMFIF Advisory Board, and author of Hubris. Four Kondratieff cycles in the US 1789-2003 to their previous levels. They have better demographics than Europe or Japan.

But even in those countries, there seems to be no innovation happening which could lift the global economy as successive rounds of innovation have done over the last 250 years.

The last innovation cycle was triggered by Silicon Valley. Since the dot com boom collapsed, nothing else has turned up.

Demography and clusters of innovation were two factors mentioned by Kondratieff as causes of long, 50 year cycles. He included wars and political movements as other factors. No systematic tests of the Kondratieff theory have been carried out. But his cycles are possible to observe.

Downward phase

Beginning in the 1780s he traced out four 50 year cycles. In the post-second world war period is a boom phase from 1940-45 till the early 1970s and a downward phase from the 1970s to the mid-1990s.

Then there was an upswing from the early to mid-1990s till 2007-08 as the next boom phase. Now we are in the down phase.

If Kondratieff were to be an accurate guide, this down phase would last till the late 2020s. To reinforce these ideas, one should add that interest rates are not only low but negative for the first time in memory.

There are no hard laws in economics, just pointers which may help. There is no doubt that there has been shrinkage in middle class jobs thanks to rapid progress in information technology.

Low productivity growth has become endemic. It could be argued, as former US Federal Reserve Chairman Ben Bernanke has, that these are temporary trends which would be removed if a recovery is sustained.

For that to be true, recovery would have to be maintained at reasonable levels in the US and UK and sped up in Japan and the euro area. And then the emerging economies would have to regain their dynamism of 10 years ago.

None of this is impossible. But to imagine it will happen stretches credulity a little too far for my liking. In 10 years, Kondratieff may be celebrated in economic circles as a man whose time, once again, has come.

■Meghnad Desai is Emeritus Professor of Economics at the London School of Economics and Politics, Chairman Source: longwaveanalyst.ca of the OMFIF Advisory Board, and author of Hubris