Larry Summers wrote in the FT last week that the IMF "essentially" endorsed his secular stagnation hypothesis. The hypothesis suggests full employment requires continued super-low interest rates, perhaps even negative nominal interest rates. However, given that negative interest rates are not practically possible and that companies are unwilling to invest, even this policy may not work. In other words, if Larry was now Fed Chair, he would be continuing with QE while, at the same time, telling Congress that it isn't really that effective.
The escape hatch from a liquidity trap, according to Summers, is more government spending, particularly in infrastructure. Others are diametrically opposed to his view, arguing instead that the government should shrink and let private markets take over. Both options require political cooperation, which at the moment seems as elusive as the return to a robust growth path that central banks around the world are trying to promote through rock bottom rates.
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