Must-read: Ken Rogoff: “The Fear Factor in Global Markets”

Must-Read: This, by the very-sharp Ken Rogoff, seems to me to be simply wrong. If “the supply side, not lack of demand, is the real constraint in advanced economies” then we would live in a world in which inflation would be on a relatively-rapid upswing right now. Instead, we live in a world in which Global North central banks are persistently and continually failing to meet their rather-modest targets for inflation. If a fear of supply disruptions or supply lack were ruling markets, then people in markets would be heavily betting on an upsurge of inflation and we would see that. But we don’t. What am I missing here?

Ken Rogoff: The Fear Factor in Global Markets: “There are some parallels between today’s unease and market sentiment in the decade after World War II…

…In both cases, there was outsize demand for safe assets. (Of course, financial repression also played a big role after the war, with governments stuffing debt down private investors’ throats at below-market interest rates.)… People today need no reminding about how far and how fast equity markets can fall…. The idea is that investors become so worried about a recession, and that stocks drop so far, that bearish sentiment feeds back into the real economy through much lower spending, bringing on the feared downturn. They might be right, even if the markets overrate their own influence on the real economy. On the other hand, the fact that the US has managed to move forward despite global headwinds suggests that domestic demand is robust. But this doesn’t seem to impress markets….

The most convincing explanation… is… that markets are afraid that when external risks do emerge, politicians and policymakers will be ineffective in confronting them. Of all the weaknesses revealed by the financial crisis, policy paralysis has been the most profound. Some say that governments did not do enough to stoke demand. Although that is true, it is not the whole story. The biggest problem burdening the world today is most countries’ abject failure to implement structural reforms. With productivity growth at least temporarily stuck in low gear, and global population in long-term decline, the supply side, not lack of demand, is the real constraint in advanced economies…

March 20, 2016


Brad DeLong
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