Secular stagnation rears its head once again; the global economy is not yet back to normal after the crisis

Secular stagnation

A couple of days ago I predicted the crisis is not over, contrary to the official opinion which is more well-intentioned than realistic. The situation won’t normalise whilst interest rates and the yield curve are so low. And you can add low inflation expectations to this mix. There are indicators in the graphic below which confirm this:


The red curve indicates the expectations of bondholders who buy bonds deflated at maturity by how much inflation has risen over the investment period. If we compare the return they accept with the face value of a comparable Treasury bond, we get an approximation of what inflation is expected to be in the next 10 years. It’s obvious that since the first quarter of the year these expectations have fallen significantly, from the 2% of that period.

The blue curve is a measurement of the yield curve. This is obtained by subtracting the yield on the 2-year bond from that on the 10-year bond. We can also see that from the start of the year this has declined apparently. This indicates the yield curve is flattening. So a drop in interest rates is expected, for all the Fed might announce rate hikes and predict much higher levels of interest rates than the market. The green curve is another kind of spread, that of the corporate bond against the Treasury bond. Its drop shows a greater appetite for risk, with investors seeking a higher return than that offered by public debt. 

There was some ambiguity in the comments from the Fed and the ECB last week. This ambiguity is a result of the race to “normalise” interest rates. But the objective data doesn’t recommend too much of a rush, precisely because the economy is not back to normal. The real figures continue to show that Larry Summers and his “Secular Stagnation” hypothesis are right. We are not strong. We are weak, anaemic. Fortunately better than ten years ago, but not yet back to normal. We haven’t suffered a recession, we have gone through a crisis. And it has disrupted our perception of things. This is particularly true of the appetite for long-term risk, which translates into long-term investment projects (not exactly investing in the stock market). In Spain, in particular, we are living off public debt and it’s unbridled rise. This is political bribery against a political backdrop which is very uncertain, and it’s keeping consumption alive. Meanwhile, not many jobs have been created and they are neither long-lasting nor stable.
Some months ago, the ECB had wanted to give the message that normalization had arrived. It was basically going to bring an end to QE. Well, I fear it’s going to eat its words. There is no way to put a date on the end of this Secular Stagnation. This is what the indicators analysed tell us. Every time we want to break the pessimism, the indicators are weak. That’s how it is. And I would like to recall that Larry Summers put forward his hypothesis four years ago, in 2013, based on these indicators…

About the Author

Miguel Navascués
Miguel Navascués has worked as an economist at the Bank of Spain for 30 years, and focuses on international and monetary economics. He blogs in Spanish at: http://