Saving, investment, and secular stagnation

Tyler Cowen asks a few questions regarding the relationship between saving and secular stagnation:

I have never understood how savings is supposed to remain above investment for extended periods of time. . . .

If the demand to investment is so low, why don’t the prices of investment goods fall, thereby increasing the marginal return to new investment?  (I do get why the zero lower bound may limit the ability of interest rates to fall).  That would then equilibrate planned savings and planned investment once again and eliminate the savings overhang.  Of course price stickiness may prevent this from happening in the short run, but secular stagnation is a longer run theory.

Tyler’s right that secular stagnation is a long run problem. It’s just a fancy term for a low trend rate of growth in RGDP. Real problems are not caused by nominal conditions; they reflect real factors, such as slow population growth and slow productivity growth.

The zero lower bound on interest rates can create problems for nominal growth (i.e. monetary policy), but only if the Fed allows it to do so. If Fed policy is inept, then when interest rates fall to zero it is more likely that there will be a negative nominal shock. This nominal shock can cause real output to fall in the short run, a recession. But this does not cause secular stagnation. Wages and prices adjust in the long run.

To summarize:

1. Secular stagnation is a long run problem, and hence is not caused by monetary policy, saving/investment imbalances, or the zero bound problem. But secular stagnation can make a zero bound situation more likely, if the central bank is inept.

2. Business cycles are mostly caused by nominal shocks (with the exception of Covid-19, which is a real shock). Some nominal shocks are caused by ordinary Fed policy mistakes when interest rates are positive (as in 2008), and some nominal shocks are caused by the Fed being unable to handle the zero lower bound in an intelligent fashion (a failure to do level targeting, target the forecast, and adopt a “whatever it takes” approach to asset purchases), as in 2009.

Talk of saving/investment imbalances is not useful; it’s an extremely convoluted and misleading way of thinking about monetary policy failures. So just talk about monetary policy failures!

BTW, the zero bound problem does not prevent saving from equalling investment, rather if handled improperly by the central bank it may cause S=I equilibrium to occur at a lower than desired level of nominal spending. I seem to recall Nick Rowe saying the actual problem is not excess saving, it’s excess hoarding of money.



17 Responses to “Saving, investment, and secular stagnation”

  1. Gravatar of Iskander Iskander
    18. May 2021 at 13:21

    Scott, somewhat unrelated, I occasionally see people (usually industrial policy types talking about East Asia) claim that undervalued exchange rates lead to economic growth (even in the long run). Do you have any thoughts on such claims?

    I suspect they are off for the same reasons as the secular stagnation types, nominal things don’t matter to any great degree in the long run, and prices adjust, but I would like to see your thoughts.

  2. Gravatar of ssumner ssumner
    18. May 2021 at 14:38

    I did a study of that issue:

    I don’t view undervalued currencies as an important issue, but those who talk about the issue (at least the more thoughtful analysts) focus on the real exchange rate. So it’s not just a nominal issue. Nonetheless, I don’t believe that reducing the real exchange rate boosts long run growth.

  3. Gravatar of marcus nunes marcus nunes
    18. May 2021 at 17:17

    A few days a go I did a post based on Nicks Rowe´s interpretation of Friedman´s “Thermostat Analogy”. One insight:
    Why the “Thermostat” (Fed) behaved so differently now & then? My preferred explanation is that the GR was “Fed induced”, while 2020 was “virus induced”. So, if the Fed fully corrected its “mistake” of 2008, people would acknowledged the Fed had been incompetent. That wouldn´t do, especially since the Fed was getting all the accolade for having avoided a second Great Depression. Bernanke was even hailed “The Hero” and “Person of the Year, allowing him to publish a book titled “Courage to Act”!
    Better to say “it´s The New Normal” (or “Secular Stagnation”)!

  4. Gravatar of Lizard Man Lizard Man
    18. May 2021 at 21:24

    What, in this context, is meant by an imbalance of savings and investment? From the standpoint of an individual, I would think that it means too low of a rate of return on an investment! You want a million dollars (in inflation adjusted terms) at some point in the future, and since the rate of return is low, you have to save more and consume less than you would. And everyone else has to do this too, which should push ROI down further. All of this saving would be great if there were actually a lot of productivity enhancing projects that for profit enterprises to carry out, but it seems like that is not the case.

  5. Gravatar of postkey postkey
    19. May 2021 at 00:34

    “Real problems are not caused by nominal conditions; they reflect real factors, such as slow population growth and slow productivity growth.”

    Slow productivity growth brought about by an decrease in E.R.O.E.I.?

  6. Gravatar of Spencer Bradley Hall Spencer Bradley Hall
    19. May 2021 at 07:50

    Economics is an exact science.

    The growth of interest bearing time deposits shrinks aggregate demand and therefore produces adverse effects on GDP. Banks don’t loan out deposits, deposits are the result of lending. All bank-held deposits are lost to both consumption and investment.

  7. Gravatar of Trying to Learn Trying to Learn
    19. May 2021 at 12:30

    What is the difference between saving and “hoarding excess money”?

  8. Gravatar of Doug M Doug M
    19. May 2021 at 14:56

    The FX market makes it possible to “import savings”, allowing for a savings-investment imbalance to persist on the short-to-intermediate-terms.

  9. Gravatar of ssumner ssumner
    19. May 2021 at 15:01

    Trying, Suppose you sell some stock and convert the funds into cash. That action does not affect your net saving, but does mean that your demand for money has increased.

    Doug, Yes, but the S=I equally refers to all forms of saving, including foreign saving used to finance domestic investment.

  10. Gravatar of Michael Sandifer Michael Sandifer
    20. May 2021 at 16:57


    I’m curious as to how you view the situation regarding longer-term nominal rates in situations like the one we’re in now. The 10 year Treasury rate, for example, is roughly half what it was pre-pandemic, yet you think monetary policy is about right or perhaps a bit loose. Does this have anything to do with how you see investment and savings, or is it something else entirely?

    For me, the fact that the S&P 500 index is above the pre-crisis trend at the same time suggests that a lower discount rate rather than earnings returning to trend is responsible for much of the stock market performance during the recovery.

  11. Gravatar of Pyrmonter Pyrmonter
    20. May 2021 at 19:33

    Read TC’s comment and struggled with. Can someone enlighten me: my recollection of first year macro was that it spoke of INTENDED saving and investment: and that, basically because the models had to balance, S and I would end up equal – the simple explanation being through an adjustment in inventories. I thought that was the problem Keynes, his circle as well as the modern MMT people complained about: that I (and through it, AD) were somehow constrained, leading to lower K accumulation and in turn, lower growth. Have I misunderstood them?

    There’s a second point to TC though – expecting an adjustment in the price of capital goods. Isn’t that the whole point of Keynesian ‘assymetrically flexible prices’? That prices (whether of labour or of capital goods) either don’t fall, or don’t fall rapidly enough to allow the sort of intermediate micro market equilibration?

  12. Gravatar of Michael Sandifer Michael Sandifer
    21. May 2021 at 03:36

    I should say the 10 year is now roughly half the level of the pre-pandemic high in 2018, but it is still also lower than the level at the beginning of 2020.

    Also, at the current level of less than 1.7%, it’s even lower than the Fed’s 2% inflation target, to say nothing of averaging above 2% for a while.

    As I interpret it, either markets expect that nominal economic growth will not return to the pre-crisis trend, or the Fed is expected to keep rates relatively low in the face of what may be rather high inflation for 10 years, and actually longer when you look further out on the yield curve.

  13. Gravatar of ssumner ssumner
    22. May 2021 at 08:44

    Michael, The TIPS spreads are more useful than the nominal interest rate when forecasting inflation.

  14. Gravatar of Michael Sandifer Michael Sandifer
    23. May 2021 at 09:04


    Yes, of course that’s true, but how do we know we’re going to get NGDP growth back to trend? And which trend? Those are the questions that really matter.

    What I’m curious about regarding this post is, what does the model look like that may consider a healthy expected recovery in NGDP terms, but with markets projecting negative real rates in a growing economy for more than ten years?

    I get that the global equilibrium interest rate is lower than pre-pandemic, but doesn’t that just mean central banks have to push harder, ceteris paribus, to keep NGDP growth on trend in outer years? Why shouldn’t nominal, and hence real rate levels for a given country return to trend along with NGDP growth?

  15. Gravatar of ssumner ssumner
    25. May 2021 at 16:01

    Michael, The Fed is not targeting NGDP, they are targeting inflation. I’d prefer a NGDP target, but if they are targeting inflation then they need to hit the target.

  16. Gravatar of Michael Sandifer Michael Sandifer
    25. May 2021 at 22:01

    Sure, but I don’t care to judge them based on their regime, but rather on what would be close to optimal.

  17. Gravatar of ssumner ssumner
    29. May 2021 at 08:09

    Michael, That’s your prerogative, but I don’t think it makes any sense to do so. We need a stable monetary policy, the exact target is far less important.

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