An economy that needs bubbles

Krugman’s on fire with this post.

Echoing my German sun seeker point:

Assuring people that they can get a positive rate of return on safe assets means promising them something the market doesn’t want to deliver – it’s like farm price supports, except for rentiers.


Other worthwhile paragraphs:

So how can you reconcile repeated bubbles with an economy showing no sign of inflationary pressures? Summers’s answer is that we may be an economy that needs bubbles just to achieve something near full employment – that in the absence of bubbles the economy has a negative natural rate of interest. And this hasn’t just been true since the 2008 financial crisis; it has arguably been true, although perhaps with increasing severity, since the 1980s.

He pins the causes of secular stagnation on demographics and/or a Robert Gordonesque decline in innovation.

I disagree with the Gordon view. As stressed on multiple occasions I believe if there was a stagnation in innovation in the last decade or so it was due to artificial scarcities and innovation suppression by cartels who have no interest in encouraging further abundance.

What’s more, I believe this period of stagnation is now over because innovation has found a way to breakthrough such suppressive barriers by becoming ever less monetised in nature. This has been facilitated by the open source and voluntary research sector — which has unleashed a global pack of nerds working on innovative solutions for the sake of fun and/or innovation’s sake, rather than for profit reason. It has also been facilitated by handful of innovation-minded corporates who don’t seem to care so much about meeting shareholder expectations for returns (Amazon, Elon Musk businesses etc).

The conditions are in place for the age of infinite equity and a new dotcom style bubble wealth effect — providing, of course, that access to that equity is distributed equally.



4 thoughts on “An economy that needs bubbles

  1. I think the United States could have gotten unemployment below four percent in the Bush years if fiscal policy had been aimed at the poor instead of the rich.

  2. From a subsequent Krugman post,
    “Why might this be happening? One answer could be slowing population growth. A growing population creates a demand for new houses, new office buildings, and so on; when growth slows, that demand drops off.”…”Another important factor may be persistent trade deficits, which emerged in the 1980s and since then have fluctuated but never gone away.”

    Those two reasons seem spot on to me. The 2nd reason doesn’t sound like it is about a lack of innovation. Of course the “powers that be” usually undercut innovation that displaces them. But it is also simply harder to invest in innovation when the consumption prospects look dim.

    The other odd part is that it is harder to take risk when there’s no inflation because inflation gives us an implicit buffer in ROI. It sounds like semantics, but it is much harder to fund an investment with 3% real return and 3% nominal return than one that is 3% real return and 8% nominal return. Pitching 3% nominal return limits one’s career and innovation.

  3. Thinking about “infinite equity,” the Summers speech, and Bitcoin. Is widespread “asset price inflation” is more properly characterized as deflation? That is:

    1. Given an age of abundance and oversupply, brought on by globalization and the technological revolution;

    2. The market “wants” deflation;

    3. Extraordinary central bank actions have kept national currencies inflating, barely; but

    4. Gold, art, property, S&P 500, shares of Google and Twitter, and bitcoin — these are all currencies too, particularly when “the Dow is the new safe haven” and “the government will continue to support the market no matter what”; and

    5. Those currencies . . . they are deflating.

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