A theory of stagnation

THE past two weeks have been turbulent for the world's markets. But they have been buoyant for proponents of the theory that the global economy is stuck in a semi-permanent rut.

The so-called "secular stagnation" hypothesis was first advanced by economist Alvin Hansen in the late 1930s, and revived by Larry Summers in a different form two years ago. The former US treasury secretary argued that growth potential in advanced nations has been sliding for decades.

Ageing populations, globalisation and automation have come together to depress wages, especially for the less skilled. Demand for new investment is therefore deficient when compared with societies' desire for savings. As a result the "natural" rate of interest these economies can bear has been declining, and might even have turned negative.