Is there something seriously wrong with the economy?
It's a scary prospect, and a concern that's gotten louder and louder over the past year. In economic circles, it goes by the alliterative name of "secular stagnation." And it's a phrase that Fed watchers are likely to hear more and more in the months ahead.
Recent comments by the vice chairman of the Federal Reserve, Stanley Fischer, indicate questions within the central bank about whether the slow growth that has followed the recent recession could reflect, or at least could potentially morph into, longer-term issues within the economy. And while Fischer avoided the phrase "secular stagnation" in his Monday speech, Minneapolis Fed President Narayana Kocherlakota is planning to host a November symposium that directly addresses the issue of secular stagnation by name, CNBC has learned.
"I think there's a lot of concern about how long this will last, and I think that's certainly high on the agenda right now. At least people are entertaining that possibility now that it could drag on for longer," said Brown University associate professor of economics Gauti Eggertsson, who authored (along with fellow Brown economist Neil Mehrotra) the landmark paper "A Model of Secular Stagnation," which provides an in-depth explanation of how a long period of low growth could come about.
The theory of secular stagnation was first developed by Alvin Hansen, who wondered in the midst of the Great Depression whether diminishing investment opportunities in a maturing economy would stunt economic growth and permanently prevent full employment—at least in the absence of robust government intervention, which soon came in the form of the second world war.
These theories have found a new life in the aftermath of the so-called Great Recession, as the U.S. is experiencing (albeit to a much less dramatic degree) slow growth over a relatively long time period.
In November 2013, noted economist Larry Summers (who was considered, alongside current Chair Janet Yellen, a leading candidate to head the Fed) began to invoke the same phrase in arguing that the interest rate that the economy requires has fallen below zero.
The problem is that it is very difficult for nominal interest rates to fall below zero due to a constraint known as the zero lower bound. The upshot? Even with the Fed keeping short-term rates just above zero, market interest rates cannot possibly create adequate demand for loans, and thus the economy stagnates.
Without embracing the secular stagnation thesis, in Sweden on Monday, second highest-ranking Fed official Fischer gestured toward those concerns.
Noting slow growth in "labor supply, capital investment and productivity," Fischer warned that "This may well reflect factors related to or predating the recession that are also holding down growth" and noted: "How much of this weakness on the supply side will turn out to be structural—perhaps contributing to a secular slowdown—and how much is temporary but longer than usual lasting remains a crucial and open question."
"There was a level of concern on that point that I don't think we generally hear," said Nicholas Colas, chief market strategist at ConvergEx, referring to Fischer's speech.
The stagnation debate will also be addressed by a new eBook entitled "Secular Decline," which is due to be published on Aug. 18, and hosts contributions from Paul Krugman and Nomura's Richard Koo, in addition to Summers, Eggertsson and Mehotra, and others.
But for those who take issue with the secular stagnation theory, these dour questions are a natural consequence of recession-era thinking.
"I think it's inevitable that when you're in a slump for this long, people will start looking for answers. It's completely understandable but I think we're being way too pessimistic," said David Beckworth, assistant professor of economics at Western Kentucky University, who recently wrote an opinion piece on The Washington Post's Wonkblog entitled "Here's why Larry Summers is wrong about secular stagnation."
Beckworth is with the stagnation thinkers in believing that "the Fed has not aligned its rate with where the market-clearing rate is. And until that takes off, the economy will still be in a slump," he said. "But to me, maybe I'm an optimist, but I see demographics and technology pointing in the direction" of sustained growth.
And when it comes to what the markets ultimately care about in the short term—Fed policy—there's one thing nearly everyone can agree on: fresh concerns about secular stagnation are likely to make the Fed even more nervous about reducing accommodation too soon.
"What Fischer is saying is that the economy's growth rate is slow, we're not sure how much is structural, and unfortunately the cyclical can become structural," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank. "Reading between the lines, it seems he would be sympathetic to Yellen's view that monetary policy has a serious role to play," in avoiding economic stagnation.
Fischer's speech "did suggest that he's not in any rush. There's no indication that he wanted to end any of these policies or even put the brakes on, which I thought was encouraging," Eggertsson said.
That has clear ramifications for investors everywhere.
"If they're worried about growth, then rate hikes will be kicked further down the road, and rates will trend lower and the equity market stays somewhat bid," said Rich Ilczyszyn of iiTrader, who added: "But I'm hoping that he's wrong."
While the issues Fischer bring up are serious, however, the economist also struck a hopeful chord.
"It is unwise to underestimate human ingenuity," Fischer said.