Commenter "James in London", in a recent post by Scott Sumner, asks, "How many classic supply side recoveries have been accompanied by falling long term yields?" Scott replied that this had also been a concern of his for some time. It's one of those questions which highlights a need to approach investment through different means, among other things. In that spirit...some of the musings in this post.
Investment outcomes depend on existing supply side structures, which have not changed enough in recent decades to provide a full array of options. Were supply side issues somehow responsible for the recent liquidity trap? In a literal sense, no. Liquidity traps are monetary phenomena which result from the actions of central bankers, and there is little reason they should be perceived as "necessary". Still, while private interests aren't (literally) to blame, lackluster attitudes regarding growth greatly affect the attitudes of those responsible for monetary policy.
Neither governments or private interests have sought to adapt the marketplace for changing and present day needs. Supply side reticence to make room for productive innovation, has also meant a growing desire to pull back from financial strategies in general - some of which were scarcely the right kind of "innovation" to begin with. This led to increased determination on the part of central bankers, to pull back monetarily as well.
The innovation which is creative destruction - thus far - has had little chance to transform knowledge use or infrastructure components for local environments. Creative destruction is in some respects almost a forgotten form of innovation. Not only does real innovation free one's time use potential, it also opens up aspects of the marketplace to citizens who were not previously included. Since areas of primary consumption have remained all but untouched in this regard, a wide swathe of the population remains unconvinced that real progress is on the horizon.
Even prior to the Great Recession, central bankers were already casting about for tools (in particular, IOR) which could "assist" the supply side by freezing present circumstance into a holding pattern. The main problem with this strategy? Economic momentum is still needed, to maintain the economic patterns of the present. Without real momentum, a "one step forward" approach from the recent zero bound, could still easily result in two steps back.
Normally, an escape from the zero bound is thought of in demand based terms. When central bankers do not continue to provide sufficient demand, recoveries eventually occur through supply side means. But supply side recoveries are uncertain. In some instances, recoveries only occur after substantial resource loss. The fact that so much resource use was disrupted (and not regained) during the Great Recession, has contributed to the low growth recovery of the present.
While banks were "rescued" in the Great Recession, that rescue often did not translate into gains for citizens. Underlying fundamentals in terms of borrowing opportunities were not substantially changed. If bank lending has been restrained in recent years, so too have been the requests for loans. Normally, interest rate increases are to be expected during periods of heavy borrowing, which has certainly not been the case for some time. Given the fact that interest rates are also a price for credit, how "hot" is the market for credit right now...really?
Hence while central bankers are increasingly anxious to raise the interest rate, doing so could represent a false "business as usual" signal. Part of the problem is that today's "business as usual" is taking place without sufficient representation on the part of those in the lower to middle income range. What's more, few have addressed a growing reliance on prosperous regions for services which are needed in every local economy.
Understandably, everyone is anxious to get back to normal. But the fact that root issues weren't addressed in recent decades by private interests and governments, means important marketplace factors haven't evolved to generate inclusive and more productive growth. Therefore, when central bankers provide further liquidity under present conditions, the process feels insufficient to many who recognize the marketplace isn't as well represented as it could be. This can hold true whether or not those who recognize the problem, desire that such representation actually exists.
Update: Indicative of the credit gap which is also affected by income variance: http://www.stlouisfed.org/on-the-economy/credit-to-noncorporate-businesses-remains-tight/ The same variance is affected by a lack of legal representation for lower income levels.
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