During HSBC’s Global Investment Seminar in New York this week, Harvard professor and economist Larry Summers brought up secular stagnation.
In 2013, Summers revived the phrase, which, over time, has come to mean all sorts of things to different people. But at its core, secular stagnation refers to a global economy growing at a slow rate because there is too much saving and not enough investment.
And right now, a lot of savings (and other monies) are heading out of emerging markets and into the developed world.
“I would suggest that the defining financial development of the last year is likely to push things towards more secular stagnation,” Summers said this week at the HSBC seminar.
“It is the substantial reduction in capital inflows to developing countries, and the substantial increase in capital outflows from developing countries.”
Here’s the chart from Summers’ presentation, which shows the decline in money coming into emerging markets.
- Institute of International Finance, Larry Summers
And how does this all relate to Summers’ secular stagnation thesis? “It means more and more funds seeking to purchase US assets – safe assets in the industrial world,” Summers said.
“[Outflows] means more and more downwards pressure on those [emerging-market] interest rates; means more and more upwards pressure on [or weakening of] those currencies; means more and more disinflationary and deflationary pressure; means more and more tendency, because of lost competitiveness, towards reductions in demand, and towards increases in supply … I would suggest it is a dangerous world.”
Now for Summers, this is not necessarily a new thesis or train of thought, but Summers says the current flight from emerging markets is about to worsen the stasis we’ve seen in the global economy.
The rush into emerging markets from developed markets was one of a few so-called great rotations in markets over the last few years, as highlighted by Deutsche Bank’s Binky Chadha in a note to clients on Thursday.
- Deutsche Bank
It’s been a turbulent year for emerging-market economies, from Brazil’s fiscal crisis to China’s slowing economy. And this year, emerging markets had the biggest capital outflows since the financial crisis.
Chadha wrote that there had in fact been outflows from emerging markets to developed markets over the last few years, driven by slowing economic growth in the developing world.