After having been considered to head of both the Federal Reserve and the Bank of Israel earlier this year, Lawrence Summers has been propelled back into the center of the broader economic dialogue with a speech at a recent IMF Economic Forum.
Essentially his argument is deceivingly simple and straight forward. The natural or neutral interest rate, which is needed to achieve full employment is below zero. Given the relationship between labor force growth and the natural rate of interest, the demographic outlook suggests that negative interest rates may be necessary for a prolonged period. Moreover, for the past 30-years, it has been arguably debt-fueled bubbles that allow the economy to reach full employment and bolster the natural interest rate.
There is little that is new in Summer's argument, but it has captured much territory in traditional media and the blogosphere. Economists have been fretting of a New
U.S. stock investors have largely dismissed several market-moving forces from the previous decade. "Decoupling," rising interest rates, the yen carry trade -- many of the most powerful forces in the financial universe have been less relevant because the Federal Reserve is purchasing $85 billion in government and quasi-government bonds.
More recently, however, the uncertainties of yesteryear are nipping at the backsides of formerly undeterred bulls. Today, there appears to be acknowledgement that U.S. stocks cannot decouple from foreign stock assets indefinitely. Whereas U.S. stock participants had not been fazed by Europe's recession nor the underperformance of emerging market equities, the recent deterioration of foreign stock shares is beginning to weigh on U.S. stocks. Similarly, there seems to be recognition that if the Fed does slow its bond-buying endeavors, interest rates are likely to rise. Indeed, Fed tapering chatter sent interest rates significantly higher, causing rate-sensitive assets across the income-producing spectrum