If they're right, it's good news for savers and investors. Secular stagnation doesn't just imply negative real returns on cash and higher-quality bonds, but also perhaps low returns on equities to the extent that it means weak economic growth.
But are they right? The question hinges upon another question: why are real long-term interest rates so low? Yields on 10-year index-linked gilts are now minus 0.6 per cent, compared with an average of 3.7 per cent between 1985 and 1997.
This is exhibit A for secular stagnation. It implies that the 'natural' rate of interest - the interest rate consistent with the economy operating at full potential - has fallen since the 80s and 90s. If secular stagnation is false, we need an alternative explanation of why real yields are so low.
You might think there's an obvious answer here: quantitative easing has reduced yields. This, though, isn’t the whole story. The Bank of England estimates that the first £200bn of QE reduced yields by around 1.5 percentage points, which implies that £375bn of QE reduced them by 2.8 percentage points. Adding this onto current index-linked yields gives us a yield of 2.2 per cent. This still leaves yields 1.5 percentage points below what they were in the 80s and 90s. What's more, it is an overestimate of the effect of QE on real yields. The Bank's estimates refer to the impact on nominal yields. But much of this effect comes because QE raised inflation expectations. The impact on real yields is therefore smaller.
QE, therefore, can't explain all the decline in real interests. There is, though, another possibility - that a global shortage of safe assets has depressed yields.
Again, there's something in this. But how much? We would expect a shortage of safe assets to lead to higher prices of riskier assets too. This is simply because rising prices of safe assets (and hence lower returns on them) would lead some investors to switch out of safer assets into riskier ones - the so-called reach for yield. We'd therefore expect to see high share prices too, as some investors shift along the risk curve.
But it's not clear that this has happened. The strongest sign of high equity prices is that the cyclically-adjusted price-earnings ratio on the S&P 500 is well above its long-term average. But this in part is because cyclically-adjusted earnings are low; they are still depressed by the great recession of 2009. Other equity valuations are not high. For example, the dividend yield on the All-Share index, at 3.5 per cent, is in line with its post-1990 average, and the non-financial PE ratio, at 12.3, is well below its post-1990 average, of 16.7. This is odd simply because low real interest rates should mean that future dividends are discounted lightly, which should imply that share prices are high now.
So why aren't they? An obvious explanation for low share valuations despite a low discount rate is that investors expect dividends and profits to grow only slowly - in other words that they believe we are in an age of secular stagnation: low growth requires low real interest rates. Yes, there's high demand for safe assets - but this is in part because investors don't want growth assets.
Of course, investors might be wrong. They might simply be too pessimistic. Three facts, however, are consistent with their belief:
■ Labour productivity growth has almost ceased. In the past five years, output per worker-hour has grown just 0.25 per cent per year, even though the early stages of recovery from recession normally see big rises. This is consistent with low trend GDP growth.
■ The profit rate has fallen. Official figures show that the return on capital in the non-oil, non-financial economy is now 11.4 per cent, compared with over 12 per cent in the late 90s. This has weakened firms’ motives to invest.
■ Business investment is low. It is only 10.2 per cent of GDP now, compared to over 12 per cent in the late 90s.
This poses the question: why, given all this, are economists so sceptical of the idea of secular stagnation? It’s certainly the case that stagnation isn't the only explanation of what's going on. Negative real rates and low growth are also due in part to overly-tight fiscal policy and perhaps to the long-term legacy of the financial crisis in depressing growth - although productivity growth, profit rates and the investment-GDP ratio were all falling before the crash.
Also, some don’t like secular stagnation as a theory: it doesn’t tell us whether weak growth is due to demand or supply problems; and the concept of the natural rate of interest is unsatisfactory as it is unobservable. Such objections, though, don’t bear upon the factual question of whether we face years of slow growth.
Perhaps the strongest reason for optimism here is that there are signs of the problem easing. In recent months real interest rates have risen and productivity and investment have picked up. It's way too soon to write off the secular stagnation threat - especially as the economy is now cooling off. But it might not be quite so severe as we'd thought.
