Bracing for Stagnation

The United States may be enjoying economic recovery, but stagnant wages and widening inequality suggest that those few glimmers will not sustain the global economy. Worries run high about feeble economic growth and deflation. In an article for Project Syndicate, reprinted by Live Mint, Raghuram Rajan, governor of the Reserve Bank of India, lists the problems and underlying causes of the “new mediocre,” as coined by Christine Lagarde, the IMF’s managing director. Nations focus on monetary stimulus to keep interest rates low and encourage fast growth rather than long-term structural reforms. Other problems include aging populations, generous social programs and increasing debt. Detroit’s bankruptcy and the need to make hard decisions could be a harbinger for nations struggling with overspending: “overall, there is a palpable sense of gloom in the developed world, a feeling that growth is unlikely to take off in the foreseeable future,” he writes. “If secular stagnation persists, these countries will have to undertake painful structural reforms, figure out how to restructure their promises (debt, social-security commitments, and pledges to keep taxes low), and distribute the resulting burden.” – YaleGlobal