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Escaping the Trap: Secular Stagnation, Monetary Policy and Financial Fragility

Author(s): Martin Wolf

Date published: Sep 2019

SUERF Policy Note, Issue No 94
by Martin Wolf, Financial Times

JEL-codes: E1, E5, E6, F4.
Keywords: Monetary policy, debt, secular stagnation, financial crises, inflation, deflation.

"Some say the world will end in fire, Some say in ice." Robert Frost

These brilliant lines by the poet Robert Frost capture the world"s current economic prospects. Some warn that today’s world of high debt and low interest rates will end in the fire of inflation. Others prophecy that it will end in the ice of deflation. Others, again, such as Ray Dalio of Bridgewater, are more optimistic: the economy will turn out to be neither too hot nor too cold, just like the baby bear"s porridge, at least in countries that have had the fortune (and wit) to borrow in currencies they can create freely.

If we are to make any sense of the strange place in which the world economy is today and the even stranger places in which it might be tomorrow, we need a story about where it came from. By "here", I mean our world of ultra-low real and nominal interest rates and populist politics. The simplest story about how we ended here is one about the interaction between real demand and the ups and then downs of global credit. Crucially, the story is not yet over.

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SUERF Policy Note, Issue No 94SUERF Policy Note, Issue No 94

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