Tyler Cowen asks a few questions regarding the relationship between saving and secular stagnation:
I have never understood how savings is supposed to remain above investment for extended periods of time. . . .
If the demand to investment is so low, why don’t the prices of investment goods fall, thereby increasing the marginal return to new investment? (I do get why the zero lower bound may limit the ability of interest rates to fall). That would then equilibrate planned savings and planned investment once again and eliminate the savings overhang. Of course price stickiness may prevent this from happening in the short run, but secular stagnation is a longer run theory.
Tyler’s right that secular stagnation is a long run problem. It’s just a fancy term for a low trend rate of growth in RGDP. Real problems are not caused by nominal conditions; they reflect real factors, such as slow population growth and slow productivity growth.
The zero lower bound on interest rates can create problems for nominal growth (i.e. monetary policy), but only if the Fed allows it to do so. If Fed policy is inept, then when interest rates fall to zero it is more likely that there will be a negative nominal shock. This nominal shock can cause real output to fall in the short run, a recession. But this does not cause secular stagnation. Wages and prices adjust in the long run.
To summarize:
1. Secular stagnation is a long run problem, and hence is not caused by monetary policy, saving/investment imbalances, or the zero bound problem. But secular stagnation can make a zero bound situation more likely, if the central bank is inept.
2. Business cycles are mostly caused by nominal shocks (with the exception of Covid-19, which is a real shock). Some nominal shocks are caused by ordinary Fed policy mistakes when interest rates are positive (as in 2008), and some nominal shocks are caused by the Fed being unable to handle the zero lower bound in an intelligent fashion (a failure to do level targeting, target the forecast, and adopt a “whatever it takes” approach to asset purchases), as in 2009.
Talk of saving/investment imbalances is not useful; it’s an extremely convoluted and misleading way of thinking about monetary policy failures. So just talk about monetary policy failures!
BTW, the zero bound problem does not prevent saving from equalling investment, rather if handled improperly by the central bank it may cause S=I equilibrium to occur at a lower than desired level of nominal spending. I seem to recall Nick Rowe saying the actual problem is not excess saving, it’s excess hoarding of money.