Mark Carney: The spirit of the season Speech by Mr Mark Carney, Governor of the Bank of England and Chairman of the Financial Stability Board, to the Economic Club of New York, New York City, 9 December 2013. *  *  *  Accompanying charts can be found at the end of the speech. It is always a pleasure to be in New York during the festive season. At this time of year in this city everything seems possible. However for some time now, appearances have deceived. The hopes and dreams of the holiday season have gone unfulfilled as the bright lights of December have given way to the grim realities of January. Around this time every year policymakers, investors and economists take stock. For four of the past five years, perhaps caught up in the seasonal spirit of goodwill, they have rendered the same verdict: the outgoing year was disappointing but the incoming one will be better (Chart 1). This year is no different. The IMF, the Bank of England and private forecasters all predict faster growth in the advanced and global economies in 2014. Will such hopes again be dashed once the New Year dawns? More profoundly, as the string of disappointments lengthens, some are raising deeper questions. It is being suggested that a malign spirit, a spectre of Christmases past, haunts our future. In particular, no less an authority than Larry Summers has raised the prospect that “secular stagnation” could be the root cause of past excess and current weakness.
Typically in a liquidity trap, the equilibrium real interest rate is negative, creating a persistent inability to match aggregate demand and supply. Before proceeding, I should make clear what I mean by the equilibrium (or natural) real interest rate. Let me use Roger Ferguson’s definition: it is the level of the real policy rate that, if allowed to prevail for several years, would place economic activity at its potential and keep inflation low and stable. For small open economies, like the UK, that equilibrium real rate is determined at the global level by the balance of the supply of savings and demand for investment. In the run-up to the crisis, that balance had shifted decisively as what Chairman Bernanke christened a “savings glut” from emerging economies developed. The flipside of that was low demand for advanced economy exports and low domestic demand in emerging economies. Only very low global real interest rates could spur sufficient domestic demand in advanced economies to maintain activity at its potential level. The problem of course was that the expansion of demand in advanced economies largely took the form of unsustainable consumption rather than business investment. The ensuing financial crisis pushed the equilibrium real interest rate down further and, with nominal interest rates stuck at zero and inflation low, monetary policy was unable to push actual real rates to a level low enough to maintain full employment.