It's a good, though long, piece.

Brad DeLong:

The pessimistic interpretation, which we believe is consistent with what Dalio wrote and what is implied by market prices, is that most of the rich world just doesn’t grow that much unless households and businesses are boosting their debt and eating into their savings. The so-called ‘Great Moderation’ was only made possible by two massive increases in leverage, facilitated by almost non-stop declines in interest rates, plus an equity bubble thrown in the middle. We can’t do that again unless we get a 1940s-style reflation that wipes away private debt burdens and makes future releveraging possible.

Since we didn’t get a Great Reflation, this line of thinking goes, the economy necessarily reverted to its naturally weak state — even after the Fed turned monetary policy up to 11. Thus we have the yawning gap between actual GDP since 2010 and what people expected it would have been before the crisis.

The implication is that any significant cutback in monetary stimulus will quickly cause the economy to sink from steady but mediocre growth into stagnation and then outright recession. One nugget of supporting evidence: practically every central bank that raised rates since 2010 has subsequently reversed course, often bringing short rates down to new all-time lows.

Put into central banker-ese, one possible consequence of being on the wrong side of the long-term debt cycle is that the ‘equilibrium rate’ that ensures stable inflation and full employment is a lot lower than in the past. That limits how much you need to tighten to bring the economy to a halt and also increases the odds of hitting the zero bound in the future, with all that entails.


Yup.

If you caught Cohan's juvenile OpEd in the NY Times today, make sure you read Krugman's response, also too.

Cheers,
Scott.