Niall Ferguson on ‘secular stagnation’. Financial Review.

The long hangover in the wake of the global financial crisis is finally over, says one of the world’s leading economic historians.

Harvard professor Niall Ferguson says that any threat of so-called “secular stagnation” in the US, with a future of low growth and near-deflation, receded around February this year.

“Future economic historians will look back at the first quarter of 2016 as the turning point; that was the end of the hangover induced by the GFC,” he said.

Mr Ferguson says that the real rebound of commodity prices, the tightening of US labour markets, and shifts in monetary policy as the US Federal Reserve re-calibrates rate rises for this year, all indicate that the deflation danger is over.

Workforce participation in the US has been rising for six months, and the global glut of crude oil is now starting to run down.

Two regional Federal Reserve presidents, John Williams of San Francisco and Dennis Lockhart of Atlanta this week said that there could be a least two rate rises this year, with a rise on the Fed’s table as early as next month.

Mr Ferguson says that inflation will have clearly returned to the US economy by the end of the year.

“The inflection point is happening, but it will only be visible in about a year, and is barely perceptible to most people now  … but there are forces that are turning the world economy around.”

Mr Ferguson also cites economists Carmen Reinhart and Kenneth Rogoff, who famously forecast in 2008 that the drag on the world economic growth from excessive debt and the GFC would last between five and 10 years.

Mr Ferguson said that the theory of secular stagnation had gained credibility since former US Treasury Secretary Larry Summers started promoting the idea in 2013, shortly after he failed to become US Federal Reserve chairman.

The International Monetary Fund said as recently as its global economic outlook published in April that secular stagnation remained a problem.

“It is exactly at these moments that conventional wisdom proves wrong,” says Mr Ferguson.

Mr Ferguson points out that the end of the West’s last great economic upheaval, the “great inflation” of the 1970s, happened in a similar way between 1979 and 1981.

“Nobody believed we had turned the corner. It took ages, until 1982, for perceptions to catch up. It will take a while for people to realise this time around.”

By the end of the year, he said, secular stagnation as a theory will apply only to countries like Japan and Italy that have special demographic or debt problems.

Mr Ferguson, the Laurence A. Tisch professor of history at Harvard University is visiting Australia and will be speaking at the Australian Davos Connection’s Australian Leadership Retreat at Hayman Island and at the Sydney Opera House on Sunday night.

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