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The 2008 financial crisis in the United States kicked off a debt supercycle, which spread to Europe in 2010 and has recently engulfed many of the world’s low-income and lower middle-income countries. Could the debt woes of Country Garden, the behemoth Chinese real-estate developer now facing billions of dollars in losses, augur the cycle’s next turn?
The answer remains unclear. While the Chinese authorities have a remarkable track record when it comes to containing economic crises, the challenges posed by a significant growth slowdown, combined with high debt levels — especially for local governments and the property sector — are unprecedented.
China’s current problems can be traced back to its massive post-2008 investment stimulus, a significant portion of which fueled the real-estate construction boom. After years of building housing and offices at breakneck speed, the bloated property sector — which accounts for 23% of the country’s GDP (26% counting imports) – is now yielding diminishing returns. This comes as little surprise, as China’s housing stock and infrastructure rival that of many advanced economies while its per capita income remains comparatively low.
At the same time, in what had once seemed like a race between a tortoise and a hare, the U.S. is speeding toward artificial-intelligence-powered technological innovation and higher long-term economic growth. As highly respected Wall Street Journal economics commentator Greg Ip recently put it: “No one talks about secular stagnation now,” referring to a theory that a chronic deficiency in global demand and economically important innovation will hold down growth and real interest rates long into the future.
Funnily enough, I said much the same at a conference seven years ago. In my presentation, which was based on my 2015 paper “Debt Supercycle, Not Secular Stagnation,” I explained that post-crisis malaise was typical and would at least partly fade. I then conjecturedthat “in nine years, nobody will be talking about secular stagnation” — a perhaps hyperbolic remark to underscore the point. (I am grateful that one of my co-panelists, J. Bradford Delong, quoted me on his blog, perhaps forgetting that the conference was held under Chatham House rules.)
Over the past decade, the overwhelming consensus in academic and policy circles has been that the world is deeply mired in an era of ultra-low interest rates driven by weak growth fundamentals. And in fact, it remains so today. For example, Northwestern University economist Robert J. Gordon’s magisterial history “The Rise and Fall of American Growth” offers persuasive arguments for the death of innovation and the end of growth. Gordon posits that post-1970s inventions — even the computer revolution — are not nearly as economically important as, say, the steam engine or electricity generation.
Billionaire investor Peter Thiel and former world chess champion Garry Kasparov made similar arguments in a 2012 debate on the topic of “Innovation or Stagnation” at the University of Oxford. Arguing on the “innovation” side of that debate, I pointed to advances in chess that heralded the coming of an AI age, while also noting that commercial innovation invariably stalls at times, for example during the Great Depression. In fact, my greatest concern has never been an end to innovation, but rather that the rise of AI will outpace our ability to control it.
There are strong arguments for secular stagnation on the demand side, owing to demographic decline. In a brilliant 2013 speech, Harvard University economist Lawrence H. Summers argued that only a continuing shortfall in global demand could explain the era’s ultra-low interest rates, triggering an avalanche of research on fundamentals that could explain the demand deficiency.
Progressive politicians have used this work to make the case that bigger government is needed to fill the void. Summers was more circumspect, advocating increased investment in infrastructure and education, and outright transfers from rich to poor — ideas with which I strongly agree.
But despite some good arguments for secular stagnation, concerns about sustained slower growth are overblown. Economists Charles Goodhart and Manoj Pradhan have challenged the view that demographic decline inevitably lowers demand by pointing to the rapidly growing elderly population.
Moreover, long-term trends are not wholly responsible for the spectacular collapse in real interest rates after the 2008 Great Financial Crisis; the collapse was at least partly because of the crisis itself. After all, interest rates also fell to zero during the Great Depression and stayed there — until they didn’t. Notably, the rate on 10-year inflation-indexed Treasury bonds is currently well-above its average level of about zero from 2012 to 2021.
The debt supercycle may have lasted longer than initially expected, perhaps because of the COVID pandemic. But it was a critical piece of the story, and now, as China’s economy falters, it is the best explanation for what might come next.
Kenneth Rogoff, a former chief economist of the International Monetary Fund, is professor of economics and public policy at Harvard University and the recipient of the 2011 Deutsche Bank Prize in Financial Economics. He is the co-author (with Carmen M. Reinhart) of This Time is Different: Eight Centuries of Financial Folly (Princeton University Press, 2011) and author of The Curse of Cash (Princeton University Press, 2016).
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