Unfortunately, since I put forward the argument in late 2013, the data have been all too supportive. Despite monetary policy being much more expansionary than was expected and medium term interest rates falling rapidly, growth and inflation throughout the industrial world have been much lower than anticipated. This is exactly what one would expect if structural factors were increasing saving propensities relative to investment propensities.

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Bond markets are now saying that neither inflation rates approaching 2 percent targets or real interest rates substantially above zero are on the horizon anytime in the foreseeable future. Growth forecasts are being revised downwards in most places, and there is growing evidence in the United States that inflation expectations are becoming unanchored to the downside.

I would put the odds of a U.S. recession at about 1/3 over the next year and at over ½ over the next 2 years. There is a substantial chance that widening credit spreads, a strengthening dollar as Europe and Japan plunge more deeply into the world of negative rates, and lower inflation expectations will be tightening financial conditions even as recession looms. And while there is certainly scope for quantitative easing, for forward guidance and possibly for negative rates, it is very unlikely that the Federal Reserve can take steps that are nearly the functional equivalent of 400 basis point cut in Fed funds that is normally necessary to respond to an incipient recession.

If I am right in these judgements, monetary policy should now be focused on avoiding an economic slowdown and preparations should be starting with respect to the rapid application of fiscal policy. The focus of global coordination should shift from clichés about structural reform and budget consolidation to assuring an adequate level of global demand. And policymakers should be considering the radical steps that may be necessary if the U.S. or global economy goes into recession.

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