Former US Treasury Secretary Larry Summers says the global economy is facing the most challenging conditions it has faced in four decades.
In a speech at the Institute of International Finance’s annual meeting in Washington, Summers said, “This is the most complex, disparate and cross cutting set of challenges that I can remember in the 40 years I’ve been paying attention to such things.”
He went on to lay blame on the International Monetary Fund and the World Bank, as well as central banks, saying they continually underestimated the risks of inflation, waiting too long to act and not acting strongly enough early on to tackle the problem before it metathesized.
He added, “In all honesty, I think the fire department is still in the station. … I’m very disappointed in the response.”
Summers argued that with interest rates rising, the dollar growing stronger, food shortages, geopolitical problems, and climate change, “somebody should be proposing something substantial” to solve the problems, although he himself did not offer any concrete proposals.
There have been five interest rate hikes this year delivered by the US Federal Reserve, including three consecutive 0.75% rate hikes over the past three meetings. Other central banks around the world have been pursing similarly aggressive policy. Summers says however, that the central banks waited to long to begin tightening policy, and now interest rates will have to be hiked far higher, regardless of whether it triggers a recession or not.
He added, “If you try to avoid that you just find yourself with a stagflation situation and having to do something harder a little later. But that’s got all kinds of collateral consequences for the rest of the world.”
One of the consequences Summers broached was the difficulty in financing debt markets. As an example he pointed to recent actions in Britain, where the Bank of England was forced to buy up bonds when bond prices began to collapse, after the government announced a slate of new tax cuts as part of Prime Minister Truss’ “mini-budget.”
Summers added, “What’s happened in the United Kingdom, some of that is a self-inflicted wound, but some of that is tremors of what’s happening in the global system… And when you have tremors, you don’t always have earthquakes, but you probably should be thinking about earthquake protection.”
