Larry Summers
Larry Summers Says the Economy Is Overheated (January 14, 2022)
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CPI is 7%.
Nixon imposed wage price controls when inflation was 2/3 of what it is right now. This is above the inflation of any time during the Vietnam guns-and-butter inflation.
There are transitory elements in inflation that will recede, but we are moving towards higher, entrenched inflation. It’s there in a pervasive pattern in expectations, wages, labor shortages.
We’ve got an overheated economy. The Fed has a real challenge of cooling the economy off.
This isn’t just a supply-side problem. We have a massive overheated labor market. We have the highest ratio of vacancies to unemployment in the country’s history by a large margin. We have shortaged of labor in tons of sectors.
If we don’t bring these things into balance, we could have higher or accelerating inflation.
This inflation is fundamentally about an overheating economy.
Summers supports the reconfirmation of Powell.
A feeling that Biden is trying to “politicize” the Fed could be problematic for the Fed’s credibility.
We are underinvesting on a global basis on the effort to contain COVID.
Is a Recession Coming? Fmr. Treasury Sec. Lawrence Summers Weighs In (December 17, 2021)
Fed recently announced that they’ll make 3 rate hikes in 2022.
It’s a delicate process once you have excessive inflation. History shows it’s hard to tame inflation and make a soft landing for the economy.
We’re seeing a lot of froth in financial markets.
The government gave 2.8 trillion to households and state & local governments. Summers thinks the size of this was a big mistake.
We sent households a ton of cash when they were already flush (cause they’re not going on vacation or eating out).
On top of this, Fed is buying bonds at a massive scale and keeping interest rates at zero.
Summers supports the Build Back America bill. Spending is financed with tax increases. This is investing in the future of the country.
Worker shortage => product shortages => product price increases.
Turning economies into inflationary economies hasn’t worked well in many countries. Inflation is not a friend of the middle class.
He thinks there’s a 40% chance of a recession in the next 2 years.
Fed is walking on a narrow ledge. They need to thread the needle.
We need to be careful of our situations in financial markets, look at meme stocks, crypto, etc.
People don’t make bad loans in bad times. People make bad loans in good times.
We are underresouced, underorganized, and underexecuting to be able to handle pandemics properly.
Omicron shows us there is a much wider range of mutation possiblities than we originally imagined. This could be with us for quite a long time.
There’s been a populist backlash against globalism. The broad direction has helped a lot of humans.
Populist, nationalist, Luddite policies have a pretty dismal historical record. Populist anti-globalization is a dangerous mistake.
Larry Summers Clashes with Yellen Over Inflation Fears (November 2, 2021)
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Employers are having trouble finding workers. There are other shortages. It seems like we have significant risks for inflation.
Summers thinks inflation may accelerate due to the labor shortage.
Concerned that we’re ratcheting up to new level of wage expectation.
We’re not on a credible trajectory to a 1.5 degree climate change target.
Larry Summers Says the Fed Should Taper Faster (September 24, 2021)
The task of growing the Chinese economy has been very real estate dependent.
He was happy the Fed said they would taper later this year.
He wishes the Fed would taper faster. He thinks it’s going to look a bit more stagflationary now. Continuing inflation pressure and less growth, given bottlenecks and labor shortages.
In the Michigan survey, people are saying they don’t think it’s a good time to buy a car or a house. That’s a negative demand side indicator.
Crypto suggests the desire for secrecy for large financial sums.
We wouldn’t have a viable airline industry if we didn’t regulate airline safety. Ultimately, blockchain based business will do better being regulated in a sound way.
The idea where Bitcoin will be some sort of libertarian paradise, then it’ll be resting on a flimsy foundation.
House Prices are Scary (July 3, 2021)
Labor force participation did not increase in the latest job return. The long awaited return of workers still hasn’t materialized.
The CBO report says the deficit will be $3 trillion in 2021 and then go down to $1.2 trillion in the out years of the 10 year forecast.
The CBO report makes the following assumptions:
- no passage of the Biden plan
- no passage of a range of tax cuts
- no “emergencies”
Probably a substantial underestimation of where the deficit will actually turn out.
It’s saying that we’ll be a country for a decade where the real interest rate is negative, the budget deficit will be 5% of GDP, and where the debt ratio will be above 100%. The implication is that this is sustainable. Summers thinks this might be sustainable, but maybe not.
He thinks the conventional wisdom is behind the curve on inflation.
The most dangerous times in markets are when people think they’re too high.
Summers “throw in the towel” theory:
- Markets go up, some investors short, it keeps going up, those investors throw in the towel
- Markets keep going up, more investors short, they also lose money, they throw in the towel
- Eventually a lot of pessimism gets beaten out of the market and this is when they’re most vulnerable
Biggest bubble of all time was Japan in the 1980s:
- Some people threw in the towel at 25,000
- Others threw in the towel at 30,000
- Eventual collapse came at 39,000
He’s worried that people have learned exactly the wrong lessons from the US equity markets over the last 12 years, from the phenomenal 6 fold increase in the S&P 500 index since 2009.
- Most investors have learned the lesson that trees grow to the sky
- Summers learned the lesson that trees have grown too tall to be stable
Many failures for pessimism can ironically be a basis for even bigger pessimism.
He thinks the housing market is scary. For most people, rising house prices means inflation.
He guesses there will be continued increases in house prices given shortages.
House price increases are a significant indicator of inflation psychology.
He cannot understand why the Federal Reserve is a major buyer of mortgage backed securities every month. This is the ultimate in procyclical behavior.
Worried about inflation (March 19, 2021)
US Treasury yield from 0.4% to 1.8% in March 2021.
People have declared that it’s a new era in ways that suggest that large fiscal policy will continue for a long time to come.
COVID recovery has accelerated, which is a great thing, but means more demand pressure.
The Fed has stuck to its guns on no rate hikes for years and years (and continuing to grow its balance sheet).
He’s worried about more inflation or a dramatic fiscal/monetary collision.
These are the least responsible macroeconomic policies we’ve had in the last 40 years.
He thinks there is a 1/3 chance that inflation will significantly increase over the next few years and we’ll be in a stagflation situation. Like the situation that happened between 1966-1969 where inflation went from ~1% to ~6%.
There is a 1/3 chance that we won’t see inflation, but this will be because the Fed hits the brakes hard and the markets get unstable.
There a 1/3 chance the Fed will get what they’re hoping for which is rapid growth in a non-inflationary way.
Macro policy in the past was working to stabilize world events. Now macro policy itself may be destabilizing for the economy.
Krugman isn’t worried about inflation because he thinks it takes a long time to develop and the Fed will have ample time to react. Summers thinks he’s just wrong.
He’s been rather disappointed by the economics profession. He thinks economists should analyze the economics, not rationalize what’s politically convenient. He’s been disappointed with people like Paul Krugman for gravitating to the political side of the conversation.