Larry Summers was Right about Inflation – So Keep Reading
Consider the following years – 1937, 1945, 1948, 1953, 1957, 1960, 1969, 1973, 1980, 1981, 1990, 2001, 2007, and 2020. Some of us are old enough to remember a majority of these. Others, not so much. In summary, these were not fond times in American history. This is a list of the county’s recessions since 1937. Since 1857, when reporting on recessionary periods became commonplace, the US has experienced 34. A recession is defined as two consecutive quarters of decline in GDP (Gross Domestic Product) growth. A widespread contraction in economic activity takes place and monetary tightening (a rise in interest rates) typically precedes them.
The US economy is not in good shape. Economists, pundits, and analysts of all stripes fear another recession is upon us. Larry Summers is one such thinker, the former Treasury secretary who correctly predicted the inflationary period we are suffering through at the moment. The Fed already hiked the interest rate by 75 basis points and more are expected moving forward. While most of Summers’ colleagues (including current Treasury Secretary Janet Yellen) posited that inflation would be transitory, Summers was adamant in his prediction of rising prices for an extended period of time.
Bringing down inflation is the Fed’s primary objective. To do that, Summers expects increases in the Fed funds rate and an unloading of its balance sheet. The consequence of this will be financial bubbles, predicts Summers, that will ultimately be unsustainable leading to an economic crash or a recession. At this point, there are quite a few economists on board with Summers’ prediction. In fact, many argue that the only thing to tame inflation in the current environment is extreme tightening and a recessionary period. But the recession aside for the moment, Summers has some additional thoughts, as any good former Treasury secretary would.
In the aftermath of the 2008-2009 recession, interest rates were held down by increased savings from an aging population. Coupled with overall uncertainty, people were reticent to spend. This also resulted in less investment which ultimately ushered in a period of secular stagnation. The term “secular stagnation” initially appeared in the 1930s during the Great Recession. But it was Summers who revived it following the 2008 financial crisis. The recovery during the then-Obama presidency was the slowest from a recession in the history of the country. The word “secular” in this context means long-term. Increased savings and a lack of an aggressive government fiscal policy cause stagnation. Opponents, however, argue that the true culprit of stagnant economic growth is increased regulation and fiscal intervention. Summers is not without his detractors.
Some economists feel that Western governments will be more willing to open their coffers and spend than in the 2008-09 recessionary period. In 2010 a contingent asserted the stimulus was too small and central banks had assumed an overly cautious posture. President Biden likely took note of this and swung in the opposite direction. Yet, when the focus eventually shifts to unemployment (from inflation), repeating post-financial-crisis mistakes will certainly be avoided.
Treasury inflation-protected securities remain priced for impending secular stagnation. This is one signal that the market appears to concur with Summers. Summers was right about inflation. It has been anything but transitory. He isn’t a soothsayer, but paying closer attention might do us all some good.
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