Former U.S. Treasury Secretary Larry Summers spoke with Stephanie Ruhle and David Westin on Bloomberg TV’s “Bloomberg <GO>.” On the expectation of four rate hikes in 2016, Summers said: “I’d be surprised if the world economy can comfortably withstand four hikes. And I think that basically markets agree with me. And that’s why despite the statements that are being made, markets aren’t expecting four hikes.”
Summers also said: “If you ask if there are risk that we’re going to find ourselves in a situation within the next two years where policy is going to have to reverse, yes. I think that is a significant risk.”
On austerity, Summers said: “It’s been very clear that the Congress has been the block on how much we’ve been able to use fiscal policy in this economy. And that starting in 2010 the Congress was insistent on a degree of austerity in our policies that has had a quite adverse impact on economic growth. That’s not to say I’ve agreed with everything the administration’s done, I certainly haven’t. But I think you can’t talk about what happens in economic policy without talking about Congress as well.”
On his outlook for China, Summers said: “China has achieved more in terms of growth extremely rapid growth over now well over a generation. More than any country in the history of the world ever has. And that means it’s a mistake to fail to respect their policymakers and to respect what they’ve accomplished…Even if they succeed and they become a more service-oriented economy, that’s going to be mean a lot less demand for copper, and iron ore, and other commodities. So even from a successful Chinese transformation we have risks.”
Highlights from Summers include:
- Summers: Global economy can’t withstand four 2016 fed hikes
- Risk significant that monetary policy will reverse
- Baseline scenario is more sluggish than usual
- Pervasive commodity slum signals lack of demand
- Shouldn’t bet on many fed rate increases in 2016
- Sees gathering of global deflationary forces
- Prospect real that china will slow further
- Fiscal policy underused in Europe, Japan, US
- Slowdown greater economic risk than overheating
- US has problem of savings over investment
- Policy makers should plan for problems to come
- Markets signal risks are titled to the downside
- Policymakers shouldn’t ignore financial markets
Larry Summers: Austerity Had Adverse Impact on Growth
Larry Summers: Global Economy Can’t Withstand Four Fed Hikes
Larry Summers: World Economy Is Hiding Heavily on U.S.
What Should China’s Economic Policy Be?
STEPHANIE RUHLE: OK, Larry, I painted a slightly positive picture. But let’s get real. You put out an editorial in the “FT” a few days ago warning, take a look at financial markets. The ’08 crisis was we saw it through the market, not through eco-data. I love this quote. “Markets are more volatile than the fundamentals they seek to assess.” Economist Paul Samuelson quipped “Fifty years ago the stock market has predicted 9 of the last 5 recessions.”
Is that what’s happening here? The start to the year, only 8, 9 days into it, are they predicting a recession?
Larry Summers: I don’t think it’s already to the point where they’re predicting a recession. You needed a large market downdraft than we’ve seen. But I think that policymakers make a mistake when they ignore markets. Yes they’re often driven by psychology. They’re often driven by technical. They make mistakes. But they also have a very important canary in a coalmine aspect.
Because markets aggregate large numbers of people’s views. Because their fundamental purpose is to judge the future, whereas economic statistics look to the past, I think in forming a balanced view, you have to give weight to what’s happening in markets. And when you look at the long-standing judgment in markets, if you look at index bond markets almost anywhere, the TIPS, inflation isn’t going to get up to that 2% level over the next decade. Let alone the next several years.
You look at the low real interest rates that markets are predicting. And then you look at the signs of apprehension that are surely coming out of global commodity markets, that are coming out of the stock market, that are particularly manifest in markets in China. You have to regard the situation as one where risks are substantially tilted to the down side. I think that’s the perspective that policymakers around the world need to have.
Especially in light of the reality that there’s less ammunition stored up now than there in most moments because interest rates have already been brought so low. And Central Bank balance sheets have already been substantially expanded. So I think it’s a moment for apprehension and for planning with respect to problems that could very well come.
DAVID WESTIN: Larry, in your writing you’ve said that regulators should hope for the best but plan for the worst. You’ve also talked a lot about secular stagnation. Unpack what you just said. What are the specific things you’re looking at in markets of any sort? That can be FX markets, it can be commodities, it can be (INAUDIBLE), what are the specific things that are making you most worried right now?
Larry Summers: I think what’s, my general concern is that we’ve got a chronic excess of saving over investment. That that’s depressing real interest rates. That that is leading to deflationary pressures. That that is leading every place to want to have a trade surplus and a capital outflow. And that the one thing that cannot happen is that everyplace in the world gets to run a trade surplus and gets to have a more competitive currency.
But in particular the world economy is riding very, very heavily on the United States and that the United States is in a sense the importer of last resort. And that our economy is not without its own fragilities. You know there are many people who believe that 4th quarter growth will fall below 1%. And I’ve been encouraged and I think it’s the brightest spot there is in the US economy, by the US employment picture which was again very robust last month. But even that robustness wasn’t enough to produce meaningful wage increases.
And so I think that the right posture is being ready aggressively to respond including with fiscal policy if things slow down in a meaningful way. And being preventive with respect to a slowdown as the dominant policy priority rather than being preemptive with respect to an overheating that given the global context seems to me to be very, very far away.
JONATHAN FERRO, HOST “ON THE MOVE”, BLOOMBERG TELEVISION: Larry, I want to pick out something you said there. You said a lot of things but one of the things you said was, be ready. Be ready. You’ve also written about the need of 300 basis points to come back down to be ready when the recession comes around. Quite clearly the Federal Reserve is not ready for the next turn lower. How do they respond with monetary policy?
Larry Summers: I think it’s a combination of identifying correctly the greater risk. Not looking like there’s no chance that inflation could ever get above 2%. I mean they’ve been very clear that they believe the 2% target is symmetric. That it’s equally bad to fall short and to modestly exceed 2%. But I’m not sure their actions have been consistent with what they’ve said.
I think it’s also; it’s not just a matter of what Central Banks can do. It’s probably not even dominantly a matter of what Central Banks can do. I think we have to be prepared to use fiscal policy and to use it more rapidly and more aggressively than has been the case traditionally. I think fiscal policy has been underused in Europe, underused in Japan and frankly after the first several years of the crisis when it was used quite successfully to bring about a rapid turn, I think fiscal policy has been underused as a resource in the United States.
RUHLE: All right, Larry, you’re giving us what should happen but given the current administration, it doesn’t feel like we’re going to get fiscal policy. Your calls have been spot-on–
Larry Summers: Look, I’m not very political, Stephanie. But I think it’s only fair that you, if you want to say the current situation in Washington I’ll take that. But I think it’s been very clear that the Congress has been the block on how much we’ve been able to use fiscal policy in this economy. And that starting in 2010 the Congress was insistent on a degree of austerity in our policies that has had a quite adverse impact on economic growth.
That’s not to say I’ve agreed with everything the administration’s done, I certainly haven’t. But I think you can’t talk about what happens in economic policy without talking about Congress as well.
RUHLE: Then what do you think the next 2-3 years will look like? Are we headed for a recession here? A true China blowup? You know an EU breakup? What is it going to look like?
Larry Summers: You keep trying to get me to–
RUHLE: Of course I do.
Larry Summers: –offer a single scenario. I suppose that’s–
RUHLE: It’s my job.
Larry Summers: –your job. But I think the right way to always make forecasts is with ranges of uncertainty. So I’ll just say I think history suggests that if you’re looking three years out, it’s a serious mistake to ever assume that there will be no recession. That’s a wrong assumption. That’s not to say it couldn’t happen. But that would certainly not be the right planning basis.
I think in China you are looking at real prospects that the slowdown will spread and will spread and increase because it’s a very, very profound transformation that China is attempting to undertake. And even if it’s undertaken in the most successful and smooth way, that’s likely to lead to slowdown. And what we’ve seen doesn’t suggest that we can count on it taking place in the smoothest and most successful way. Rather to the contrary.
And you have almost a perfect storm of problems in other emerging markets. Between Russia’s descent towards lawlessness. Growing apprehensions about South Africa which have led to major declines in it’s currency–
Larry Summers: Political chaos and weak economic policy combined with the burden of low commodity prices in Brazil. The emerging market sector which had been seen as a possible new salvation for the new economy has largely turned downwards. At the same time that global trade has slowed. So I just see a gathering of deflationary forces at a time when the world is probably already in danger of being demand-short.
WESTIN: So if you’re a prudent regulator, let’s just assume you’re Janet Yellen for example just to take a name. And you’re anticipating a recession, not predicting it but having to plan for it, which is what you said a prudent regulator would do. What do you do at this point? Was it a mistake to raise in December? Do you raise this year? And provocatively do you let Congress off the hook to some extent by leading with monetary policy?
Larry Summers: I think you assess the balance of risks as being towards slowdown and deflation not towards inflation. And that influences the monetary policy choices you make. At a certain point when you’ve committed yourself to raising rates in December, you raise rates in December. But whether that was a prudent commitment to make, I think is very much an open question. I don’t think you invest your credibility in the idea that you’re going to have substantial number of rate increases in the coming year. Circumstances may well permit that. But I don’t think one wants to invest one’s credibility in a substantial number of rate increases during the year. And I think one does.
I think there is also a question for Central Bankers generally of speaking to the need for more stimulative policy. Not just in the monetary area but also with respect to measures to promote business confidence. Also with respect to fiscal measures like promoting public investment. You know I’ve said it on your show before David, but it is crazy that at a moment of epically low interest rates, extremely high construction unemployment, and extremely low materials prices, we are investing less in infrastructure as a country, after depreciation than almost any time during the last 75 years.
At a time when it would be ideal both in a stabilizing sense and in a long run sense to rebuild and renew America. And that’s what we’re hearing too little of from both sides. I don’t know what the constituency is for decaying air terminals and collapsing bridges. And so I don’t understand why there isn’t more willingness in our political process to advance what seems to me to be justified on a whole set of grounds which is removing the deferred maintenance burden from our children’s generation.
RUHLE: Then help us understand. Listen you have been pounding the table for infrastructure spending. Why do you believe the president didn’t adopt the Infrastructure Stimulus Plan that he said he would and instead extending emergency funding for unemployment? Like why do you think this is happening?
Larry Summers: I think that this almost implacable opposition in Congress to anything that smacks of the government expanding it’s role. And doing more. And when people hear about public infrastructure, they reasonably enough think about the public sector. And so that’s why.
And look, it’s not that there aren’t valid concerns. There’s a bridge outside my office. It’s not a very big bridge, it’s 400 feet long, that they have been fixing for almost four years now and interfering with traffic. Julius Caesar built a bridge–
Larry Summers: –eight times as long as that bridge in 9 days. And so it’s not like I don’t understand why there isn’t some lack of faith in the public sectors ability to do some of these things. But I really believe that doing it, doing more with infrastructure and doing it better would have a powerful impact on the economy.
And by the way it’s not only public sector infrastructure. My experience is that my cell phone calls to my office in Boston are more likely to drop driving into New York City from the airport than they are–
RUHLE: I know.
Larry Summers: –driving into Beijing from the Beijing Airport. And it’s not the government’s job to make there be enough cell phone towers. I mean it is in a regulatory framework sense. But that’s a private sector responsibility. So I think that’s an important aspect of what needs to be done.
FERRO: Let’s take it global and take it back to markets because that’s what’s been important the last couple of weeks. You’ve talked about markets being a predictive force for what’s about to happen in the future. A discounting mechanism. There’s a lot of research on that.
When you look at markets though, which market, because you know what the push back will be Larry, the bond curve doesn’t tell you what it used to tell you. Given the Central Bank action. The commodity market doesn’t tell you what it used to tell you. Dr. Copper for instance, has a demand function because of the supply, in iron ore as well. Which market is it Larry that you look at?
Larry Summers: I don’t think you can look at any single market. The pervasiveness of the move in commodities tells me that it’s got to do with demand. If it was a supply side story you’d expect whatever was going on with copper would be different from whatever was going on with oil. Would be different from whatever was going on with iron ore.
And it seems to me that the fact that there’s so large a common commodity factor is telling you that something’s happening with respect to–
FERRO: So Larry, on that point, because this is important–
Larry Summers: –expectations of global demand.
FERRO: The Central Bank specifically then, every single news conference I go to whether it’s the ECB or the Bank of England, they say this is transitory. From what you’re saying this isn’t transitory at all. Because if the demand doesn’t pick up, commodity prices stay low. They could be lower for even lower. Is that what we’re looking at here?
Larry Summers: That’s the, that is the significant risk. It seems to me that we’ve been making mistakes of imputing false transients for the better part of a decade now. If you look at expectations of when rapid recovery would come, if you look at the Fed’s view as to when it would take off, they have been saying within a year for the last six. And they haven’t been right. And it seems to me you have to, at a certain point, reconcile yourself to the fact that some things you thought were transient were in fact, much more permanent.
And that’s really, I think, the importance of secular stagnation idea. It really has as its central content that a set of forces that people have regarded as being; well it’s the consequence of the financial crisis. Well yeah you could believe that the huge financial interruption is what was doing it in 2009 or in 2010. But when you’re in 2016 and the real interest rate is lower than it was 3 or 4 years ago, you have to sort of ask yourself, is this really all about the legacy of the financial crisis and some debt build up? Or is this a new situation that we find ourselves in to which we need to adapt? And that’s been my argument. That doesn’t mean we won’t ever have growth. That doesn’t mean we won’t ever have periods of cyclical expansion. But I think the baseline scenario is a more deflationary, more sluggish, baseline scenario than we’re accustomed to living with. And I think those trying to interpret data need to see it through that kind of prism.
RUHLE: You’ve mentioned “Perfect Storm” where they die, Ray Dalio has said it would be 1937 all over again. If we continue to see weakness around the world and the dollar strengthens. Will the Fed have to do an about face and cut this year?
Larry Summers: I don’t think there’s any question that if there’s, it’s sort of a tautology step. If there’s enough weakness of course–
RUHLE: Do you believe there will be enough weakness?
Larry Summers: Of course they will have to cut. I’m not going to commit to a single scenario I don’t think that’s prudent.
FERRO: Well, to Steph’s point–
Larry Summers: I don’t think that’s a prudent (INAUDIBLE).
Larry Summers: If you ask if there are risk that we’re going to find ourselves in a situation within the next two years where policy is going to have to reverse, yes. I think that is a significant risk. Am I saying that will happen? No I’m not saying–
FERRO: Well, let’s see what the Fed is going to say is going to happen. They’re saying four hikes this year Larry.
Larry Summers: That will happen but–
FERRO: They’re saying four hikes this year ballpark. Four hikes this year. If they initiate those four hikes regardless of whether they should or shouldn’t, that’s their ballpark forecast for this year. Let’s say it’s done. Four hikes. The economics of the global economy do not change that much. What kind of world–
Larry Summers: I’d be surprised; I’d be surprised if the world economy can comfortably withstand four hikes. And I think that basically markets agree with me. And that’s why despite the statements that are being made, markets aren’t expecting four hikes.
But I think it’s always a mistake to discount the range of possibilities. And it’s certainly possible that this will be the year when growth accelerates. It’s certainly possible that the trend in the employment statistics of, you know almost 300,000 jobs a month will continue. And if it does, then we probably will need to have four hikes.
But I don’t think that would be the central scenario a) and b) I think that if good things materialize and things work out well and smoothly, it won’t be very hard to work through it for policy. And so really what policymakers need to think about is insurance against the more negative scenarios. And I think the negative scenario of overheating and inflation seems to me a) remote in terms of likelihood and b) starting from where inflation is seems to me easily managed and not that serious.
RUHLE: But what makes the–
Larry Summers: And that’s why my plea has been that policy should be more focused on insurance against the more negative scenarios.
RUHLE: What makes no sense, you were encouraged–
Larry Summers: What makes no sense — that is very strong.
RUHLE: You were encouraged by the employment number. You thought it was great. But when you actually dig into it, things aren’t growing. Companies aren’t hiring in any significant way, high wage jobs. And global economies are weakening. So is that employment number a bad number? Or giving us a false positive?
SUMMERS: I, I–
RUHLE: Because President Obama was bulled up last night.
Larry Summers: I think he was, I would not, that would not have been the term I would have used. I think he was right to point out how different the world looks than it did seven years ago when he came into office. I think you were looking at a possible Great Depression scenario, unemployment did reach 10%. I think the financial system was on the brink of collapse. We’re in a very different situation–
RUHLE: But could be headed for a recession.
Larry Summers: –than we were then. I don’t think that it’s happy times are here again and that’s certainly not the way I heard the President talk. But yeah I do believe, as I’ve been saying, that the right focus for policy concern is more on the slowdown scenarios than it is on the overheating scenarios.
WESTIN: One of the uncertainties we have that we’ve never had before I think in history is the second largest economy in the world being one that has not really had to deal with these problems. Does China have an economic policy and what should it be?
Larry Summers: China. China has achieved more in terms of growth extremely rapid growth over now well over a generation. More than any country in the history of the world ever has. And that means it’s a mistake to fail to respect their policymakers and to respect what they’ve accomplished.
I do think that the experience of investment-driven, huge investment-driven export-based growth models in Asia is that at a certain point they burn out and you need a transformation. And that the experience of Japan after 1990, the experience of Korea and the Asian financial crisis countries in 1997, suggests that that transformation is very difficult to pull off in an easy and smooth way.
And so I am concerned about what happens in China. And there’s one other thing to say about China, David–
WESTIN: I just want to make sure you have time to talk about pandemics. So that’s my only concern.
Larry Summers: The only other thing I’d say about China David is that they are, is that even if they succeed and they become a more service-oriented economy, that’s going to be mean a lot less demand for copper, and iron ore, and other commodities. So even from a successful Chinese transformation we have risks.
WESTIN: OK, very quickly, I’m afraid I have to ask, pandemics, why you’re here in New York.
Larry Summers: I’m keynoting a report from the National Academy of Medicine that’s basically going to say that pandemic risk, another version of AIDS, Ebola, flu; I believe is the most important national security issue relative to how much attention it gets of any of the issues out there.
FERRO: Former Treasury Secretary Larry Summers–
RUHLE: Way to end on a high note.
WESTIN: Yeah, exactly.
FERRO: Thanks for joining us this morning. Thank you very much.