I’m a great fan of Larry Summers, the economist and former Treasury Secretary. Everything he says makes sense to me. He’s not a Pollyanna but rather looks ahead to the problems that policies can cause in the Macro economy.
Here are snips of an hour-plus interview.
**Transcript: Ezra Klein Interviews Larry Summers, The New York Times, March 29, 2022**
**LARRY SUMMERS: I’m probably as apprehensive about the prospects for a soft landing of the U.S. economy as I have been any time in the last year. Probably actually a bit more apprehensive. In a way, the situation continues to resemble the 1970s...And so now I think we’ve got a real problem of high underlying inflation that I don’t think will come down to anything like acceptable levels of its own accord....**
**I think the combined idea that we’re going to have 3 and a half percent unemployment for the next three years and that while that’s happening inflation is going to decline substantially is not something that is supported by anything in the relevant economic history, nor is it consistent at all with market inflation expectations...**
**I don’t think we’re going to avoid and bring down the rate of inflation until we get to positive real interest rates. My sense is that given the likely paths of inflation, we’re likely to have a need for nominal interest rates, basic Fed interest rates, to rise to the 4 percent to 5 percent range over the next couple of years. If they don’t do that, I think we’ll get higher inflation. And then over time, it will be necessary for them to get to still higher levels and cause even greater dislocations...**
**What are the odds that the economy will go into a recession in the next year and what are the odds that the economy will go into recession in the next two years? Depending on just how you calculate the answer, it’s about 50 percent that it will go in the next year and about 75 percent that it will go in the next two years....** [end quote]
This is a very long interview. These are just a few snippets.
Based on his track record of predicting the demand-driven inflation we are seeing now , I believe Summers. There are several METARs who object to the idea that current inflation is demand-driven, but BEFORE you respond, read the article. Summers makes a rock-solid case that inflation in 2022 is demand-driven.
A fed funds rate of 4% to 5% will still be a negative REAL yield unless inflation comes down. But Summers thinks that’s the minimum. That will severely damage asset prices, including stocks, bonds and real estate.
Not to mention the effect of the next recession on the asset bubbles.
This article stresses the Risks in the METAR story…and, by extension, our portfolios.