Former Treasury Secretary Larry Summers was one of the first prominent economists to warn that federal policymakers were underestimating the threat of persistent inflation, and today he is worried about a global economic crisis that could result from central banks’ efforts to fight rising prices.
“We’ve got the most complex, disparate and cross-cutting set of challenges that I think I can remember in the 40 years I’ve been following this stuff,” Summers told an audience at the Institute of International Finance annual meeting Friday. “And in all honesty, I think the fire department is still in the station.”
Summers said that the combination of rising interest rates, a strong dollar
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shortages of energy and food, geopolitical tensions and the challenges of climate change “means somebody should be proposing something substantial here and moving it along.”
He added that he believes interest rates are going to have to increase above what the Federal Reserve and financial markets are forecasting in order to tame inflation, a fact that could lead to economic dislocation across the world.
“If you try to avoid that you just find yourself with a stagflation situation and having to do something harder a little later,” Summers said. “But that’s got all kinds of collateral consequences for the rest of the world.”
One such consequence is governments potentially struggling to fund themselves through debt markets, as evidenced by recent turmoil in the markets for U.K. government debt
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“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 the in the global system,” Summers said. “And when you have tremors, you don’t always have earthquakes, but you probably should be thinking about earthquake protection.”
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