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Former US treasury secretary: There will be no soft landing

Peter Griffin, Editor. 23 September 2022, 6:22 am

As the US Federal Reserve was hiking its key interest rate by 0.75 per cent yesterday, former Treasury Secretary Larry Summers was in Silicon Valley predicting further pain ahead for the US economy.

Summers, who served as Treasury Secretary from 1999 to 2001 was an early and vocal critic of pandemic stimulus efforts. In a February 2021 editorial in the Washington Post, Summers wrote that President Biden’s US$1.9 trillion covid-19 relief plan risked setting off “inflationary pressures of a kind we have not seen in a generation”.

He turned out to be right, which he puts down the hubris of a new political administration eager to act decisively in the face of the crisis.

“If all that $1.9 trillion had been for new toys for the Pentagon, then plenty of my friends would have figured out that it was quite inflationary,” Summers said in an on-stage interview with Salesforce co-CEO Bret Taylor at the software company’s Dreamforce conference in San Francisco.

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Larry Summers on stage with Salesforce co-CEO Bret Taylor at Dreamforce 2022

Summers repeated his view that recession in the US is likely.

“There's never been a moment in a major industrial country where inflation was above four (per cent) and unemployment was below four [per cent] and we didn't have a recession,” he said.

That would likely see unemployment spike from its current lows and an even more challenging period for businesses and consumers, making a “soft and easy landing” highly unlikely.

Summers pointed out that interest rate increases had so far failed to stifle inflation.

The affliction and the antibiotic

“Last month, core inflation ran at 7 per cent. The month was faster than the quarter, the quarter was faster than the half year, the half-year was faster than the year and the year is faster than the previous [year],” he said. August’s inflation rate was actually 8.3 per cent, down slightly from July.

“That says to me, there's a lot of inflation we're going to have to take out of this and if you don't take it out, it's gonna be worse.”

Summers described monetary policy as the “antibiotic” to treat the “affliction” of inflation and that the high inflation of the 1970s showed how the near future could play out.

“We had four false starts during that decade at stopping inflation. We had to have interest rates that were well into the double digits and a recession, where the employment rate was close to 11 per cent.”

“My guess is that there's still more adjusting to come, given the persistence of inflation.”

The Federal Reserve seems to be of the same view, suggesting today that additional rate hikes are likely in the coming months.

Strong businesses, universities

If there’s a silver lining, said Summers, it's that the US had a large number of high-quality and innovative companies and some of the best universities in the world. Summers served as president of Harvard University from 2001 to 2006.

The US largely had energy independence too.

“We are not dependent in the way Europe is, on a pipeline controlled by a tyrant,” said Summers.

But he suggested Silicon Valley companies like Salesforce will face financial pressure as higher salaries paid to secure talent in a tight labour market began to be applied to the rest of the workforce too. Statistics show that people switching jobs in the US earn on average 8.5 per cent more in their new role.

Don’t exacerbate China’s woes

Asked about the state of US-China relations, Summers said he wanted to travel to China, but was put off by the lengthy quarantine requirements due to China’s stick covid restrictions. The situation hadn’t changed in nine months, he added.

“They have had extraordinary difficulty with COVID and it's not clear yet that they have a vaccination strategy that will work their way past it,” said Summers.”

He said China faced a multitude of problems with the country’s struggling property market chief among them. Real estate prices in China have plummeted. Summers said there were enough empty apartments in the country to house the entire population of Germany.

“Look globally at financial crises. They tend to have their roots in real estate. It’s like Florida land in the United States in the 1920s. Think about what happened with subprime mortgages,” he said.

But he said now was not the time for the US to capitalise on China’s woes to increase its geopolitical influence.

“Are we going to gloat? Are we going to provoke? Are we going to set ourselves up to be scapegoats at a moment, when the Communist Party's legitimacy from growth may be slipping away?”

Peter Griffin attended Dreamforce 2022 as a guest of Salesforce


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