Larry Summers predicts more inflation and a recession

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funkervogt
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Larry Summers predicts more inflation and a recession

Post by funkervogt »

He was right that inflation would be really bad in 2021. He now predicts that it will lead to a recession.

(Skip to the 14:00 mark in the audio interview)

https://www.bloomberg.com/news/articles ... -look-good
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funkervogt
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Re: Larry Summers predicts more inflation and a recession

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Former member of the Federal Reserve Bank, Thomas Hoenig, echoes Larry Summers.
While Hoenig was concerned about inflation, that isn’t what solely what drove him to lodge his string of dissents. The historical record shows that Hoenig was worried primarily that the Fed was taking a risky path that would deepen income inequality, stoke dangerous asset bubbles and enrich the biggest banks over everyone else. He also warned that it would suck the Fed into a money-printing quagmire that the central bank would not be able to escape without destabilizing the entire financial system.

On all of these points, Hoenig was correct. And on all of these points, he was ignored. We are now living in a world that Hoenig warned about.

The Fed is now in a vise. Inflation is rising faster than the Fed believed it would even a few months ago, with higher prices for gas, goods and automobiles being fueled by the Fed’s unprecedented money printing programs. This comes after years of the Fed steadily pumping up the price of assets like stocks and bonds through its zero-percent interest rates and quantitative easing during and after Hoenig’s time on the FOMC. To respond to rising inflation, the Fed has signaled that it will start hiking interest rates next year. But if that happens, there is every reason to expect that it will cause stock and bond markets to fall, perhaps precipitously, or even cause a recession.

“There is no painless solution,” Hoenig said in a recent interview. “It’s going to be difficult. And the longer you wait the more painful it will end up being.”

To be clear, the kind of pain that Hoenig is talking about involves high unemployment, social instability and potentially years of economic malaise. Hoenig knows this because he has seen it before. He saw it during his long career at the Fed, and he saw it most acutely during the Great Inflation of the 1970s. That episode in history, which bears eerie parallels with the situation today, is the lodestar that ended up guiding so much of Hoenig’s thinking as a Fed official. It explains why he was willing to throw away his reputation as a team player in 2010, why he was willing to go down in history as a crank and why he was willing to accept the scorn of his colleagues and people like Bernanke.

...Hoenig isn’t optimistic about what American life might look like after another decade of weak growth, wage stagnation and booming asset values that primarily benefited the rich. This was something he talked about a lot, both publicly and privately. In his mind, economics and the banking system were tightly intertwined with American society. One thing affected the other. When the financial system benefited only a handful of people, average people started to lose faith in society as a whole.

“Do you think that we would have had the political, shall we say turmoil, revolution, we had in 2016, had we not had this great divide created? Had we not had the effects of the zero interest rates that benefited some far more than others?” Hoenig asked. “I don’t know. It’s a counterfactual. But it’s a question I would like to pose.”
https://www.politico.com/news/magazine/ ... rve-526177
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funkervogt
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Re: Larry Summers predicts more inflation and a recession

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Joe Biden's popularity is already sagging, partly because of high inflation in the U.S. If Summers and Hoenig are right, further economic and financial pain are inevitable regardless of how Biden chooses to address the problem. It will only damage his odds of winning reelection in 2024.
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funkervogt
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Re: Larry Summers predicts more inflation and a recession

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Update: Larry Summers doesn't think the Federal Reserve is raising interest rates fast enough.
The Fed is showing determination. I understand the decision to do a 0.75-percentage-point move as a significant policy step. But I still don’t believe that the Fed has realistic projections. In March, I said that the dot plot, which charts members’ individual rate forecasts, wasn’t remotely realistic. While [the dots] were significantly adjusted this time around, unfortunately I still don’t think they are realistic. Why should anyone think that inflation is going to come down from the 8% range to the 2% range without unemployment rising above the Fed’s estimate of its normal rate, an estimate that is itself too low? My guess is that you will see further increases in projected inflation, projected unemployment, and projected interest rates.

I think the 0.75-percentage-point move was a desirable move for the Fed’s credibility, but I don’t think the Fed helped itself with the new projections and rhetoric. We are still headed for a pretty hard landing.
https://www.barrons.com/articles/larry- ... 1655402216
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Re: Larry Summers predicts more inflation and a recession

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funkervogt wrote: Tue Dec 28, 2021 4:25 pm It will only damage his odds of winning reelection in 2024.
It depends on who the Republicans choose to challenge Biden. If it's DeSantis, Biden will win again even in the backdrop of a recession and skyrocketing inflation. DeSantis is basically Trump 2.0. People don't forget easily.
To know is essentially the same as not knowing. The only thing that occurs is the rearrangement of atoms in your brain.
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funkervogt
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Re: Larry Summers predicts more inflation and a recession

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Another statement:
“We need five years of unemployment above 5% to contain inflation -- in other words, we need two years of 7.5% unemployment or five years of 6% unemployment or one year of 10% unemployment,” said Summers said in a speech in London Monday. “There are numbers that are remarkably discouraging relative to the Fed Reserve view.”
https://www.yahoo.com/finance/news/larr ... 55450.html
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Re: Larry Summers predicts more inflation and a recession

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"The risks of a 2022 recession are significantly higher than I would have judged six or nine weeks ago," Summers told Bloomberg Television.

He noted that a downturn sparked by a "self-fulfilling process coming out of high inflation and reductions in people's incomes" is appearing more likely.

But it's possible that if a recession hits before the end of the year, it would act to stem inflation. Summers has predicted before that a recession is the only way to bring down the historic inflation rate to the Federal Reserve's 2% target.
https://markets.businessinsider.com/new ... ely-2022-7
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