• No return to secular stagnation
• The phase of low interest rates will not return
Interest rates have recently fallen on the bond markets. Harvard professor Larry Summers, who was US Treasury Secretary in Bill Clinton’s cabinet from 1999 to 2001, has no understanding for this, because in his opinion the low interest rate phase – despite the risk of recession – will not return.
Wrong assumption
The economist explained, according to Bloomberg, that while numerous indicators – including the 10-year Treasury yield, the median Fed forecast for the long-term real interest rate, and the 10-year breakeven rate in the US – would seem to signal that the same factors, which inflation would have slowed down before its recent rise would now occur again. Nevertheless, he believes the resulting assumption, which is particularly widespread on the bond market, that the low interest rate-Era borne by disinflationary pressures will return, for wrong.
As justification, the economics professor pointed to a number of changes that would indicate that the pattern of secular stagnation from before the corona pandemic will not return. Secular stagnation is a situation of chronic underdemand for a country’s goods and services. It is characterized by long-lasting (“secular”) low economic growth (“stagnation”). Underdemand is reflected in the fact that too little is invested in relation to the savings.
changes
For example, Larry Summers expects capital spending to increase as the US scrambles to bring manufacturing back into the country to make supply chains more secure. In addition, spending on national security would also increase. In addition, Summers explained that the “green energy transition” will help to skim off savings. If the uncertainty then increased, investors would probably demand higher risk premiums, says the economist.
riots
Furthermore, during the television program “Wall Street Week” on Bloomberg TV, Larry Summers praised the Federal Reserve’s change of course, which has been on a hawkish course in recent months monetary policy has flipped. He recommended that the monetary authorities decide to raise interest rates further and hold on to the high interest rate level for some time in order to curb inflation.
Meanwhile, Summers believes investors should brace themselves for a difficult 2023. “I expect turmoil” for markets, ex-Treasury Secretary warned. And further: “This year will go down in history as the V-year, in which we recognized that we are moving into a different kind of financial age with different interest rate patterns”.
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