“Renowned Economist Larry Summers Cautions the U.S. Economy as Overheated and Vulnerable”

Larry Summers Predicts Continued Inflation in the US

Former US Secretary of the Treasury, Lawrence Summers, predicts that the fight against inflation in the United States is far from over. Following his attendance at the Caixin Asia New Vision Forum in Singapore via video link, he stated that the US economy is still very hot, and is an underlying 4.5-5% inflation country. Summers is known for being a longtime inflation hawk, and previously warned that US stimulus during the COVID pandemic would eventually lead to increases in prices.

Reasons for Inflation

Summers suggested that low unemployment and high wage growth have been key factors causing inflation to rise. He believes that reducing inflation rates will require a 6% unemployment rate. The Federal Reserve recently began to share Summers’ concerns, and has been increasing interest rates at every monthly meeting since March 2022.

Interest Rates

This week, the Fed will have a meeting to decide whether to change interest rates once again. Despite most economists anticipating that the US central bank will cease raising interest rates this month, the previous rate hikes which occurred inspired the banking crisis early this year. This led to a tightening of credit markets.

Inflation Rates

Although US inflation rates have declined since their peak at 9% almost a year ago, core inflation has remained elevated at 5.5% year-on-year. Unlike with prices which fluctuate, core inflation isn’t affected by the volatile food and energy prices. According to the Bureau of Labor Statistics, there will be a 4.2% year-on-year rise in the consumer price index for May, with core inflation increasing by 5.3%.

Summers’ Concerns

Summers is sceptical of the US’ ability to achieve a soft landing in response to its current state of inflation. This soft landing is when a country can control inflation without causing a recession. He believes that the hoped-for landing is the “triumph of hope over experience”. Currently, there are pockets of distress in commercial real estate, which Summers highlighted. The rise of remote working has seen tenants scaling back and threatening office owners with delinquent payments. This has led to some property owners defaulting on their loans, which has had a knock-on effect on banks.

Fallout and the Future

A collapse in commercial real estate would lead to a knock-on effect on lenders, mostly small and medium-sized banks. The consequence could seriously impact the economy. Meanwhile, lenders with less than $250 billion in assets typically provide around 80% of the commercial real estate lending, according to Goldman Sachs’ analysis. The fallout could lead to a decrease in lending, which places downside pressure on property values. The founder of Corion Enterprises, Fred Cordova, previously stated that the situation in the office sector is apocalyptical.

Conclusion

Inflation remains a significant concern for the United States, despite recent decreases. Interest rate hikes have continued, and will inspire concerns over potentially causing another banking crisis as experienced earlier this year. Certain sectors, particularly commercial real estate, are facing challenges which could impact the economy in a major way. The impact could be highly significant as small and medium-sized banks are responsible for a substantial amount of commercial real estate lending. It’s worth noting that inflation rates have been on the rise in the US for some time, and Summers has been a hawk on inflation for years.