Former U.S. Treasury Secretary Lawrence Summers said Saturday that he doesn’t think the economy will return to the low-interest-rate environment that was interrupted by the COVID pandemic in 2020-2021.
Summers had earlier predicted that low rate environment which he had labeled “secular stagnation.
In a presentation at the American Economics Association meeting in New Orleans, Summers said “my guess is we will not return to the era of secular stagnation” once inflation has been tamed.
The return of low interest rates has been the base case for the traders in the bond market.
In an interview with Bloomberg about his forecast, Summers said this will lead to “tumult” in the bond market this year when traders recognize their assumptions are incorrect.
“This is going to be remembered as a ‘V’ year when we recognized that we were headed into a different kind of financial era, with different kinds of interest-rate patterns,” he told the agency.
In his talk to the AEA conference, Summers compared the current economic environment to the Second World War. As the war was coming to a close, economists generally thought that the economy might slump back into the doldrums seen after the Great Depression in 1929.
But instead of falling into a ditch after the war, the U.S. economy took off, growing at a strong rate spurred by the growth of the suburbs while the government completed the national highway system and other large infrastructure products.
In his talk, Summers said that interest rates will stay high once inflation cools because of the large amount of government debt issued during the pandemic.
Tension between the U.S. and China will keep defense spending high, he added.
In addition, switching to a greener economy will lead to more spending, Summers added.
Harvard economist Ken Rogoff, in a separate talk at the conference, agreed with Summers.
“Very low interest rates, based on history and logic, probably won’t return,” Rogoff said.