It would be a 'real mistake' to assume other countries will avoid UK-like turmoil, and the US must watch its fiscal issues, former Treasury Secretary Larry Summers says
- Other nations could see the same market turmoil that played out in the UK, ex-Treasury Secretary Larry Summers warned.
- He pointed to the risk of a "doom loop" created by unsustainable deficits and rapidly rising interest rates.
It'd be a "real mistake" to assume other nations won't see the same kind of turmoil that gripped UK markets, former Larry Summers said on Friday, warning investors of potential trouble in debt markets.
The former Treasury Secretary pointed to the recent fiasco in Britain, where concerns surrounding the UK's growing debt balance and the proposal for unfunded tax cuts roiled the gilt market and sent the pound plummeting to 37-year lows, eventually leading to Liz Truss's resignation as prime minister on Thursday.
"Things can change extraordinarily fast if you lose credibility," Summers said in an interview with Bloomberg TV.
"If your deficit project starts to get out of control and your real interest rates start to rise rapidly, you can get into a kind of doom loop," he added.
Summers also noted liquidity issues in the market which could eventually lead to a situation where there are more sellers than buyers.
He pointed to a recent comment from Treasury Secretary Janet Yellen, who brought up concerns of illiquidity in US Treasurys that has created more volatility and sudden spikes in yields.
"We're going to need to be watching our own fiscal projections in the United States very carefully, because I think they're going to look different with current market interest rates," he added. "If you factor in the recession that's likely to come, that's going to have some significant effects."
The US will need to be particularly cautious with its budget, given Biden's student loan-forgiveness program, emergency aid for Hurricane Ian, as well as the growing defense budget, Summers added. "The fiscal issues need, sooner or later, to be back on the table in the United States."
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