Larry Summers warns global markets are bracing for Japan-style stagnation with central banks' policy levers at risk

• Global financial markets are pricing in expectations of slow economic growth and low real interest rates, said Larry Summers, according to a Bloomberg report Wednesday.
• The former US Treasury Secretary warned that could suggest a return to "secular stagnation, or Japanization."

Investors worldwide appear to be anticipating slower global growth and low real interest rates for the next few years, conditions that would hobble the ability of central banks to steady their respective economies, said former US Treasury Secretary Larry Summers.

"What markets are seeming to price is a return to secular stagnation, or Japanization," Summers said at a lecture to the London School of Economics, according to a Bloomberg report Wednesday.

The term "Japanization" refers to the mix of stagnation and deflation that's kept the Japanese economy from recovering from the massive pop of its real-estate bubble in the early 1990s.

Summers' remarks reflect his view that an excess of savings and lack of investment are among the key problems in industrial nations, the report said.

The result will limit monetary policy makers in their ability to raise interest rates in the coming years and leave governments to shoulder most of the responsibility for stabilizing their economies.

Summers, an emeritus professor at Harvard University and a paid contributor to Bloomberg, also warned that low borrowing costs will contribute to the risk of a new financial crisis.

"Extremely low interest rates set the stage for leveraging and the perpetuation of zombie enterprises and the perpetuation of financial bubbles," he said. "We're seeing a lot of evidence of speculative risk. Extremely low and negative real interest rates are problematic."

Summers made his remarks on the same day the US Labor Department reported the consumer price index rose to 6.2% in October on a year-over-year basis, the fastest rate of annual inflation since 1990. He has been among a number of economists who have raised concerns that inflation will stay dangerously high.

"Labor market tightness, behavior of housing markets & asset prices all rising in a more concerning way than I worried @ a few months ago," Summers wrote on Twitter in July, linking to a Politico article about his view that President Joe Biden's spending agenda was creating the risk of an inflation spike.

"This raises my degree of concern @ overheating scenario. There are huge uncertainties but the focus of concern now should be on overheating," he wrote.