Markets are wrong to think things will return to normal and should brace for an era of tumult, debt, and high interest rates, former Treasury Secretary Larry Summers says
- Markets are wrong to think things will return to normal this year, former Treasury Secretary Larry Summers said.
- He warned investors to brace for a new period of debt, tumult, and volatile interest rates.
Markets are wrong to think that things will return to normal this year, and investors should brace themselves for a new era of volatility, debt, and higher interest rates, former Treasury Secretary Larry Summers warned.
"I suspect tumult," Summers forecast in an interview with Bloomberg on Friday, looking back at the market's upheaval in 2022. Central bankers hiked interest rates an aggressive 425-basis-points to tackle sky-high inflation, driving stocks to a 20% loss for their worst performance since the 2008 recession.
Market bulls have been optimistic that the central bank could dial back rate hikes later this year, sparking a new stock market rally. But investors in the past have been wrong to assume market conditions will return to normal, Summers said, pointing to false expectations after World War II that the economy would return to stagnant growth and sluggish interest rates.
Markets may also be wrong to think a return-to-normal is possible after this inflationary shock, Summers said, as the era of ultra-low interest rates and steady economic growth is now in the past.
"This is going to be remembered as the year when we recognized that we were heading into a different kind of financial era with different kinds of interest rate patterns."
Summers believed the new era would also be defined by higher debt levels due to higher national spending, as well as higher investment demand. And while growth in the global labor market contributed to disinflation over the past few decades, he doubted it would continue at the same rates, meaning higher inflation could also be in store.
That echoes the view of other market commentators, who have warned that central bankers' struggle to tame inflation is paving way for a new period of volatility and higher interest rates. BlackRock analysts warned markets were now facing the "biggest macro storm in decades," and top economist Nouriel Roubini warned a stagflationary-debt crisis could soon slam the global economy, combining the worst aspects of the 2008 debt crisis and 1970s-style stagflation.
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