Larry Summers, Treasury secretary under Bill Clinton and chairman of the Council of Economic Advisors under Barack Obama, had been on Joe Biden’s case about inflation long before the CPI began to skyrocket.
As far back as the passage of the first pandemic relief bill in February, Summers was sounding the alarm about the Biden administration’s spending causing inflation. In October, he argued that the country is “in more danger” than it was during his career “of losing control of inflation in the U.S.”
He also complained about the Fed managers who were more concerned about being “woke” than fighting inflation. “They’re defining themselves by how socially concerned they are,” he said at a virtual conference of bankers in November.
Later in the month, Summers also clashed with Secretary of the Treasury Janet Yellen after she suggested he was wrong for alleging the country faced a risk of out-of-control inflation.
He defended his claims, explaining he believes that “the gap between Treasury & Fed statements and the everyday experience of businesses and consumers in terms of inflation has widened in recent months.”
“Until the Fed & Treasury fully recognize the inflation reality, they are unlikely to deal with it successfully,” he said in October.
Summers reflected that be believed there was a “less than a 50/50 chance” that Yellen was correct when she said inflation levels would return to normal by next year.
In an extended Twitter thread, Summers called out the Biden administration’s illusions that inflation is transitory and everything will be back to normal soon.
I cannot understand why so many in Admin & out cling to the idea that inflation is caused by bottlenecks & will soon recede to normal levels. Of course there is uncertainty but the idea that inflation will revert soon to levels anywhere near Fed’s target looks like a long shot.
— Lawrence H. Summers (@LHSummers) December 13, 2021
We have all seen house prices & rents soar. Home prices based on Case Shiller are up 15 to 20%, as are rental prices, as reported by the nation’s largest landlords. If we assume 17% residential inflation, both CPI and core CPI would have exceeded 10 percent last month.
— Lawrence H. Summers (@LHSummers) December 13, 2021
Inflation has trended up through 2021 and the economy is growing far more rapidly than potential output. Given housing prices and tightening labor markets, there is no compelling reason to expect major deceleration in inflation.
— Lawrence H. Summers (@LHSummers) December 13, 2021
Summers is wrong. There is, indeed, a “compelling reason” to expect a lower rate of inflation. It’s called politics and 2022 is an election year. For the Biden administration to admit that inflation will be a problem into 2022 would be political suicide.
Summers is also warning of the markets “spontaneously deflating” — i.e., “crashing” — as a result of the “euphoria” of retail investors getting caught up in the excitement of the rising stock market.
Summers, who has been warning of the dangers of elevated inflation for months, said it would be very hard for the Fed to rein in excessive price gains without also damaging the economy.
“The Fed will have a very difficult time organizing a soft landing,” he said, noting the long and variable lags between monetary-policy actions and their impact on the economy. “All the efforts at disinflation that we have had historically, where it was clearly established that inflation was too high and the Fed acted, have ended in recession.”
The Fed announced last month that it would begin to taper its purchases of mortgage-backed securities to bolster the market. But Summers is predicting the Fed will get serious about fighting inflation next year by raising interest rates.
“I would be establishing a presumption that the Fed will do whatever is necessary to bring inflation under control, and that quite possibly that could involve four rate increases during the next year and more after that,” he said.
Just when Biden wants to add trillions more to the national debt, the interest rate taxpayers will pay to service that debt will rise dramatically. It’s a recipe for a recession, so don’t be surprised if Republicans begin to begin ringing that bell as well.
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