Former US Treasury Secretary Summers: The Global Economy Faces a Japanese-Style Stagnation

Former US Treasury Secretary Larry Summers said on Wednesday that global investors seem to expect slower economic growth and low real interest rates in the next few years. These conditions will hinder the ability of central banks to stabilize their economies.

Summers said in a speech at the London School of Economics: “The market seems to expect that the economy will return to long-term stagnation or Japaneseization.”

The term “Japaneseization” refers to a mixture of economic stagnation and deflation, which hindered the recovery of the Japanese economy from the large-scale real estate bubble in the early 1990s.

Summers’ remarks reflect his view that excess savings and insufficient investment are one of the key issues facing industrialized countries. The result will limit the ability of monetary policymakers to raise interest rates in the next few years and allow the government to assume most of the responsibility for stabilizing the economy.

Summers also warned that low borrowing costs will exacerbate the risk of a new round of financial crisis.

He said: “Very low interest rates laid the foundation for leverage, zombie companies and the persistence of financial bubbles. We have seen a lot of evidence of speculative risks. Very low negative real interest rates are problematic.”

On the same day that Summers made these remarks, the U.S. Department of Labor reported that the Consumer Price Index (CPI) rose 6.2% year-on-year in October, which was the fastest annual inflation rate since 1990. Many economists, including Summers, are worried that inflation will remain dangerously high.

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