“Everyone’s going to get plastered” – warning from a former U.S. Treasury secretary

The U.S. Federal Reserve’s current approach to monetary policy is setting the stage for “substantial difficulty”, according to former U.S. Treasury secretary, Larry Summers.

Speaking at a Citi Investment Conference today, Summers accused currently policy makers of being oblivious to longer-term inflationary pressures.

Traditionally the Fed “removes the punchbowl just before the party starts,” he said.

“Now the party’s gotten great and the Fed’s not removing the punchbowl until they’ve seen conclusive evidence that everyone’s going to get plastered.”

“I don’t think we are in a terribly rational or sound place. I think we are taking big risks.”

Summers pointed to labor shortages, wage increases, increasing energy costs, coupled with surging demand for goods resulting from extraordinary levels of stimulus as cause for concern.

“That’s a prescription for overheating… The (the Fed) are forgetting how costly it will be if we allow (inflation) to rise and get out of control.

“It’s magnified when you have zero rates and a large quantitative easing program, and a $2 trillion savings overhang.”

Related: Saxo Markets Chief Investment Officer, Steen Jakobsen, warns of the profound impacts inflation may have on the global economy in the years ahead.

‘Unusual’ inflation could become the usual

Summers also discussed “unusual inflation” – a term used by some economists to describe recent price spikes in areas such as used cars.

Summers says the latest data shows there’s unlikely to be any longer-term reprieve.

“Not only are they (used cars) not reverting, there is going to be another round of unusual inflation coming from used car prices”.

Despite a growing number of skeptics, the Fed has remained stedfast in its position that current inflation spikes are transitory, and the short-term result of COVID-related supply chain problems.

IMF: Inflation could lead to social unrest, food insecurity

Just hours before Summer’s no-holds-barred speech at the Citi conference, The International Monetary Fund chief economist Gita Gopinath, also joined the growing list of high-profile individuals to express great concern about inflation.

In a blog post on the IMF website, Gopinath, said trade-offs being faced by policy markers around the world are becoming more complex, citing supply chain disruptions as the greatest present challenge.

“Pandemic outbreaks in critical links of global supply chains have resulted in longer than expected supply disruptions, feeding inflation in many countries.

“On the one hand, pandemic outbreaks and climate disruptions have resulted in shortages of key inputs and lowered manufacturing activity in several countries. On the other hand, these supply shortages, alongside the release of pent-up demand and the rebound in commodity prices, have caused consumer price inflation to increase rapidly in, for example, the United States, Germany, and many emerging market and developing economies.

“Food prices have increased the most in low-income countries where food insecurity is most acute, adding to the burdens of poorer households and raising the risk of social unrest.”

Gopinath also warned of a “recovery gap” that will see emerging markets and developed economies remain “scarred” by COVID for a much longer period than developed nations.

She spoke about this in a new podcast episode which you can listen to below.

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Asia Markets Partner