Lawrence Summers (right), former US Treasury Secretary, Ray Dalio (centre), Founder, Co-Chairman and Co-Chief Investment Officer at Bridgewater Associates, during their conversation with Stephanie Flanders (left), Senior Executive for Economics at Bloombe
The road to global economic reconstruction is laden with monetary policy challenges such as liquidity overheating, rapid inflation in financial assets, as well as creating bubbles, financial and investment experts Ray Dalio and Lawrence Summers have warned at a panel discussion during the Qatar Economic Forum yesterday.
Speaking at a session on ‘A New Economic Blueprint – Restructuring the Global Economy’, former US Treasury Secretary and professor at Harvard University Lawrence Summers said he welcomes the US Federal Reserve’s (Fed) efforts towards markets, and reiterated the growing awareness towards overheating which will likely necessitate monetary policy response.
“I still think the reality of overheating is being overestimated. The prevailing forecast in February was we will have inflation just about 2 percent this year. We’ve already had more inflation than that in the first five months of the year. That would suggest to me that people should not just modify their forecast, but should think about what their errors of thinking were that led them to be so far off in their forecast,” said Summers.
He added: “One of the things I hear people say which seems bizaare to me is we see rapid inflation because of globalisation. I think the opposite. Because of globalisation, we’re much more like a small country than we used to be. That means if the dollor gets into trouble, which it easily could, the faster the inflation. The really hard monetary policy dilemmas are when a direction is not entirely clear”.
Speaking about asset price inflation, Summers said: “Long term returns are going to be lower on assets. We’ve been saying that for some years now. My feeling is that the warnings are now even more valid because the conditions precedent forming the basis have become more true with the passage of time. I like to see signals that overheating, liquidity, and bubbles are now seen as major risks facing the American economy, and would like to see a program of structural blueprint for the supply side and reduction in the amount of populist transferring of cash to large groups in the economy”.
Also, speaking during the event, Billionaire investor Ray Dalio, Founder, Co-Chairman and Co-Chief Investment Officer at Bridgewater Associates, which is the world’s largest hedge fund, stressed on the relativity of interest rates to inflation and liquidity.
He said: “There’s a huge amount of liquidity and negative real interest rates. I think you’re going to see the continued inflation in other assets. The other things that worry me is the whole shift in terms of the quantity of debt money that’s being produced that goes into creating bubbles that creates an enormous amount of liquidity. This will manifest by either a rate rise tracing inflation or dollar decline. And we also have to deal with the changes in the political situation and the wealth gap situation. That’s a particularly US issue, it’s a European issue too, it’s a world issue. But it differs around the world. I think those are the bigger issues and what the rise of China means”.
Dalio went on to warn against inflation in financial assets. He said: “Because there’s massive amount of liquidity around, and it’s a difficult environment for those returns to be justified. I think we’re building a kind of a bubble. There’s a tonne of money around and the value of money goes down. That really raises financial assets and it changes capital flows in important ways. I think it’s easy to see that the Fed should tighten, and I think that they should, they should put on the brakes a little bit. But I think you will see a very sensitive market, and a very sensitive economy. Because the duration of assets has gone very long. And just the slightest touching on those brakes has the effect on markets. I think the challenge of the Fed is going to be able to balance those in a highly political sensitive environment. It’s a difficult position for the Fed,” Dalio added.
The Fed surprised some investors last week by anticipating two rate hikes in 2023, and have started to discuss when and how to pare back from their $120bn in monthly asset purchases. This has also prompted US Treasury yields to rise and global markets to turn risk-averse.
