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Former Treasury chief sees need for fiscal debate in US
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Oil prices pose a major ‘wild card’ for inflation, recession
Former Treasury Secretary Lawrence Summers said that policy makers in the US and elsewhere should heed the fiscal lessons from the UK’s recent crisis, and not assume Britain’s troubles were unique.
“That would be a real mistake” to conclude that other countries wouldn’t end up confronting similar challenges, Summers told Bloomberg Television’s “Wall Street Week” with David Westin. The first lesson from the UK is “that things can change extraordinarily fast.”
Governments need to pay increasing attention to their budgets, with mounting deficits alongside surging borrowing costs having the potential for shaking confidence, he said. In the US, student-loan forgiveness, emergency funding for Hurricane Ian and rising defense spending needs suggest that fiscal debates will need to be “back on the table,” he said.
“If your deficit projection starts to get out of control and your real interest rates start to rise rapidly, you can get into a kind of doom loop,” said Summers, a Harvard University professor and paid contributor to Bloomberg Television. “We’re going to need to be watching our own fiscal projections in the United States very carefully.”
Outgoing UK Prime Minister Liz Truss abandoned a program of unfunded tax cuts after its unveiling prompted a destabilizing selloff in UK government bonds.
Yellen on Friday recognized the importance of having “a credible fiscal policy and to make sure the debt is sustainable over time,” and argued that “our budgets have done that.” She hailed fresh data showing an historic drop in the deficit.
Yellen’s Take
“I do see our debt as being on a responsible path,” Yellen said in answering questions from reporters.
Summers said that a further risk stemming from government debt markets is the concern with deteriorating trading conditions. He endorsed Treasury Secretary Janet Yellen’s recent expression of concern over a “loss of adequate liquidity” in US Treasuries.