Former U.S. Treasury Secretary Larry Summers and Harvard University economics professor Kenneth Rogoff both said that the U.S. economy may not be able to return to the long-term low interest rate era before the epidemic. Summers also warned that the bond market will Will be thrown into turmoil in the process of facing the new reality.
Summers told the American Economic Association (AEA) conference that even if inflation cools, the U.S. may not be able to return to the era of low interest rates that he described as “secular stagnation.”
Bond traders have been betting that the U.S. will return to the era of low interest rates, but Summers warned that traders will have to admit that their previous assumptions were wrong and predicted that the bond market will be in turmoil this year.
“As we move into a different financial era and a different interest rate profile, this year will be remembered as a ‘V'[to describe the movement in bond yields],” he said.
Summers compared the economic situation to that of World War II, when, as the war drew to a close, most economists believed that the economy might fall into a depression similar to that of 1929. However, the fact is that the post-war American economy took off rapidly due to the rapid growth of the suburbs and the completion of basic construction drawings.
Even after inflation cools, interest rates will remain high, Summers said, because the government has issued a lot of bonds during the epidemic, while tensions between the United States and China will keep defense spending high. In addition, the transformation of the economy towards green energy also means that more spending is required.
Rogoff shared the same view as Summers, saying in a separate speech at the AEA: “Historical experience and logic suggest that very low interest rates may be a thing of the past.”
Rogoff, who was the chief economist of the International Monetary Fund (IMF), pointed to low interest rates as the main factor behind the surge in real estate and stocks, and the force that allowed governments to borrow heavily to fight the epidemic. Therefore, the end of the era of low interest rates will have a major impact on the financial market and the economy.