E Larry Summers Cannot Save The Fed And Misspoke About Fed Capabilities

Larry Summers has spoken once again about secular stagnation on a Business Insider article entitled Larry Summers: the Global Economy Is in Serious Danger. Summers makes an excellent case for why things cannot remain as they are. He is right in saying that stimulus in the form of fiscal efforts is likely needed to expand the US economy.

But, there are two points that were contained in the article that make me not trust him anymore than I trusted him when I wrote the article Summers and Roubini Talk Negative Interest Rates, Sound Logic but Uncharted Waters.

First of all, I had mentioned that more than anything, Summers worries about and cares about the banks first. Every motive he has, to the best of my observation, revolves around what is good for the banks at that moment. It may not be a long term fix he has in mind, but he is bank first at least in the now.

So, it is no surprise that he says we should have fiscal stimulus to really put the economy on a path towards lift off. He may really want this for benefit to society, but he really mostly wants this because  he says there is a shortage of treasury bonds. He says what others have been saying, that bond markets are telling us that there are not enough bonds. He wants more fiscal spending and resulting debt, in order to produce more bonds! That is for the banks, clearinghouses, and derivatives. That creation is for the financial system most of all. Summers doesn’t fear increased government debt as much as he fears the shortages of bonds.

A shortage of bonds causes interest rates to experience lower yields and bond prices to go up. Banks don’t want to pay too much for bonds and want more bonds available. And it isn’t really normal to have this great shortage of bonds, until this new normal, that is. Summers knows this, and wants rates to go up by burying America in a sea of red. 

Bonds are the new gold to the bankers, but bonds are a burden to the taxpayer, who can’t grasp this new economics. Looking at Japan one can think that we could be there some day. Just how much debt can a nation handle before it becomes a big problem. Well, nations probably can handle more than 90 percent of GDP which was a Rogoff austerity idea debunked.