Summers Says Saudi Arabia's Shift To Russia And China Is A Huge Challenge For The U.S.: 'It's Looking A Bit Lonely On Right Side Of History'

On Friday, former Treasury Secretary Larry Summers shared his thoughts on the U.S. economy and the country's global image in light of recent economic data and amid China's increasing influence in the Middle East. 

Fed Faces Very Difficult Choices: There is growing evidence of stagnation along with continuing concerns over inflation, Summers said in an interview with Bloomberg.

Citing the fact that defaults have been rising, the flow of credit has been coming down and retail sales are weakening, Summers said, “I think you have some grounds for concern about what's happening with real activity on a forward-looking basis.” 
While the former Treasury official conceded that consumer price inflation and producer price inflation surprisingly slowed, he noted that one-year inflation expectations from the University of Michigan, along with the Atlanta Fed’s wage growth tracker (which measures the nominal wage growth of individuals and is a relatively solid indicator of what’s happening in the labor market), jumped a bit last month.
“I don't see inflation as on a secure path down to the 2% target unless the economy turns over a bit,” Summers said, adding that the Federal Reserve has several very difficult choices to make ahead.

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Impact of Tighter Credit Standards: The Fed has already begun tightening credit standards, Summers said. Prior to the banking crisis, the economist said he had looked at the possibility of the federal funds rate rising to up to 6%.

“What's very hard to know is whether that action in credit, which is reinforcing the Fed, whether that's three moves' worth of reinforcement, whether it's only one move's worth of reinforcement, and that's the judgment the Fed's going to have to make on an ongoing basis,” Summers said.

He expressed surprise over the markets' expectation of a large series of rate cuts over the next two years. “It seems to me that we're not very likely to get six or eight rate cuts over the next two years unless the economy is headed towards recession,” he said.

“And certainly recession of a substantial sort is not what's priced into the stock market, or for the most part, priced into high yield credit,” he added

State of U.S.' Global Image: When asked about the growing rift between the U.S. and Saudi Arabia and its impact on oil prices and headline inflation, Summers said Saudi Arabia and Russia's increasing closeness is due to a restoration of diplomatic relations brokered by China. 

The relationship is a “symbol of something that I think is a huge challenge for the United States,” Summers said.

“We are on the right side of history with our commitment to democracy, with our resistance to aggression in Russia … but it's looking a bit lonely on the right side of history, as those who seem much less on the right side of history are increasingly banding together in a whole range of structures,” he explained.

“There’s a growing acceptance of fragmentation, and — maybe even more troubling — I think there’s a growing sense that ours may not be the best fragment to be associated with,” he added.

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