The Global Economy is in ‘Dangerous’ Situation Says Larry Summer

This week, in New York City, HSBC’s Global Investment Seminar is held and Larry Summers, a Harvard professor and economist talk about ‘secular stagnation’.

It was on 2013 when Prof. Summers had enlivened a peculiar phrase, which was made known globally – secular stagnation. Secular stagnation pertains to a slow growth rate of a global economy resulting from too much saving and lack of investment.

Summer said, “I would suggest that the defining financial development of the last year is likely to push things towards more secular stagnation. It is the substantial reduction in capital inflows to developing countries, and the substantial increase in capital outflows from developing countries.”

Along with his discussion is a graph presentation showing a decline in money coming into emerging markets. He said, speaking about the graph, “It means more and more funds seeking to purchase US assets — safe assets in the industrial world.”

He then added, “[Outflows] means more and more downwards pressure on those [emerging-market] interest rates; means more and more upwards pressure on [or weakening of] those currencies; means more and more disinflationary and deflationary pressure; means more and more tendency, because of lost competitiveness, towards reductions in demand, and towards increases in supply … I would suggest it is a dangerous world.”

This is not a mere thesis for Summers, but a present flight that emerging markets are suffering and it gets worse as we have seen in the global economy.

According to Deutsche Bank’s Binky Chadha, over the last few years, the emerging markets experienced a rush from developed markets and this is considered as great rotations in markets.

Moreover, he said that it is a tragic year for emerging markets citing the example of the fiscal crisis in Brazil and the slow growth rate of China’s economy. She also said that this year, emerging markets experience the greatest capital outflow since financial crisis was experienced.

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