Summers: We’ll Have ‘Wile E. Coyote Kind of Moment’ with Consumption, Downturn Will ‘Be Fairly Forceful’

During an interview aired on Friday’s broadcast of Bloomberg’s “Wall Street Week,” Harvard Professor, economist, Director of the National Economic Council under President Barack Obama, and Treasury Secretary under President Bill Clinton Larry Summers argued it will be much more difficult to bring down inflation without a recession than many believe because “At a certain point, consumers run out of their savings, and then you have a Wile E. Coyote kind of moment where consumption falls off.” And he believes the downturn will “be fairly forceful.”

Summers said, “[I]t’s much harder than many people think to achieve a soft landing, because there are all these mechanisms that kick in. At a certain point, consumers run out of their savings, and then you have a Wile E. Coyote kind of moment where consumption falls off. At a certain point, people start putting their houses on the market and then you see house prices falling and then other people rush to put them on the market. At a certain point, you see credit drying up, and when credit dries up, people can’t pay back their old borrowing. So, there is this proposition, we’ve talked about it before on the show, David…when the unemployment rate goes up by .5%, it goes up by more than 2%. And that’s because once you get into a negative situation, there’s an avalanche aspect. And I think we have a real risk that that’s going to happen at some point.”

Summers added that “there’s an old saying that things…don’t happen as fast as you think they will, and then they happen faster than you thought they could. And I think that may be the way it is with the downturn. I don’t know when it’s going to come, but when it kicks in, I suspect it’ll be fairly forceful.”

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