Summers: Debt ‘Could Easily’ Hit 130% of GDP in Next Decade and Boost Interest Rates, We’ll Have Problems Without ‘Very Low’ Rates

During an interview aired on Friday’s edition 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 stated that he believes the debt-to-GDP ratio “could easily” increase by 30% over the next decade to 130%, which would increase interest rates and the deficit, and barring “very low” interest rates, “we are going to have fiscal problems and fiscal challenges that we are going to have to address.”

Summers stated, “I think that CBO report is concerning…my guess is that the ultimate debt trajectory may well run higher than the CBO is saying. It assumes that fed funds is going to settle for the long-term at 2.5 without there being a recession. That strikes me as having much more room to be too low than to be too high. The CBO does its job, which is to predict current policy. But my guess is that spending in the national security area is going to have to rise significantly over the next decade, given the threats that we are facing. [The] CBO does its job and assumes current law, which is that all the tax cuts legislated in 2017 are going to phase out in 2025. But I’d be surprised if that was actually true. And so, you add all that up, and I think that where they’re looking for debt-to-GDP ratios to go to 120% of debt, an increase of about 20% over a decade, my suspicion is it could easily be 30% over a decade. And that, in turn, will push — put pressure on interest rates, which will put pressure on the — increase the deficit, and so you get a little bit of a vicious cycle.”

He added that it’s not “an imminent emergency” or “something that will be any kind of crisis if it is not dealt with this year.” And “those who somehow use fiscal concern as an excuse to not raise the debt limit are exacerbating all of the fiscal risks.”

Summers concluded, “I do think we’ve got to recognize that unless interest rates really revert to very low levels — which is certainly possible. It is what happened in the era of secular stagnation — that I think we are going to have fiscal problems and fiscal challenges that we are going to have to address.”

Follow Ian Hanchett on Twitter @IanHanchett