The plunge in the British pound, which fell to record lows on Monday, is surprising even the “very pessmistic” Larry Summers.
“I did not expect markets to get so bad so fast,” tweeted Summers on Tuesday morning. Summers pointed to rising bond yields and a falling currency as a “hallmark of situations where credibility has been lost.” Yields on U.K. bonds are now at their highest point in over a decade.
On a Friday interview with Bloomberg TV, Summers said “Britain will be remembered for having pursued the worst macroeconomic policies of any major country in a long time,” and predicted that the pound would soon hit parity with the U.S. dollar.
But on Tuesday, Summers was even more dour about the pound’s prospects. “My guess is that [the] pound will find its way below parity with both the dollar and euro,” tweeted Summers.
As of 4:30 p.m. Hong Kong time, the pound was trading at 1.082 U.S. dollars to the pound, and 1.123 euros to the pound.
Summers had harsh words for British economic policymakers. “The first step in regaining credibility is not saying incredible things,” Summers tweeted, continuing that he was “surprised” that U.K. Chancellor of the Exchequer Kwasi Kwarteng pledged further tax cuts over the weekend.
Kwarteng’s package of tax cuts for high earners, funded by $49 billion in new government debt, helped send the pound to a 37-year-low on Friday as currency traders worried about the sustainability of the U.K.’s debt.
Summers’ prophecies
Summers on other occasions hasn’t minced words about what he thinks governments should do regarding economic policy. The economist long warned that U.S. fiscal stimulus risked increasing prices, rejecting the idea that inflation was a short-term phenomenon caused by COVID disruptions.
U.S. economic officials, like Federal Reserve Chair Jerome Powell and U.S. Treasury Secretary Janet Yellen, have abandoned the “transitory” label, and now agree that inflation is a longer-term challenge for economic policy.
Summers now thinks that the U.S. needs to lower demand to get inflation—measured at 8.3% year-on-year in August—under control. In an interview with Fortune, Summers suggested that unemployment needed to increase to 6% to “significantly restrain inflation.” The current U.S. unemployment rate is 3.7%.
On Tuesday, Summers warned that “a currency crisis in a reserve currency could well have global consequences.” The British pound makes up 7.4% of the International Monetary Fund’s “special drawing rights”, which are assets that are freely convertible into its five foreign currencies—the U.S. dollar, the euro, the Chinese renminbi, the Japanese yen, and the pound.
“I am surprised that we have heard nothing from the IMF,” Summers wrote.
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