Cathie Wood says Larry Summers is overly fixated with inflation, and she’s holding fast to her view that we’re suffering deflation.
Money manager Cathie Wood was less known until 2017, and in the past five years, which is her favored time horizon, she has underperformed the S&P 500.
Meanwhile, Harvard Prof. Larry Summers is one of the foremost economists of his generation, once served as treasury secretary, and called our current bout of inflation before many others did.
So whose views on inflation would you trust more, Woods’s or Summers’s?
Summers says the Fed must be vigilant and continue raising interest rates to quell inflation, while Wood says we’re actually in deflation. And when the Fed comes to realize this, she says, it will have to ease policy.
Wood says the proof that we’re in deflation is the recent drop in commodity prices. She has said that the consumer price index is a lagging indicator and that gold is the best inflation indicator. But when gold surged in 2009-11, inflation was quiescent.
To Task on Twitter
In any case, Wood took Summers to task on Twitter.
“Larry Summers seems to be leading the Biden administration astray with his conviction that inflation is intractable, with the ‘70s as his guide,” Wood tweeted. “The ‘70s inflation started in 1964 with the Vietnam War and the Great Society and burgeoned for 15 years.”
By contrast, the present round of inflation “started fewer than two years ago with COVID and supply chain bottlenecks, exacerbated by Russia’s invasion of Ukraine this year,” Wood said.
“The Fed is solving supply chain issues by crushing demand and, in my view, unleashing deflation, setting it up for a major pivot.”
Summers reportedly is helping the administration with its fiscal policy. But it’s primarily the Fed that is fighting inflation.
With the end of the covid stimulus, government spending is unlikely to get cut further or taxes raised. There’s no indication that Summers is advocating additional fiscal tightening.
There’s also no sign that the Fed is crushing demand yet. Payrolls climbed 315,000 in August.
Wood is correct that the inflation of the late 1970s had built up for 15 years. But just because the current spate of inflation cropped up more quickly doesn’t make it less dangerous. This time around inflation has peaked at 9%. That’s quite a bit lower than the 14% zenith of 1980, but substantial nonetheless.
The economy moves much faster now than it did in the 1970s, so it’s not a huge shock that inflation might spread more quickly in this era.
Few mainstream economists are quarreling with Summers’s view that the Fed’s rate hike campaign must continue if the central bank is to wipe out inflation.
In sum: advantage Summers.