U.S. Risks Recession With Brinkmanship On Trade, Says Former Treasury Secretary Larry Summers

Germany's industrial output fell more than expected in June, according to new figures out Wednesday — the latest warning sign of a global economic slowdown connected to the escalating trade dispute between China and the U.S. Some economists say there is a growing risk of recession.

"The risks of recession now look to be larger than at any time since the last recession," Larry Summers, who was treasury secretary under former President Clinton and director of the National Economic Council under former President Obama, tells Here & Now's Jeremy Hobson.

On a potential recession 

"The risks of recession now look to be larger than at any time since the last recession. I say that because the expansion has been going for a long time, because a variety of economic indicators of industrial production and other things have shown some slippage. A tremendous amount of uncertainty is being introduced because of the Chinese conflict that had added to uncertainty with the president's claims that the Chinese currency was manipulated. And because the single best indicator of future recession, the so-called slope of the yield curve — whether long-term interest rates are higher or lower than short-term interest rates — right now they're lower, which has historically been a sign that a recession was likely to come."

On whether China is a currency manipulator 

"I think the suggestion's absurd. Currency manipulators are pushing their currency down. China is intervening in the market to hold its currency up. Currency manipulators are running large surpluses with respect to the world. China is in balance with respect to the world and has moved its trade position in a way that favors the rest of the world by a massive amount in recent years. So China was a manipulator 25 years ago when the Clinton Treasury declared it to be a manipulator. You could have made a reasonable argument when the Obama Treasury threatened to declare it a manipulator that they were engaged in questionable practices. But now with the surplus eliminated and their interventions being to buy their currency rather than to sell their currency, it's an absurdity."

On what should be done to bring the U.S.-China trade war to an end

"We should reach an agreement, we should stop engaging in these sadomasochistic policies where the debate is about whether our sadism to them is going to be better or worse than our masochism to ourselves. We should get the agreement that we can and we should focus on what's most important, which is what we do to strengthen our own economy."

On what the Federal Reserve should do amid what some have called attacks on its independence from Trump

"I think the Fed should and likely will reduce rates over the course of the next half year. I think the president, ironically, makes it harder for them. Any central bank to preserve its credibility has to look like — and be like — it's making its decisions on the economic fundamentals, not on the political pressures. And so when the president engages in such overt and extensive political pressure, it almost forces the Fed to demonstrate its independence by not appearing overly responses. So I believe we'll have higher interest rates because of what the president is doing, not lower interest rates."

On Brexit

"I think the British will probably leave. On just what terms, I don't know and I'm not certain. The U.S. is a massive market for Britain. Britain is a relatively minor market for the United States. That just means that all the issues of U.S.-U.K. trade are not going to get nearly as much attention from the United States — given everything else that's going on — as the British hope. That's why I think any idea in Britain that E.U. departure is okay, because of the relationship they're going to have with the United States, is a very problematic one."

Chris Bentley produced and edited this interview for broadcast with Kathleen McKenna.