Markets are underpricing risks of populist politics in the U.S. and abroad, Larry Summers says

Markets are underpricing risks of populist politics in the U.S. and abroad, Larry Summers says
By: market watch Posted On: February 23, 2024 View: 21

Former U.S. Treasury Secretary, Larry Summers, has said markets may be underestimating the risks posed by an upsurge in political turmoil that threatens to undermine the basic order and stability that has underpinned America’s economic growth in recent decades. 

The American economist said the risks of political strife are “really, very substantially greater” now than they have been throughout his career, as he warned the rise of populism in the U.S. and the rest of the world threatens to spark a period of political volatility that may stunt economic growth.

“The world is potentially headed into a period where there is a less of a sense of what the order is going to be, and therefore more risk of disorder, chaos, and the associated suffering, and I’m not sure that kind of risk is fully priced in to markets,” Summers told the FII Priority Summit.

Speaking in Miami to Eric Schmidt, the former CEO of Google, Summers said markets have taken political stability in the U.S. for granted and he argued this steadiness has driven huge economic growth in the U.S. that has seen American companies’ valuations surge over the past 25 years. 

The economist instead argued markets have “insufficiently” priced-in risks associated with the rise of “populist, nationalist politics” that could see a breakdown in the rule of law in the U.S., ahead of the upcoming 2024 elections, and increased trade protectionism abroad. 

“One of the clearest lessons of economic history is that over a period of a decade, populism is almost always bad for economic performance, whether it’s right-wing populism or left-wing populism,” Summers said. 

He explained that increased restrictions on the flow of goods and people internationally, paired with the collapse of international collective security arrangements, could undermine global economic growth in the future.   

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