The Prophet: TIE Founder and Editor David Smick interviews Larry Summers, the former Clinton Treasury secretary, top Obama economic adviser, and Harvard president. Summers' recent accurate inflation forecasts have drawn attention from many market participants.

TIE: The New York Federal Reserve recently upped its inflation forecast. A sizable number of FOMC members in their public statements are also sounding a lot more concerned about the recent rise in inflation. You were way out front in your inflation forecast. For example, at the beginning of this fiscal year, U.S. Treasury Secretary Janet Yellen predicted 2 percent inflation by year end. We are of course way beyond that now. The argument that the inflationary outbreak is all transitory seems increasingly less convincing. What convinced you to take this public stand? A lot of people in the Democratic Party weren't very happy with you. But then I am reminded that you did the same thing with Fannie and Freddie years ago. They were a major Democratic Party fundraising base but you took them on anyway, accurately predicting a coming crisis. Is this your new public policy role now--to say courageously what needs to be said, even if it is unpopular?

Summers: I try to call them as I see them, especially when I'm not in government. Ultimately, everybody's interests are best served by the most open debate.

I was surprised by the complacency surrounding inflation early this year. It seems to me that if you did very elementary calculations of the output gap, the size of the fiscal stimulus, the multiplier, the extremely expansionary monetary policy, and the savings overhang, you reach the conclusion that aggregate demand was going to run very hot relative to even optimistic views about supply. Frankly, I did not expect so much inflation so soon. We are looking at real grounds for concern going forward.

TIE: Where does China fit into your global forecast? Will Chinese and other supply bottlenecks continue? The Chinese economy seems to be slowing. I'm not ready to utter the word "stagflation," but to what degree does the role of China play into your outlook for U.S. GDP growth, interest rates, and inflation in 2022?

Summers: China is a major source of uncertainty for itself, and for the global economy. Some years ago, I predicted mean reversion in Chinese growth rates. There has been less mean reversion than I would have expected. Looking at Evergrande and what it signifies for the Chinese real estate sector, which is hypertrophic relative to the Chinese economy, and looking at the demography, rising protectionism, and the increasing extent of state control, I am concerned about China's economic prospects. Potentially, that will have significant consequences for global commodity markets, and for many emerging markets for whom China is an important export destination. Ultimately, it is a negative factor for the U.S. economy. I think the forces coming out of China look to be, right now, more deflationary than stagflationary.

TIE: Talk a bit more about your China worries. Uppermiddle-class Chinese families for so long bought one or two extra properties as an inflation hedge. But that situation is at risk of unwinding, particularly if consumer demand weakens further and credit conditions contract under President Xi Jinping's new inward policies. Will a Chinese real estate collapse be the tripwire of the global economy?

Summers: I am quite concerned about what could emanate from China. In mechanical models, it's not so easy to go from adverse events in China to major global consequences. But then again, it was even harder in those kinds of mechanical models to trace huge linkages from, for example, the Thai baht or the Indonesian rupee to the global economy in the late 1990s. And that is what we saw.

Problems in China are a major source of global risk. Other sources of uncertainty are another pandemic or a mutation of the coronavirus that is significantly more lethal and transmissible, and also a generally extended level of asset valuation. If my suspicions are right that long-term interest rates are substantially too low for the current settings of policy, then there is the risk that the market wakes up to that reality with consequences for bond, stock, and real estate markets.

TIE: In this issue of TIE, we are concentrating on the subject of sovereign debt. Can you comment on the link between America's sovereign debt as a percentage of GDP and the...