‘Western world headed for a state of disaster’ ‘We’re in trouble!’
‘Monetary policy has done everything it can’ . . . Alan Greenspan
FOX BUSINESS NETWORK — These are but a few of the headlines from the former head of the Federal Reserve, Alan Greenspan, who was recently interviewed by Neil Cavuto, senior V.P. of the Fox Business Network.
Greenspan stated his dire warning about the economy. He told Cavuto that the U.S. has “a global problem of a shortage in productivity growth” and is headed for a state of disaster.
“What the Fed does at this particular stage is less important than what the markets are doing. And what the markets are beginning to show us is acceleration in money supply for the first time in a very long… We have a global problem of a shortage in productivity growth and it’s not only the United States but it’s pretty much around the world and it’s being caused by the fact that the populations everywhere in the Western world, for example, are aging and we are not committing enough of our resources to fund that,” he said.
Greenspan said the main challenge confronting our country and the global economy is long-term economic growth.
“Our problem is not recession, which is a short-term economic problem. I think you have a very profound long-term problem of economic growth at a time when the Western world — there is a very large migration from being a worker into being a recipient of social benefits as it is called. And this is legally mandated and all of our countries. The size has got nothing to do with the rate of growth in economic activity, but if we stayed down at the 2 percent economic growth in the United States and elsewhere, we’re not going to be able to fund what we are already legally obligated to spend,” he said.
Former Reagan budget director David Stockman recently told Cavuto that the United States could be on the verge of a market economic collapse but Greenspan says “we need not go that far.”
“Since 1975, the sum of gross domestic savings and entitlements as a percentage of GDP has been remarkably flat and what that tells us is all the way back to 1965 we had essentially been seeing a $1-$1 tradeoff between entitlement growth and gross savings decline. And despite the fact that we are borrowing savings from abroad, it is our rate of capital investment as a percentage of GDP going down.
Greenspan who is “not exactly” a fan of Donald Trump or Hillary Clinton also discussed the candidates’ opposition to trade deals and why they are critical to economic growth.
“People don’t realize, they think that you’re going to shut off, for example, imports from China, that somehow will create jobs in the United States– it doesn’t. Instead of getting goods out of China you will get them out of the Philippines or someplace else. But before they come back to the United States, they will try other places around the world where labor costs are perceived to be cheaper. So the issue of foreign trade is something which has helped the country grow all the way back to 1790 and the presumption that all of a sudden we’re turning off on trade is very narrow-minded in my impression,” he said.
In an interview with Bloomberg News, Greenspan stated that he is not willing to go so far as to condemn negative interest rates as “dangerous,” he does say the global race to the proverbial Keynesian bottom is “counterproductive.”
As far as the US economy is concerned, Greenspan is not optimistic. “We’re in trouble basically because productivity is dead in the water… Real capital investment is way down below average. Why? Because business people are very uncertain about the future.”
Of course, we’re in it not for “the Greenspan put” and without decades of monetary policy largess we might never have had a financial crisis in the first place (David Stockman will tell you all about Greenspan’s role in creating the conditions we now find ourselves in).
As for whether the Dodd-Frank federal legislation has solved anything, Greenspan says no: “The regulations are supposed to be making changes of addressing the problems that existed in 2008 or leading up to 2008. It’s not doing that. Too Big To Fail is a critical issue back then, and now. And, there is nothing in Dodd-Frank. which actually addresses this issue.”
And finally, here’s the punch line. Asked whether he’s optimistic going forward, Greenspan said this: “No. I haven’t been for quite a while. And I won’t be until we resolve the entitlement programs. Nobody wants to touch it. And that is gradually crowding out capital investment, and that’s crowding out productivity, and it’s crowding out the standards of living — where do you want me to go from there?”
In an interview with CNBC, Greenspan said that monetary policy has reached the outward bounds of its effectiveness without another round of quantitative easing. “Monetary policy… has done everything it can unless you want to put additional QE’s (quantitative easings) on. They are not helping that much in the sense that ultimately determines whether or not you’re getting an effect from the QE’s beyond increasing price-to-earnings ratios in the stock market,” he said during an interview with CNBC’s Squawk Alley.
“There is no real evidence that we’re getting an impact on lending and on the economy picking up.” He also stated that he disagreed with International Monetary Fund Managing Director Christine Lagarde that negative interest rates create a net positive impact.
Japanese and European policymakers have pushed some key rates into negative territory. Negative interest rates “hurt in the sense that financial intermediaries require positive interest rates, but I wouldn’t blame it on the negative interest rates, I’d blame it on the policies that guide us to where we are,” Greenspan said.
Anemic productivity growth and flagging corporate profits can be traced to too much entitlement spending as the world’s population ages, Greenspan added.
“If you look at it in a bookkeeping sense, it’s because gross domestic savings, everywhere across the spectrum– the political spectrum– has been severely undercut by social benefits increases in virtually every single major country.”
“It’s fundamentally… A political problem.”
Greenspan said he believed that problem could have been solved in the United States had Congress taken up the fiscal policies put forward by Alan Simpson and Erskine Bowles in 2010. The bipartisan plan created “a very clever way of controlling the deficit.”
Last week in Part 3, we concluded our series of articles about the prospects of a coming recession without doing any research on the expectations of Alan Greenspan. However, we became aware of his comments began to check other sources of quotes from him on the economy in general.
We also became aware of comments by David Stockman, where he was part of a three-person panel on one of the business networks and his suggestion that people should sell out of the stock market.
This was a discussion about the decision by the Federal Reserve to not raise short-term interest rates at this time as had been originally anticipated. The comments by this panel were essentially that the Fed has no idea what to do about the current economic condition in the United States and that they are uncertain what to do about the economic conditions that exist abroad that are influencing the Fed’s monetary policy decisions in the United States.
Experts are all over the map on whether or not ‘Brexit’ (possible British exit from the European Union) will be good for the United States economy or not. You look at the unraveling of the economy in Venezuela, and comments by experts such as Jim Rogers (which we reported previously) and you see a very jumbled up mass throughout the economies of the world. There is no one leader that is going to be a safe haven for investors, but many of the people in the financial community believe that in the end, the Flight to Safety will be beneficial to the U.S. economy as the tallest midget in the room.
Based upon all of these factors and more, we decided to revisit the article about the economy and use the information from the interviews with Alan Greenspan as a platform with which to explain his point of view. We hope that you, our readers, find this information useful as you investigate how to manage your money and/or your retirement.