Former Fed Chairman Alan Greenspan spoke with Tom Keene and Mike McKee for Bloomberg TV & Radio. He discussed the ramifications of negative interest rates, entitlement spending, and declining productivity.
On the state of the U.S. and global economy, he said: “We’re in trouble basically because productivity is dead in the water.”
On whether he is optimistic going forward, Greenspan said: “No. I haven’t been for quite a while. And I won’t be until we can 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.”
Greenspan was critical of negative interest rates but refused to comment directly on the recent decision of the ECB. He is also worried about interest rates and the level of debts.
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Key Quotes
- Entitlements now probably require a three to four percent growth rate in the United States.
- Rate cuts, negative interest rates, buying corporate debt is no part of the solution.
- Gross domestic savings as a percent of GDP has been declining over the years largely because entitlements have dug into them.
- You just can’t print money and buy the infrastructure. Productivity will only increase if there is savings behind the investment.
- We should be more concerned about inflation than we appear to be.
- The issue is how long can we maintain long-term interest rates by continuously pushing money into the system, at rates which I would say, human psychology doesn’t continence.
Interview Transcript Courtesy of Bloomberg
DAVID WESTIN: Thanks very much, Stephanie. So we are here sitting with Dr. Alan Greenspan, who led the Fed for eighteen and a half years. I ask him, he’s very precise about this. So welcome to Bloomberg GO. It’s great to have you here. Beyond that, he’s really one of the major economic thinkers of our era.
So we had the Bank of England just hold their rates. We had the Fed yesterday, we’ve had the Bank of Japan. It’s all about central banks right now. Everyone one of those central banks, whatever their approach, is focused on growth and the problem of getting growth going. …..
GREENSPAN: Well, the fundamental problem, if you dig under the fingers, is — it is ultimately the fact — that entitlements — which are legally required, because that’s what they are; they’re entitlements — will grow wholly independently of what the ability to fund it is. And the ability to fund it is largely related to the GDP. I would say it is hard to know exactly, but it just — entitlements now probably require a three to four percent growth rate in the United States, for example.
WESTIN: I’m sorry — Just to pay for entitlements?
GREENSPAN: Well — no, it requires the context of the types of revenues that arise for government, specifically one form another to fund entitlements. Implicit in where the entitlements are on the spending side is an economic growth probably close to four percent. We’re at two and struggling at two. And therefor what is happening is there has been a significant decline in savings in the society that has gross domestic savings as a percent of GDP has been declining over the years largely because entitlements have dug into them.
And in fact, one way to see that is if the sum on entitlement spending plus gross domestic savings, which incidentally is household and business savings. Some of those two items, as a percentage of GDP, has been relatively constant since 1965. And what that says is for every dollar increase in entitlements, we’ve lost a dollar in gross domestic savings, but gross domestic savings causes gross domestic investment and gross domestic investment is the key element in productivity growth. And so this sequence of starting with an — unfundable retitlements has led to a stagnation in productivity growth.
WESTIN: So to oversimplify, instead of investing in things like plants and equipment, long-term capital assets, we are spending it on entitlements. Those dollars are going for entitlements.
GREENSPAN: Actually — exactly the issue. The interesting thing about it is that during Republican administrations, entitlements grew more than on average during Democratic administrations.
WESTIN: That is your party, after all.
GREENSPAN: That is my party. I want you to observe how much this issue is being discussed in this campaign. This is what — what they should be talking about. The problem is is that entitlements is the third rail of American politics. You touch it and you lose.
WESTIN: Right. But to come back to the central banks for a moment, because we were all fastened on the central banks right now. I listened carefully to your answer. I heard nowhere in there, let’s cut rates, let’s go to negative interest rates, let’s buy corporate debt, the way that ECB is doing. I didn’t hear any of that as part of the solution.
GREENSPAN: Well, because it isn’t.
WESTIN: So what do you think of the ECB buying private corporate debt?
GREENSPAN: I don’t like to comment on — how — people with whom I’ve worked. Second-guessing is a wonderful activity. I love it. But I don’t like — I shouldn’t practice it.
WESTIN: But you first guessed, actually, not second guessed back in 2000 when there was the Soma report that came out under your leadership in the Fed. Were you had all the Federal Reserve system sign on to it with some fairly stringent rules about what — the Federal Reserve, at least — should be investing in, what assets should be investing in. Because you were concerned about distortions in the market.
GREENSPAN: Well — the Federal Reserve is there to act as a central bank to supply liquidity to depository institutions. You can do everything you want there by merely stay with U.S. treasuries. We used to (ph) (inaudible) U.S. Treasury bills made a very short turn — I mean, investing long-term in U.S. treasuries was considered inappropriate. The point is that once you start to invest in anything, where do you stop? And since it appears though the Central Bank, which has got the sovereign credit under its thumb, can produce free money anytime you want. And so what you get is that the political system looks on and says, well hey, this is — How long has this been going on? And you get an extraordinary demand for entitlements and all sorts of programs which are not funded. Why? Because why do they need to be funded? We just print the money.
WESTIN: So let’s come back for (inaudible) investment and I understand you think we should be dealing with entitlements, we should give us the money. But as you say, politically that is very difficult. Why shouldn’t, as an alternative — this wouldn’t be the central bank, this would be the treasury. Why shouldn’t we borrow 30-year money at 2 percent interest rates and invest in infrastructure? Isn’t that a way of getting investment into the system?
GREENSPAN: Well it wouldn’t be, but it would certainly help to fund the system in a way which would be very cheap. Of course, our level of debt is now on the rise and it’s going to accelerate on the upside. And the more of that that is in 30-year issues, if we can put them out there, the better off we are. And I think we need (inaudible).
WESTIN: But if that money was used to invest in things like broadband internet access for all — bridges and roads, traditional infrastructure, basic education for the new market economy, wouldn’t that increase productivity?
GREENSPAN: No. It would increase productivity only if there were savings behind the investment. Although it says double entry bookkeeping, the question is, you just can’t print money and buy the infrastructure, for example. Ultimately inflation begins to take hold. And one of the very — I find that the fact that — I know yesterday, the consumers price index came out, and the last two months at an annual rate have been more than 3 percent. Now I grant the — That the CPI is not the ideal — I should (inaudible) core CPI. Even that’s not the ideal, or statistic to use. But I think we’re going to be watching the inflation issue coming (inaudible).
WESTIN: Shouldn’t we be more concerned about inflation than we appear to be?
GREENSPAN: Very much so.
WESTIN: And what is the proper measure? PCE?
GREENSPAN: Well it is — Yeah, it’s PCE core and that’s not going up into three percent. But I don’t deny that there is a strong deflationary process that’s been going on very much — very similar from what happened in Japan after their crisis — But that’s going to pass and the issue is how long can we maintain long-term interest rates by continuously pushing money into the system, at rates which I would say, human psychology doesn’t continence (ph). I think there is a limit to that.
WESTIN: The Federal Reserve yesterday indicated there won’t be as many rate hikes as were originally thought this year. But they have been fairly consistently wrong in their projections. They have overestimated their ability to raise — rate hikes. And although those numbers have come together a little bit for 2016, if you go out to 2017, 2018, there’s still a fair spread between what the market thinks can be absorbed and what the Fed is singling. Who is right and why is the Fed — it seems to be consistently wrong on this issue?
GREENSPAN: No comment.
WESTIN: Okay. That’s fair enough. From your experience with the Federal Reserve and central banking, is there a practical limitation on the ability of any central bank to raise rates because of foreign exchange at this point?
GREENSPAN: Well, remember when you’re talking about foreign exchange, it’s a two-sided coin. There are those who basically think that everybody’s exchange rate is going up or they’re all going down. It’s a zero sum game. And we know that you (ph) think in terms of what your exchange rate is doing. Always think in terms of what the system as a whole is doing. I mean, it is very obvious that we have been through a period where the dollar has been extremely strong, not because we did things necessarily right, but other people did other things wrong. And so that we ended up, by default, at the top of the heap. But I’m not sure that’s all good.
End Transcript
On the whole, however, that was a surprising good, as well as accurate interview. His comments on entitlements and productivity were generally spot on.
I disagree with Greenspan’s belief that inflation is best measured as price increases in “core PCE” personal consumption expenditures.
Such a belief led to the housing bubble for which Greenspan never admitted responsibility.
Essentially Greenspan chastised central banks for asset bubble blowing polices he started.
Mike “Mish” Shedlock
Greenspan’s “progression” has been Randrhoid, apostate Randrhoid, neo-classical Keynesian and now he’s just confused and can’t decide which failed economic theory to espouse. Keynes was a contemporary of Douglas and Keynesianism was basically watered down, half @ssed plagiarized abstract Douglas that remained unconscious of the on the ground realities of the costing/pricing system ruled by the enforced conventions of cost accounting. Hence it allowed the monopoly, money creating business model of Finance to rule every other business model and 99% of the general populace.
Every current economic theory is way more complex and abstract than it needs to be because they have missed the micro-economic cost accounting reality that rules every enterprise and is hence a macro-economic reality as well.
Alan Greenspan is still as wrong today as he has always been. You’ think with all of his failures that he would have tried to learn something.
Entitlements are crowding out investment? Absolute and utter nonsense. American corporations have a lot of choices on investments: build factories in the US, build factories overseas, buy back their own stocks, and many others. They are just choosing 2 & 3. Neither of which increases US productivity.
Greenspan is just too stupid to even look at what’s going on.
On a rant now…
And Greenspan doesn’t even know that in a partial reserve banking system, banks DON’T LEND OUT SAVINGS!!! What an ultra-maroon!
Real savings, Jon, is what Greenspan is addressing- not the credit created by the banking system. Real savings are the goods and services dedicated to the production of investment goods, not the money/credit per se. These only arise because someone voluntarily decided not to consume those goods and services in an unproductive manner-i.e. in a consumptive manner. For example, me not taking that vacation in Hawaii using my wages earned, but instead funding my brother’s start up business.
What Greenspan is warning about is the attempt to increase investment via by-passing the real savings phase and creating an un-backed bid for those goods and services. Sure, the un-backed credit can bid away the goods and services, but it creates inflation and disconnects the one who forgoes the consumption he/she earned, and awards to the one who did not. Yes, this is how the fractional reserve system operates today, but it is also how you get multiple increases in debt vs production. Greenspan is warning about the coming full monetization of government debt- something you can already see the calls for in fiscal policy and infrastructure “investment”.
Greenspan, once out of the Fed, seems to be returning to his sound/hard money philosophy. A sound money prevents such extensions of un-backed credit from getting very far since you can’t paper things over so easily- people start demanding payments you can’t create out of thin air.
Yancey – you are correct
Well stated
Of course banks lend out savings, while the fractional banking system can increase the money supply that does not mean that the banks create money to lend. Every dollar lent buy a bank has to be raised, about 8-10% from equity and the rest from debt and deposits. If this were not true why would banks bid for deposits including the high (relatively) online rates. I have been in banking for about 30 years and I can assure you that we have to find every dollar and these are real savings.
Bingo Yancy wins the prize well stated Yancy!
@David,
No banks do not lend out savings. They bid for deposits because they are required, by law, to maintain a reserve. The act of forcing banks to maintain reserves gives the federal reserve control over them, forces them to provide a safe deposit utility for the community, and keeps any Joe off the street from starting his own bank.
When a bank makes a loan, all it does is debits a receivables asset (the new loan) and credits a new deposit liability. Money is created out of this air.
And of course in a world where QE has created trillions of excess reserves, the bid for deposits is extremely low.
Jon, repeating your mistaken impression does not make it right. As anyone who is a senior exec in a bank or bank analyst or auditor can tell you, if commen sense does not, banks have to have a source of actual funds for every dollar lent. If you go through a 10k or a fed call report it will show this. Unfortunately people equate the statement that bank lending increases the money supply with actually creating cash.
Rant:
He said inflation and deflation. Is his speech still inscrutable?
Jon you are wrong
Yancey wins the debate between the two of you
Mish,
You and Yancey will never understand (fundamentally in your respective souls) that the economy is not a zero sum game. Real resources are human labor and the raw products of mother earth. If I have millions and millions of unemployed/underemployed people and mounds of raw materials stockpiled in China or wherever, I do not need to “save” anything.
By voluntarily (important word to Libertarians) choosing to remove resources from the economy (saving) in order to later on “invest” said savings in your brother’s startup, you are just trading one person’s production for another: The Hawaiian travel agency produces less so that the brother’s startup can produce more. Zero sum.
Far better to take the vacation, and borrow the money to invest (which is created out of thin air). Then you get a vacation, the vacation company can produce more, and your brother can produce more. And new money is made available intermediate the greater production. The added revenues at the Hawaiian production may even find their way back into the brother’s startup making him even better off. Even the banker makes on honest living assuming it is a profitable investment.
Jon,
Spending the money on a Hawaiian vacation, leaves the next guy exactly the same off as you. No change at all. By spending it on an investment good, in the future, the same number of people, making the same effort, can produce a bit more. That’s how productivity grows, and hence, how an economy gets wealthier.
There are no “underemployed/unemployed” people huddled around valuable commodity stockpiles in China. nor anywhere else. If those people were willing and able to buy the commodities at a price the owners would be willing to sell for, and turn it into more valuable final goods, they would have. Assuming you are right about the unemployed and willing to work part, the problem is the value the current commodity owners place on their supposed stockpiles. Which is unnaturally high, because the cost to just sit on them instead of “taking a loss” is virtually nil, in a world where interests are artificially kept at zero.
“Future Savings” can also underlie financing of positive NPV projects whether undertaken by private individuals or governments.
“Alan Greenspan is still as wrong today as he has always been. You’ think with all of his failures that he would have tried to learn something.”
Greenspan did learn something. How to cast blame on anyone/anything but himself. It is the ultimate act of a member of the political party of personal responsibility. Over there, it’s their fault.
Other than his self-promotional book, Greenspan has spoken much truth recently.
Mish
Note that Greenspan is silent about the bloated military budget. The idea that entitlements can be cut while war spending continues to surge is totally absurd.
The war machine is, in strictly legal and budgetary terms, paid for in a more pay-as-you-go fashion. The biggest problem with the entitlements, is that they are supposedly “promised” sans any backing. Hence, are straight forward to project into the future, since they supposedly cannot be altered. While war making is a discretionary peccadillo, to be enjoyed out of discretionary funds.
Of course, in reality, as everywhere it has been tried has shown; when it comes down to a fight for survival between soldiers and geezers, you’d have to be quite naive to place your bets on the latter.
Is this the same Greensputum who started the low interest rates will solve everything bandwagon? Next we’ll have ben shalom criticizing low interest rates.
But, but, but….. My low interest rates were only temporary……… Like, in Japan…….
Is Greensputum grousing about Social Security when he bitches about “entitlements”? Prepaid for by decades of taxes on wages, frittered away on continual wars since Korea – all untaxed, and now too expensive or economically unproductive to repay?
This man must have had something on someone to get where he did.
The entitled ones…tbtf….et al….
Goldman Sachs probed in alleged Treasury rigging
Washington’s probe into the alleged rigging of the $13 trillion US Treasurys market by Wall Street banks has narrowed its focus to a handful of firms — including Goldman Sachs, The Post has learned.
In addition, European authorities have opened up their own investigation into possible Treasurys bid-rigging, sources said.
Investigators in the fraud division of the Justice Department have obtained chats and e-mails from Goldman that appear to implicate the company in manipulating the price of Treasury bonds, according to two sources familiar with the investigation.
Those chats and e-mails are being analyzed to determine if traders at other banks could be involved with any possible bid-rigging of US government debt, those two people said.
The identities of any traders in investigators’ cross-hairs couldn’t be learned.
Goldman is said to be cooperating with the probe, one person said.
http://nypost.com/2016/03/20/goldman-sachs-allegedly-rigged-prices-of-treasury-bonds/
…in other developments, the Justice Dept investigators are said to have left copies of their resumes with the human resource folks at Goldman Sachs.
It is painful to watch Alan Greenspan attempt to stand in the light, after spending so much time on the dark side. I think he is attempting to leave a positive image on his legacy, after abandoning his common sense when joining the establishment financial elite.
“The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
This is the shabby secret of the welfare statist’s tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights”.
– Alan Greenspan 1967
MISH, BEST ARTICLE EVER, THANKS….ERIC WALTON
Mr.”I found a flaw in my model” is back again.
Without further ado, please die Sir, the world will be a better place without your discredited drivel
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And, Mish, the word I think you were looking for is countenance, not continence, though I could see a humorous interpretation of that!
Greenspan’s “analysis” is flawed. Social security funding comes from taxes on wages and salaries. Increased productivity does not result in higher wages/salaries. That correlation ended in the early 1970s. Therefore, increased productivity will not lead to greater funding for social security.
As far as “not enough investment”, how does Greenspan explain the mounds of cash companies have been sitting on, the stock buybacks, the speculation, etc. That’s where the investment/savings is going to. The idea of investing in “plants and equipment” in the United States is ludicrous and China already has enough manufacturing capacity.
Please remember that government in all forms is the biggest entitlement of all. Government is mostly about dividing the pie for the deserving few and very little about making more pie for all.
Government: “Don’t worry citizen, we’ll take care of your retirement. Just give us 15% and we’ll do the rest.”
Austrians: “What a crock of…”
Government: “Citizen, who are you going to believe? The Austrians (Hitler was from Austria) or the guy promising you a brighter future?”
Years later…
Government: “Hey well, remember that money we were supposed to save for you? Well, funny thing, turns out we spent it on a bunch of stuff. But if you give us a lot more we promise to not do that again…”
During the Reagan administration Greenspan chaired a commission charged with solving the troubled Social Security funding mechanics. Their recommendation was enacted into law. Their solution was….wait for it…..quadrupling the payroll tax. Sometimes problem solving is an easy gig. So Greenspan’s record of reigning in entitlement programs is a bit suspect. That doesn’t make his position in the interview wrong but if a person says one thing when he is out of power and does another when he is in power we call that person a hack.
Never mentioned in entitlements are state and local government employee pensions, as we ll as state and local welfare-type programs. These are likely to amount to a larger sum than federal entitlement programs.
Yancey: “Greenspan, once out of the Fed, seems to be returning to his sound/hard money philosophy.”
Trillions of dollars too late. Greenspan’s reckless damage is already done, so his round trip of philosophy is absolutely meaningless. Bernanke lamented no corporate head was prosecuted while he was in charge. Bernanke never referred anyone for prosecution, though. Lamenting means nothing after the fact. He purposely did nothing when he had the power to, just as Greenspan had. Each FED chairperson can do the same, each in their turn. What is the result of that going to be? Nothing good.
Is he? Or is he perpetuating the myth that he didn’t set up the 2008 “crisis” in the first place, and then resign before its successful conclusion, to begin the “not my fault” narrative?
When Old Alan made the pro gold statement quoted above, in ’67, his concerns were about the state robbing the “owners of wealth.”
What happened soon thereafter, was that instead of relying on gold as a protection, the owners of wealth bought the state instead. Which allowed them to not only protect their wealth, but to confiscate any wealth generated by the labors of others as well. Which, him being one of “them”, Old Alan was perfectly fine with. Crank out free money for his wealthy social circle, so that their income derived from “asset appreciation”, vastly outstripped the debased income of those who had to work for it.
But then, as was always inevitable, you get to the point where Alan’s little clique of “owners of wealth”, have already taken it all. So that there is nothing more to take, no matter how bought and paid for the state apparatus has become. And then, meaning just about now, the game for Alan becomes one of providing external means the “owners of wealth” can protect their loot with again…..
He’s been pretty consistent his whole life, if you just know what is important to him.
I’m not sure I understand the relationship between entitlements and productivity that Greenspan alludes to. He seems to find a causal relationship where higher entitlements necessarily drive down productivity by reducing savings, and points to historical relationship statistics for this ratio. But productivity is not necessarily driven entirely by savings, so the entire Greenspan view is questionable from that perspective. Of course, as others have pointed out, military spending is completely absent from the discussion, and transfer of spending from military to entitlements could easily take care of the entire issue.
In 2013, entitlement spending accounted for about 49% of federal spending while national defense accounted for around 18% of federal spending. Now I am sure that there is plenty of waste in the defense budget, and I am all for cutting out that waste. However, even if you cut significantly into national defense spending, we still have a major issue when it comes to entitlements-one that cannot be fixed by defense budget cuts alone.
The only thing I would disagree with is Greenspan’s fear inflation is misplaced. Deflation is the force rearing its head. The fact that bond markets can’t find proper risk/reward opportunities in stocks is a clear indication of this force. The fact that interest rates are negative in many developed countries is a clear indication Deflation is winning.
so how do you reduce entitlements when the way companies are increasing productivity is to lay people off and install robots or ship the jobs overseas, hire H1B visa or illegals
everything companies are doing now to increase profits and productivity INCREASES entitlements later and also reduces profits and productivity later as people on welfare can’t afford the goods the companies make.
Nobody is entitled to money that is taken from a generation that wasn’t even born to vote on it. This is what all entitlement programs are. The boomers should pay themselves with whatever they have. Their social security contributions have already been spent.
So the fact that politicians spent the SS funds boomers paid, means they are not entitled to the very money they earned and paid into the system?
Martin you want to blame boomers that paid all their lives into a system that was created before they too were born. FDR created this mess long before boomers came into existence.
PSYOPS is alive and well in you young ones!
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The real problem is entitlements for the upper 1% who get unreasonable tax breaks while exporting jobs and destroying the middle class.
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