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.

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