by Mish

Greenspan Quotes

  1. We could see a shift away from excessively low interest rates “fairly soon”.
  2. “I think up in the area of 3 to 4, or 5 percent, eventually. That’s what rates have been historically, not only for hundreds of years, but thousands of years.”
  3. “We’re moving into the very early stages of inflation acceleration. That could be the trigger. There is only one long-term direction in interest rates and that is up.”
  4. “It’s a problem, as in going from where we are now to 4 or 5 percent. There’s a whole structure of adjustments which have taken place, basically since 2008, which have to be unwound, and that’s not going to be done without a problem.”
  5. If you listen to the debates and the primaries, nobody is addressing the fundamental issues that need to be addressed. Entitlements are rising and choking off gross domestic savings, and ultimately gross, domestic investment. And it’s the major cause of the reason why output per hour and productivity were so flat, not only in the United States, but throughout the developed world.”

Greenspan Video

Click on the above link for an excellent video.

No Savings Glut

Points five above is key. It’s really about socialism and free handouts.

In contrast to the widely-held “saving glut” thesis of Ben Bernanke, Larry Summers, and others, Greenspan, for all his faults, understands savings are both necessary and have been crowded out.

Math for Greenspan

I rather doubt we get to 5% rates or even 2% rates “fairly soon”. At an interest rate of 4%, interest on the national debt will soar as noted by Q&A: Everything You Need to Know About the National Debt.

The Congressional Budget Office projects the interest rate on ten-year Treasury bonds will climb from slightly over 2 percent today to over 4 percent by 2019. As a result, interest payments will more than triple from $250 billion in 2016 to more than $800 billion in 2026. By 2030, interest will represent over 14 percent of the federal budget and continue to climb. This represents money that cannot be spent on other government priorities such as education, national defense, research or infrastructure.

Interest Rate and Growth Projections

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We are already crowding out savings at a mere 0.50% interest rate. That problem will more than triple by 2026 according to the CBO. Unfortunately, that is an extremely optimistic projection.

It’s equally save to presume GDP will grow much slower than projected over the next 10 years.

Lacy Hunt at Hoisington Investment Management also understands the effect of debt on the economy and interest rates. For discussion, please seeNegative Multiplier of Government Debt.

I suspect we may be in a bit of an inflation scare. For details, please see Is the Rise in Price Inflation Transitory?

Mike “Mish” Shedlock

Greenspan: Worried About Inflation, Says “Entitlements Crowding Out Investment, Productivity is Dead

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Good Reason to Expect Recession: Greenspan Doesn't

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Greenspan Predicts Housing Bust

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Bubblicious Debate: Greenspan Says “Bond Bubble About to Break”, No Stock Market Bubble

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Lacy Hunt: Secular Low in Long-Term Treasury Bond Yields Remains Ahead

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Greenspan Admits ‘Flaw’ in His Market Ideology

Speaking before Congress Greenspan Concedes to ‘Flaw’ in His Market Ideology.

Diving Into the Medical CPI: Are Your Medical Expenses Up Only 5% from Year Ago?

On November 1, I posted a couple of charts from Variant Perception that shows medical price inflation plus rent inflation is up nearly 9% from a year ago.

Long-Term Mortgage Delinquencies Seriously Under-Reported

Keith Jurow, a real estate analyst and author of the Capital Preservation Real Estate Report, pinged me a few days ago with his analysis that suggests long-term mortgage delinquencies are seriously under-reported.

Negative Interest Rate Mutiny in Germany, Japan

Banks in Japan and Europe are fed up with central bank negative interest rate policies that cost the banks money.