Former Federal Reserve Chairman Alan Greenspan told Bloomberg Television's Trish Regan and Adam Johnson on "Street Smart" today that "I guess" Bitcoin is a bubble. He said, "the question is I do not understand where the backing of Bitcoin is coming from… Individuals with very high net worth and who have great reputations could create their own currency because people would be willing to exchange their checks with others probably at par. That is not the case with Bitcoin."
Alan Greenspan: I'm More Concerned About Fundamentals
Alan Greenspan on whether Bitcoin is a bubble:
"I guess so. Let me say that currencies to be exchangeable have to be backed by something. When we had – when we were on the gold standard, gold and silver had intrinsic value and people would be willing to exchange their goods and services for gold or silver and wouldn’t ask any questions of where the monies came from. Alternatively, when we went into currencies, it was the backing off the issuer of the currency. In other words, if some individual had great credit standing, his checks could circulate as money. But the question is I do not understand where the backing of bitcoin is coming from. There is no fundamental issue of capabilities of repaying it in anything which is universally acceptable which is either intrinsic value of the currency or the credit or trust of the individual who is issuing the money, whether it’s a government or an individual. Individuals with very high net worth and who have great reputations could create their own currency because people would be willing to exchange their checks with others probably at par. That is not the case with bitcoin."
Alan Greenspan on whether Bitcoin could be the new gold:
"No. Well, see that – it has to – it has to have intrinsic value. You have to really stretch your imagination to infer what the intrinsic value of bitcoin is. I haven’t been able to do it. Maybe somebody else can. But if – you asked me is this a bubble in bitcoin. Yeah, it’s a bubble."
Alan Greenspan on what has changed with investors' perception about gold this year:
"Well first of all, remember we used to be at $35 an ounce. And then even several years ago we were well under $1,000 an ounce now we’re $1,2000 or thereabouts. And to be sure, we’ve come down a bit but it’s after a very significant rise. So the issue here is that the reasons for buying gold were, one, fears of significant inflation first of all which didn’t materialize, and just generally the notion that inflation looks to be relatively stable for the indefinite future and that therefore the hedging aspects of gold are really not that all necessary at the moment. And so what you’re getting is clearly this type of problem which one would ordinarily expect when the – the basic reasons for holding gold are not – not that strong. My – I think that we’re probably at a gold price now which is not all that different from where it probably would be considering that it’s, on the one hand a commodity, copper, on the other hand a monetary asset like the Swiss franc used to be before they fixed it against the euro."
Alan Greenspan on new market highs and whether we've entered a new age of irrational exuberance:
"No, I don’t think that’s the best way to describe what we’re looking at. I tend to look at the market as being made up of two major components. One is the fundamentals of earnings obviously and long-term interest rates and the various risk premiums associated with them. On top of that, we have the valuation process run largely by the extent of animal spirits, to the extent that they’re operating. And that basically includes euphoria, fear and herding. The concept of bubbles has to apply solely to the latter or has no meaning. And in that context, you have to measure what we are looking at with respect to these valuations. And there’s no bubble there in the sense that…"
Alan Greenspan on whether people should look at the median price to sales ratio:
"I look at it, but I find that the most useful thing to capture the extent to which we’re pricing products above what the fundamentals is essentially what we call the equity premium. That is, the price that individuals are willing to hold stocks at. And JPMorgan Chase & Co. (NYSE:JPM), which has got the best equity premium measure that I know of, up until a couple of years ago had the highest ratio, meaning the lowest value – the lowest markups – I’m sorry, the lowest valuations for stocks in 50 years. Now of course it’s come down a significant amount with the big bulge that’s occurred in the market, and obviously you can’t continue doing what we’re doing. I’m more concerned about the fundamentals at this stage…the market than I am – yeah, exactly. Than I am about the state of euphoria, fear and herding."
Alan Greenspan on what he's most concerned about right now:
"Well first of all, profits have been rising extraordinarily, as you know. And the result is that the share of national income has been rising to levels which cannot persist in the sense that if you get even a slowdown in the rate of increase in the share of profits to national income, that in and of itself slows the growth in earnings and eventually slows the expectations of future earnings. So that’s one of them. But the main issue is interest rates. As I’ve written in the book that I published a few weeks ago, it’s very difficult for me to see that we’re not on the edge of a significant rise in long-term rates. I don’t know when that is. I do know that we are very significantly undervalued. The rates are significantly lower than they would ordinarily be and that obviously is the result of various QE1, QE2 and QE3, which essentially have focused on not monetary policy but buying long-term assets. That’s not something the Fed has done in the past and it’s going to be very interesting to see in retrospect how successful this whole process has been. But it clearly is driving the markets."
Alan Greenspan on the Fed's quantitative easing
"Well I’ve stayed away from commenting on current policy. But let me just say that what is actual causing this is not related to the Fed. It’s essentially the fact that if you look at the data on the