FORMER FEDERAL RESERVE CHAIRMAN ALAN GREENSPAN TELLS FOX BUSINESS NETWORK THAT WE’RE ON A “VERY PERSISTENT MOVE FROM DEFLATION TO INFLATION”

In an interview on FOX Business Network’s (FBN) Mornings with Maria (weekdays, 6a-9a/ET), former Federal Reserve Chairman Alan Greespan discusses the Bank of England not cutting interest rates and Japan’s economy with anchor Maria Bartiromo. When asked about the Bank of England’s rate, Greenspan said, “I think we are on the edge now of a significant change in the global outlook” and that it’s a “very persistent move from deflation to inflation.” Greenspan also commented on negative interest rates in Japan saying, “it’s not worrisome in any sense” and that “it’s not going to last very much longer.”

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(C) Maneet Ahuja – with permission to ValueWalk

On the Bank of England not cutting interest rates:
“Well, I can’t comment very specifically on the Bank of England’s rate, but I think we are on the edge now of a significant change in the global outlook, and it’s the very slow, very turgid, very persistent move from deflation to inflation.  We’re seeing the very early signs of a process of inflation arising, first, I might add, in an area where it must occur, which is in the rate of increase and transaction balances, so-called M2 in the money supply, because the only thing that ultimately determines the ultimate price level is the money supply.  It’s what the data show going back 100 years. The issue now is, we haven’t quite clearly got a breakthrough…I think the stock market is showing the same pressure.  In order to get out of this particular phase, we have to go through a phase which looks fairly positive, meaning stock markets move, yield rates, I might add, rise in the process, but it will look more like a normal recovery in economic activity.  It’s not that at all.  It’s, they’re moving towards an inflationary environment where we have so much purchasing power out there that is unused, and this is not only the United States, it’s virtually everywhere.  It has to break through at some point.  I don’t know when.  It’s a wholly new phenomenon.  It could go on for weeks or even months, but I think we’re on our way out of this particular phase, which has dogged us really since it hit the Japanese a long time ago.”

On whether we are going to see a weakening in Europe:

“I think Europe is a separate issue for the moment. I think, yes, if we’re starting to move on the price inflationary, which remember, we have not yet seen, and it’s still latent in the data — but when that starts, the presumption that it’s going to stabilize at some moderate rate is, I think, foolish.  History tells us that we will get out of a deflation area, but we will be in nirvana, so to speak, for a very short period of time as we move into a fear of inflation as the markets begin to move.  And I can’t say I — it is a wholly new environment.  We’ve never been through anything like this.  But the presumption that the inflationary pressures are going to remove the deflationary, and that is good, that will last for about three weeks, maybe four.  That’s not what the issue is.  The issue is — it’s a different issue completely.”

On whether negative interest rates in Japan are worrisome:

“Well, it’s not worrisome in any sense.  I know what’s causing it and I know it’s not going to last very much longer.  And basically, negative interest rates occur when a hard currency, like the Swiss franc, or even the Deutsche mark, or the euro aspect of the Deutsche mark — whenever you see strong currencies in a normal market, they’re spread against, say, Spain and Italy’s ten year notes — these are relatively stable through time.  But as the rates overall go down, clearly, at some point, as the rates go down, you’re going to pick up negative rates for the highest quality currencies, like, of course, the Swiss franc.  And I think that this is just a passing fancy.  Fundamentally, of course, we could always arbitrage against negative interest rates, but it would require a huge amount of currency in storage, and I don’t think anybody is willing to do that at the rates that they are now.  They might be if you got extremely high negative rates, but I don’t expect that.  I expect these to disappear shortly.  So I’m groping for where the next outlook is.  I know it isn’t in our past.”

On the economic growth wider than ever in Japan:

“What we’re looking at now is, as the Congressional Budget Office indicated earlier this week, is a significant increase in the budget deficit.  And the reason that’s going to occur is that we’re seeing an aging of the population very rapidly, and that means essentially that an ever increasing share of those in the population who are entitled to Medicare and Social Security rise inexorably over the next number of years, and that is going to mean that we’re going to get entitlements driving out, or crowding out, basically, gross domestic savings.  That’s going to hit gross domestic investment out of necessity, and when gross domestic investment is weakened, as we’ve seen over the last half century, what happens is, productivity slows down.”

On Brexit:
“Let me just say one thing parenthetically about that October 19, 1987, one-day crash — you do not see a huge loss in market value of stocks reflected in the GDP.  The GDP has kept going up, and that told us a great deal about how markets were.  But leaving that aside, the rest of the world is in far worse shape than we.  Clearly, Italy is in difficulty.  They have major debt problems.  The euro in general isn’t having problems.  Basically — remember, the euro was constructed for the purpose of assisting and moving the European community towards a structure which was consolidated governments.”

On whether businesses will start spending again soon:

“Well, I frankly don’t know.  I think that we’re not going to get a significant growth because we don’t have the productivity and we’re not going to do what is required to get the productivity, which is essentially to slow down the rate of entitlement.  I’ve argued this until I’m tired of doing it, but there’s no question that the entitlements have been crowding out, virtually dollar for dollar, gross domestic savings in the United States.  The data are unequivocalized.  The only issue is that people go, how could it happen with interest rates so low?  There are reasons how that could happen.  It’s got to do with the spread of between 5-year notes and 30-year bonds.”