Alan Greenspan Sees ‘Two Separate Economies’

Alan Greenspan
Alan Greenspan

There is a unique, structural imbalance in the U.S. economy, former Federal Reserve Chairman Alan Greenspan said Wednesday on CNBC.

“It may be a recession, but I’m not seeing it at the moment, and it’s not relevant as far as I can see,” he said in an interview on “The Kudlow Report.”

The economy, Greenspan said, is unlike anything previously seen.

“The best way I would describe it is to think in terms of two separate economies,” he said. “One is probably 90, 92 percent of the GDP and is doing actually reasonably well. The other 8 percent is largely structures or more exactly, long-lived assets. The attitude of business and households against committing to long-lived assets is extraordinarily suppressed.”

Host Larry Kudlow suggested it resembled a capital strike.

“It’s a capital strike for long-lived buildings, you know, those with 20 years of potential life and longer,” Greenspan said. “It’s both household and residential. The rest of the economy is not doing well but is doing reasonably well. But if you take 50 percent out of 8 percent of the economy, that's the 4 percentage points which the unemployment rate has run up. And that's where all of the problem is.”

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On the topic of quantitative easing, Greenspan noted that he has refrained from commenting on Fed policy.

“I will say this, however, that the data do show that the expansion of assets has had very little impact on the economy, for an important reason, that we've created a major increase in the asset side of the Fed balance sheet and a very large trillion and a half increase in excess reserves,” he said.

But, Greenspan added, there is no evidence that what were essentially deposits into the Federal Reserve Bank system were being re-loaned.

Meanwhile, the effect of nearly $1 trillion of government stimulus spending appeared counterintuitive.

“Well, actually, strangely as it may seem, the data are showing that it’s negative,” Greenspan said.

“I'm very surprised at the data. But the data themselves are very, very interesting. We show, for example, that if you try to measure the elements of uncertainty in the system, I find that you—there are two ways of doing this. For the business sector, what I tend to do is to look at the share of cash flow that's invested in illiquid assets. The disinclination of business people to take liquid assets and put them into irredeemable long-term assets, even if the rates of return are potentially high, is extraordinarily low at this stage, and indeed, the ratio itself of fixed investment to cash flow from a nonfinancial corporate sector is at the lowest level since 1935.”

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Greenspan added that the data show that this “extraordinary expansion” in the deficit is crowding out private-sector investment, a result he said “shocked” him.

“But what it is, if it’s not AAA corporates that are being pushed out or even probably BBB, investment grade, there is major evidence that the extraordinary rise in the deficit is pre-empting the savings that usually fund capital investment,” he said. “But where it is, is it’s heavily concentrated in those areas which pay high interest rates. I mean, to be sure, at 2 percent, you're not going to be stopped by anything.”

Smaller businesses, Greenspan pointed out, would have to pay higher rates. And that has a broad impact.

“It affects everything,” he said. “But the point being is that all of that decline that we’re looking in this sort of second part of the economy is coming in this direction and a very large part of that is the result of the large deficit itself, including the problem with Medicare.”

Greenspan went on to say that he did not think the economy was creating enough GDP to implement and fund entitlement programs.

“Obviously, health care entitlements are the critical issue where the expansion is occurring,” he said. “But when I look at the data, what I see, basically, is an extraordinary set of pressures which say to me that by, say, 2030, government will not be able to fulfill the promises now legally on the books in real terms.”

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