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According to former central banker Alan Greenspan, today we are witnessing the Deflate of a global bond bubble. The former chairman of the Federal Reserve is also very concerned about the lack of productivity growth and the aging population. As a result, we see rising inflation with stagnating economic growth, a situation known as stagflation.
According to Greenspan, the current economic problems are very difficult to address, because it is no longer possible to raise interest rates drastically. The last time the U.S. economy went into stagflation was in the 1970s, when the central bank raised interest rates to 20% to get the economy back on track. This solution is not possible today, because the debts are much higher now than they were then.
Greenspan is concerned about the United States budget. Increasing social constraints will lead to a further increase in budget deficits, which means that even more borrowing will be required. That is becoming increasingly difficult, because, according to Greenspan, there is less and less enthusiasm worldwide to lend money to the American government. We've been doing the whole interview at Bloomberg transcripted for you.
I have serious doubts. What we are seeing is a transition from stagnation to stagflation, a combination of a stagnant economy and rising inflation. We haven't seen that since the 1970s. The first effect of stagflation is that prices start to rise and that changes a lot of things, such as profit margins, the price structure, and the stock market. For a while, that gives the impression that people are spending more.
However, this cannot continue because the economic stagnation is holding it back. It is an exceptional situation that we will have to deal with in the coming years. I think you have to look back at different times in history when something like that happened. The last time was in the 1970s. It's a global phenomenon now, in fact, throughout the developed world.
Economic growth is when the whole structure of society flips from period of contraction in economic activity to a kind of reset, after which everything moves upward again. This is a very rapid change. The problem we have now is not the price-to-earnings ratio of stocks, but the ratio of bond prices to interest rates. We have a bond bubble that is about to deflate.
This still has a long way to go and will have an impact on the economic outlook. This is really something else. We've had so few stagflations that we don't have models to see what to do next.
It could be if it were constructive. There is nothing wrong with various stimulus programs that make the economic structure more productive in the long run. But in the long term, it has to be financed. At the moment, we have very serious budgetary problems. As soon as the new budget arrives, we will soon find out. Where should you get the money from? If you accumulate larger and larger deficits, you will only feed inflation.
That is possible, but not likely. The reason is that we have a fundamental problem that I have discussed before. If the U.S. ages, then you get a shift in the proportion of people over the age of 65. This is independent of the economic movements. And this is now happening in all developed countries. We are all ageing, Japan is the most extreme example of this.
We've never had this kind of challenge before, so we don't know how to tackle them. We are now looking at the baby boom generation as a fiscal problem. You could say that we should raise taxes on the rich, but those taxes are already high. More than 90% of individual tax liabilities in the U.S. are already with the higher incomes. You can still get a little more there, but we don't have much room for manoeuvre to increase the tax burden. Taxes on corporations are almost the highest in the world, and then we have all kinds of other taxes.
We've tried all kinds of things. Many tax expenditures can be adjusted, but they never made it through Congress. This could have solved the problem.
Not now. A necessary condition for this is that the productivity per hour is above 2% per year. That is now less than half a percent per year. Over the past five years, productivity has barely grown. If you know what the productivity per hour is and what the number of hours worked is, then you can estimate the future GDP. But as long as productivity doesn't grow, you won't get GDP growth.
With an annual increase in social obligations of 9%, you eat up the savings. Those are savings that you need for capital investment and that is the key to productivity growth. It is these social obligations that no one wants to discuss. If you want to be president and you start talking about this, you're going to lose. Both the Democrats and the Republicans don't want to talk about this.
As long as that is not resolved, I do not see how we can get the economy growing again. We borrow money from abroad, now about $8 trillion dollars. You can't keep doing that and I wonder if we can borrow much more from abroad. We also don't have enough savings domestically.
The question is how fast the money supply greets. The stagflation is relevant because there are two forces at work. The money supply grew stably at 6% year-on-year earlier this year , but is now rising to 9% year-on-year. At the same time, we see that unemployment is at its lowest level, we cannot go much lower.
We will have an increasingly tight labor market and then wages will rise. We are already seeing that. If interest rates rise and the money supply increases, then you get more inflation. Both the Democrats and the Republicans don't want to address this problem, it's a hot potato politically.
Many people think that central banks can control interest rates, if only they could. Volcker had to bring the interest rate to 20% to bring the system back into balance. The Federal Reserve or other central banks would now lose control at that level. It's very difficult, there's not a lot of realism. Everyone wants to bring inflation to 2% and I hope it can stay there. But this is not an environment for two percent inflation.
You have to go back to the origins of the euro. Adenauer and De Gaulle met at the end of World War II. "We've fought each other twice and look what it has yielded."At the time, there was a great will to set up institutions that would make World War III impossible on the European continent. And that meant political consolidation, as crazy as that may sound today.
We had the ECSC and other institutions. The whole European system was set up in that context. It strikes me that it is precisely in this context that we have come to the point where everyone is now concerned about the survival of the euro. The assumption was that if you put all the coins together, it would work. That a country like Italy would start behaving like Germany. The expectation was that countries would grow together, but that has not happened from the beginning in 1999 until now. I am very worried about a euro crisis, because there is no major institution that can support the euro if it gets into trouble.
Every morning I look at this spread and at the Target 2 balance. Target 2 is a mechanism of the European Central Bank, through which the individual central banks lend money to each other. This is a zero sum game. The Bundesbank has lent more than €600 billion to the rest, especially to Spain and Italy. When you see that the assets of the Bundesbank are increasing and the liabilities of Spain and Italy are equal, you know that this cannot go on forever. That has to break at some point.
The danger is that Italy is a bigger problem than we think. Pemier Renzi had the right solutions for that, but they were voted down. This is a global phenomenon. We are seeing a shift internationally, think of Brexit, Scotland, Ireland. And then there's Spain, where it's always restless. And finally, the problem child Greece, which entered the Eurozone illegally. They've admitted as much, but they're still in it. The system is not stable.
Certainly. China was a key figure in the model, but is now pulling back. The yuan weakens significantly. The reason is that the structure is changing. There is an inconsistency in China. They want to become a capitalist economy, but that is not possible in a country with only one party. We then say that they are manipulating the currency, but not in the direction we think. They are currently trying to back the coin with capital controls, but they are unsuccessful.
The currency is trying to become an international currency. A year ago, everyone thought we were going to trade in the yuan instead of the dollar. Not so. There's no evidence that that's going to happen.
Everyone is manipulating their currency today and that's the problem. We're all guilty, but it's a ''zero sum game'. This may have been a meaningful question 15 years ago, but now it's not a significant topic.
Individual countries can do this. Globalisation is a fragile structure, it can easily turn around. It requires a free market with a free society. We as the United States propagated this to the world, we have lost it. Globalisation can and I believe that it is retreating. In the 1930s, we tried to solve everything through the government, but that didn't work. This is now happening worldwide.
Globalisation was very positive, the two emerging countries today are China and India. But what you need is some kind of leadership in the world, which we were in every conceivable way. But it doesn't work that way anymore.
Globally, we are seeing an aging population and we have to recognize that we cannot continue to spend as we have done so far. It's about fiscal policy, not monetary policy. Central banks around the world have problems, but the biggest problem is the ageing population, which is mainly a fiscal problem.
