Greenspan: "Interest rates will go back to 4 to 5 percent"

According to Alan Greenspan, interest rates will eventually return to the historical average of four to five percent. Rising inflation will trigger this trend, the former Federal Reserve chairman expects. In an interview with Bloomberg he says that interest rates on U.S. 10-year bonds could rise very quickly if inflation rises.

Greenspan says he is already seeing signs of rising inflation, which will eventually end an era of extremely low interest rates. "There's only one direction in which interest rates can move in the long term and that's up."  This is a dangerous development, because with rising interest rates and bond prices falling, investors will be less willing to finance US deficits.

Greenspan also notes in the interview that in several Western countries, productivity is barely growing, which he says is the result of an increasingly expensive welfare state.

Bloomberg: How long can the bull market in government bonds continue and what will burst the bubble?

Greenspan: It may well be that we are in the early phase of accelerating inflation. That could be the trigger. But it's a very unusual bond market, we've never seen anything like this before with such low interest rates for such a long period of time. In fact, interest rates have never been as low as they are now. As a result, we do not have a historical example of how to deal with this. All we can say is that there is only one direction in which the market can move in the long term, and that is up.

A word about the election: What options does the new president have for the economy? What else can the new president do, given the state of the economy and the balance sheet of the U.S. government.

They must first identify the problems of the economy. If you then listen to the debates, both in the primary and in the election, we see that no one is addressing the fundamental problems. I have said that before in programmes of this kind. The unsecured liabilities are squeezing savings and, ultimately, investment. That's the biggest reason why productivity is so flat. Not just in the U.S., but throughout the developed world.

To date, we have always been able to borrow more and more and more. When will this stop? What can prevent us from following this path?

It can go on for a very long time, until those who lend the money to us revolt. I don't see any sign of that right now, but if the early phase of inflation that is now developing continues, then you could see a very big shift away from the exceptionally low 10-year bond rates pretty quickly. I think it could eventually go towards three, four or five percent. That's what interest rates have been historically, not just for the last hundreds of years, but for thousands of years. This is an exceptional period in which interest rates have been kept low solely due to the fact that governments have set a set of circumstances in place. This can't go on forever.

Higher interest rates and higher inflation, when will this become a problem? Historically, 4 to 5 percent was normal, is that a problem now in your opinion?

It's a problem because you're going from the current level to 4 to 5 percent. Now, if you could wipe out all the debts of the last five to ten years and start with 5 percent, you could do that. But there is a whole series of adjustments that have only taken place since 2008 and that will be reversed. And that's not going to work without problems.