Alan Greenspan on Brexit, U.S. Economy, and Inflation (Full Interview)

[00:00:00] Speaker 1: Mr. Chairman, you said a little earlier, and you have said in the past that the euro has become something of a failed experiment here. Does that suggest that you think the British are right to be concerned about being in the European Union? Leave aside the damage that may be caused by leaving, but do you have any sympathy for the idea that they're better off outside? [00:00:20] Speaker 2: No, there's a fundamental difference between being in a structure where everybody is forced into the same currency, irrespective of differentials in culture, economic status, and a variety of other things. The EU is fundamentally a very good idea. It's a free trade zone structure, which we need an awful lot of, so that the choice of Britain to stay in the EU and get out of the eurozone was, I thought, the most sensible action that could be taken. And Gordon Brown, who was instrumental in that decision, I think, ought to be distressed by what is going on, as I know it is. [00:01:09] Speaker 1: Well, the question comes up if the eurozone itself is a failed experiment, and one of the problems they have is the lack of a fiscal authority. The only way they can get there is to centralize more power in Brussels, which is exactly what the United Kingdom doesn't want. [00:01:26] Speaker 2: Well, but the problem with the euro isn't going to be solved by that. The problem with the euro is much more fundamentally difficult one, which is going to arise fairly surely. Let me suggest something, which nobody discusses, and I think it ought to be discussed. If the Federal Reserve were to run into financial trouble, and the dollar were in a very extreme case, the sovereign credit of the dollar back, I should say, which the Treasury Department would back up the Federal Reserve, and there'd be no problem. There is no backup on the European Central Bank. Right. I mean, theoretically, the Maastricht Treaty has got means by which they would be financed if they [00:02:21] Speaker 3: got into trouble, but that's not going to work. That speaks to the fractious nature here, and it speaks to, I think, Barry Eike Green at Berkeley talking about the exorbitant privilege. Where's the leadership to drive a solution? We've been saying this now for four and five days. We remember Valerie, she started to stank, Charles de Gaulle, Adenauer of Germany, I believe named Greenspan from the United States. Do you observe leaders that can make tough decisions as the acclaimed Chancellor Merkel has made? Well, yeah. I mean, [00:02:55] Speaker 2: Tony Blair and Gordon Brown made from the United States. They're not in office right now. [00:02:59] Speaker 3: Do you see leaders right now? No, I was about to say that, [00:03:00] Speaker 2: and I don't see anybody to match them. So the basic problem is, it's very difficult for somebody from the United States, no longer in government. I don't have direct daily contact as I did for 20 years. [00:03:14] Speaker 3: You've not been speaking with Mr. Trump recently? No. [00:03:19] Speaker 1: We may want to get back to that a little bit later. If you were still at the Fed and you go into your office at 20th and C Street on Friday, how do you think about it as a central banker? You lived through market meltdowns before. What's the first thing you do? What kind of conditions within your bank do [00:03:40] Speaker 2: you try to establish? Well, the first thing I would ask is, what is the cause of the problem? Trying to ameliorate the symptoms of the problem is never a successful course because it doesn't get at the root issue. Nobody is getting at the root issue that confronts all of the developing world, which is the cause of the problem now because what is happening is productivity growth, as you know, for, I think, more than two-thirds of the OECD countries is, in fact, it's more than two-thirds, is been running at less than a half a percent per year for five years. That means incomes are stagnating. [00:04:30] Speaker 3: And you see that in real disposable income across England, just like this? [00:04:34] Speaker 2: Absolutely. And what I was about to say, this is a problem which is not strictly in the United States, but, as I said, by all the OECD countries. And what that is doing is creating a general stagnation in the developed countries, which is causing desperation on the part of their electorate. [00:05:00] Speaker 3: I want to go to the economic point of the last number of days, people linking currency into interest rate, into inflation, into declining GDP. And it shows within a reduced current account deficit for the United Kingdom. And maybe you bring up the idea of a phrase from another time, twin deficits, greater fiscal fiscal deficit. Tell us your experience with a nation that has to work with a rapidly worsening current account deficit. [00:05:29] Speaker 2: Well, usually the problem which you have is only two choices. One, you flood the particular problem with reserve balances of some form or another, irrespective of where it's coming from. Or two, you allow the currencies to float. The first is obviously a desirable one if it works, but it's a risky one. And you're always better off to allow the markets to run their course. In other words, free up the currencies, free up very much the actions which would allow prices to move. If you're trying to stop prices, you're going to create huge problems. And that has always been my view as to what should be done. [00:06:18] Speaker 1: Is there a risk though, in the UK situation, to doing that when you have a 7% current account deficit? [00:06:27] Speaker 2: There's a risk in doing anything. The question is, what's the least worst risk? [00:06:32] Speaker 3: What is it right now? [00:06:34] Speaker 2: I would say, I wouldn't be that concerned about the currency because there's not all that much you're going to be able to do about it. The currency, remember, is a bilateral or multilateral exchange rate. The effect of the pound sterling against the US dollar. That is as much our doing as it is theirs. And as a consequence of that, if you're dealing up against a strong currency, good luck. That's why I suggest that the worst thing you can do is feudal activities which seem to be successful, or seem to be at least offer success. I need to get you in trouble today then. What is, [00:07:25] Speaker 3: what should the Japanese do with a failed Abenomics, the currency goes completely the other way of the desire of Mr. Abe? Should they use the Greenspan prescription and ignore 100 yen or 95 yen or dare I say 90 yen? [00:07:43] Speaker 2: Well, I'm not about to give the Prime Minister, who is a very thoughtful person, advice on this. And I just assume, leave it where it is at the moment. You can figure out where I come out. [00:07:56] Speaker 1: I try. Let me try and ask it this way. As a central banker, during the period that you were in office at the Fed, when you came to office, intervention was a regular practice of governments. By the time you left, it wasn't being done anymore. Have we outgrown that as a tool? I hope so. [00:08:23] Speaker 2: It doesn't work or it has consequences? It doesn't mean distorting a currency for the purpose of achieving stabilization is a loser's game. And the sooner you get the currency adjusted to the marketplace, then you get the positive forces that people will say, my God, it's gone too far on the downside. Let's come in on it. That's what you need. What you need now [00:08:55] Speaker 1: is all of a sudden the pound to be undervalued. Well, let me ask this then. Do you have some sympathy with the Swiss who are facing a tsunami of money fleeing the Eurozone? And it's sort of the only tool they have is to intervene in the currency. Well, yeah, but the problem is [00:09:17] Speaker 2: I mean, what they're ending up with is severe and negative interest rates. And what is fascinating is the extent to which nobody can get enough Swiss francs. There are not enough Swiss francs out there to buy to meet the demand. So what you're getting is that the Swiss are charging to hold their currency. [00:09:38] Speaker 3: Right. Link in your world of economics into the responsibility of any central bank for the financial system. To be polite, the banks are troubled this morning in Europe. What should Mr. Draghi do? What should Mr. Carney do, frankly, if he keeps his job at the Bank of England and other leaders do to support European banks who seem to not be able to make tough decisions? [00:10:02] Speaker 2: When I was in office, I very much appreciated the fact that Paul Volcker never commented on any of the monetary policies that the Fed did when I was there. That is an extraordinarily useful operation. To have former central bankers like myself second-guessing and carping on what others should not do, I don't think it's a very profitable activity. Because I'm 0 for 2. I'm going to go for [00:10:37] Speaker 3: a natural hatchery here of questions. I'm going to switch gears a little bit. [00:10:41] Speaker 1: Please. We were talking earlier this morning about whether or not the decision by voters in the UK to take this leap is a sign that globalization may have peaked and might go into retreat at all. If the benefits are so diffuse compared to the very visible losses that some people take, that you've come to a sort of a tipping point. [00:11:07] Speaker 2: Well, I think we're at that, we're already moving. I mean, it's just a matter of time before Scotland gets another referendum because it wants, it'll make it a lot easier to stay in the Euro, in the Eurozone, I'm sorry. The EU, as they choose to do, if in fact they don't have to take too many actions. Freeing themselves from the UK before the article 50 takes hold would make it easier for them to stay there. So I think that we're going to get very soon a significant renewal of the referendum on Scotland. And I'm almost certain it's going to pass. [00:11:57] Speaker 1: Does it go, does it then spread to other European countries? You can't stop the march of progress, as it were. You can throw a lot of sand into the gears. [00:12:05] Speaker 2: I think the vulnerable institution right now is the Eurozone. Because as I said before, there is no backup to the ECB yet. The European Central Bank assets, which had gotten up to a high level and then came all the way back down, has now come all the way back to the height of where they were. That raises a serious question. What happens if all of a sudden the Euro ceases to be a hard currency? It happens overnight. They'll be in very significant difficulty, as far as I can see. And I think the thing to do is what they should have been doing a long time ago: get Greece out because they're a toxic liability sitting in the middle of a very important economic... [00:13:00] Speaker 1: But is it just Greece or would you have to get rid of Portugal or maybe even Italy? [00:13:05] Speaker 2: I think it depends on them. In other words, theoretically, if you ask me what would the Eurozone basically exist up? Germany, the Netherlands, Finland, all currencies, which the best way to put it, is when a crisis happens, they all move together. [00:13:29] Speaker 3: Then are we seeing a death? Forget about the European experiment or Monet's action. Are we seeing a death of the Washington consensus here? The Atlantic Charter to President Bush senior's work with GATT and trade? Is this referendum the first signal of the death of your Washington consensus? [00:13:48] Speaker 2: Well, it's too soon to say, and incidentally, death is too strong a word. It absolutely needs readjustment. The Eurozone cannot go on structurally the way it's put together. Now, it's fundamentally the northern states of the eurozone funding the southern states. The result of that is you have an unstable system which cannot go on indefinitely. If you're going to put more than one currency together, it has to have a similar culture. You cannot have differential cultures. Now, you know, the argument I used to get is that when the euro comes in, the Italians would behave like Germans. They never did from day one. [00:14:47] Speaker 3: Is the United Kingdom a differential culture from Germany? [00:14:51] Speaker 2: I mean, most certainly in the sense that the United Kingdom is sort of, it's hard to define it. It's not, it's coming off of generations of squeezing down from British Empire. The United Kingdom, in 1913, was at its peak. And World War I did very great damage. World War II, obviously, significant. And were not for Margaret Thatcher coming in, when she did, and did what she did, it wouldn't be in as good shape as it is today. And remember that when labor came in after Thatcher, that Tony Blair and Gordon Brown didn't change anything, [00:15:46] Speaker 3: what Thatcher did. What can the next president do to assist Europe with these immense challenges? Lord Brown of British Petroleum is adamant that the United Kingdom had to remain because of tensions from 70 years ago, the outcome of World War II. How can we assist Europe stay away from those primeval tensions? [00:16:12] Speaker 2: I wish I knew the answer to that question. We're dealing now in the very early days of crisis, which has got a way to go. I mean, this is, this is, we've triggered a series of events here, which when Scotland, where Scotland goes, Northern Ireland. To be clear, you're predicting that Scotland, [00:16:35] Speaker 3: back to 17, I believe, 03, will leave the United Kingdom? Yes. [00:16:42] Speaker 2: And Northern Ireland as well? Well, Northern Ireland, probably. See, you got the same, not the same type of problem. Remember Scotland wanted to become an independent nation because it had all that oil in the North Sea. Right. By the time they finally got to the referendum, that the whole reserve was almost gone. It is gone now. So the economic problems that Scotland's going to run into when and if I say when it moves are going to be very difficult, I think, because they don't realize the extent to which Whitehall is funding them. And it's going to be, it's going to be a lot of wrenching [00:17:31] Speaker 3: things that are going on. Right. I want to tease forward to our next section. We've got about two more minutes here, Chairman, and we'll move on to more mundane ideas. Where are we in the debate, the battle of rules versus discretion? Give us an update on where that is as we prepare for our next discussion. [00:17:50] Speaker 2: I'd say that discretion has won the day. Because every time you try to lock in some rules, you get them locked in incorrectly because you can't anticipate how the market's going to behave. [00:18:07] Speaker 1: Well, there's still a movement on Capitol Hill to try to put the Federal Reserve into a rules-based [00:18:14] Speaker 2: procedure. What would happen if that were to pass? Well, we would find ourselves trying to support [00:18:23] Speaker 1: the currency in an unsupportable position. Is it the legislative version of going back on the gold [00:18:30] Speaker 2: standard? No, if we went back on the gold standard and we adhered to the actual structure of the gold standard as it existed, say, prior to 1913, we'd be fine. Remember that the period 1870 to 1913 was one of the most progressive periods economically that we've had in the United States. And that was a golden period of the gold standard. So I think that it's -- I mean, I'm known as a gold bug and everyone laughs at me. But why do central banks own gold now? [00:19:12] Speaker 3: Well, we're going to come back on that. We could talk forever about this. Alan Greenspan, gold bug with us today. Our guest, Alan Greenspan, who I doubt needs any introduction. Mike, why don't you start with Chairman Greenspan's thoughts on the why we're here? [00:19:27] Speaker 1: Well, that's an interesting question because you have noted -- and back in March, when Tom and I last spoke with you, you noted at the time that there is something beyond the individual day-to-day news that we are watching. It's a deterioration in the standards of living that people have these days that is around the world. It's global. And that is leading to symptoms like what we're seeing in the [00:19:54] Speaker 2: United Kingdom that aren't the cause themselves. Well, I think the problems that we have, as I mentioned before, is the fact that -- well, let's -- let's -- you know, it's often useful to start with the end result and go back causation in reverse. What we see is a desperate population out there, everywhere. We're seeing it in the United States. You can see it all during our election period. It's a fear. It's a desperation. They're looking for somebody to come and help them out. That is similar -- this is basically what Brexit has been all about. We're seeing it in Europe generally. And so, the question is, why? Well, nobody wishes to discuss this because it's politically very difficult to discuss because nobody knows what to do about it. In the United States, which is not by itself by any means, in fact, the U.S. is best to talk about because our data system is better. But what I'm about to tell you exists pretty much throughout the developed world. And that is that as the populations age and they all are now in their baby boom period and they're going into retirement, that is creating a major fiscal problem in all of these countries. And the issue is essentially that entitlements, which are entitlements are legal issues. They have nothing to do with economics. You reach a certain age or you're ill or something of that nature, you're entitled to certain expenditures out of the budget without any reference to how it's going to be funded. Where the productivity levels are now, we're lucky to get something even close to two percent annual growth rate. And that annual growth rate of two percent is not adequate to finance the existing. In your experience, can policy makers adjust productivity higher? No. No. Well, they can indirectly. I'm sorry. If they were to slow down the rate of growth of entitlements and enabled. Remember, what's happening, which is a remarkable statistic for the United States, the sum of gross domestic savings plus entitlements as a percent of GDP is flat for a half century. That means that basically every dollar of entitlement crowds out one dollar of gross savings. The gross savings adjusted for the current account balance is what gross domestic investment is. [00:22:58] Speaker 3: But critically, your tenure shows, and I think of Tip O'Neill as well, Speaker O'Neill, nothing gets done without crisis. Does Alan Greenspan just wait for the next crisis before Capitol Hill does anything? [00:23:12] Speaker 2: I said in a book I finished recently, I don't know how it's going to resolve, but there's going to be a crisis. You said that in the last book. Well, I said I'm waiting. [00:23:21] Speaker 1: And he was right. He was right. Well, these solutions come on the fiscal side. Yes. And it's not like people on Capitol Hill or people in Westminster don't know what to do. They don't want to do it. What's the communication? How do you tell them? How do you get through to them about these issues? [00:23:46] Speaker 2: This is one of the great problems of democracy, and it goes back to the founding fathers. How do you handle a situation like this? And it's very troublesome, but eventually you get things like Margaret Thatcher showing up in Britain. Their situation is far worse than ours. And what she did is she turned it all around essentially by, as I remember it, the miners were going to strike. And she decided that she knew they were going to strike. Since at that point the government owned the coal mines, she built up a huge inventory so that when they went on strike, there was enough coal in Britain so that eventually the whole union structure collapsed. That put her on a whole different... She fundamentally changed Britain to this day. I mean, the fact that we're doing so well in the EU is not altogether clear that it is the EU or whether it was Margaret Thatcher. [00:25:09] Speaker 1: What? Do we need then an accident of history? [00:25:14] Speaker 2: Probably. I don't see it because in the United States, social benefits, which is the more generic term, or entitlements, are considered the third rail of American politics. You touch them and you lose. Now, that is a general view. The Republicans don't want to touch it. The Democrats don't want to touch it. Right. They don't even want to talk about it. This is what the election should be all about in the United States. You will never hear one word from you. Alan Greenspan with us with Bloomberg Radio and Bloomberg [00:25:57] Speaker 3: Television Worldwide. We need to do a data check. It's a deteriorating tape, negative 211 on the Dow, 17,189. The VIX adding more than odd today, 24.70. Just simply the mathematics there is a bit out of kilter to say the least. Sterling with a modest bid, 132.43 off a very, very difficult morning as well. Did you read Mervyn King's book? [00:26:23] Speaker 2: Yes. What did you think? I thought, like everything Mervyn King does, it was splendid. [00:26:29] Speaker 3: What would Mervyn King do and what would be your advice for Governor Carney, and I don't mean in terms of do this, raise rates and all that, because I know you're not going to answer me, but to set the tone. Because a lot of this with Margaret Thatcher and with Sir Winston Churchill was to set the tone. How do you set the tone? What would Mervyn King do? What would Alan Greenspan do? [00:26:54] Speaker 2: You threw in the, the, the, the monkey wrench, the last fret, last fret. [00:27:00] Speaker 3: I tried. It's a hat trick now. But, but seriously, a tone has to be set. [00:27:04] Speaker 2: I don't know. The first thing you do is, which is what we always did when we had a crisis, we'd get together the G10 or the G7 or bilateral meetings. Much of what goes on in such economic meetings you never hear about. And it basically requires sometimes a judgment of trading off one terrible thing versus another. I hesitate to give anybody any advice. First of all, they have access to far more information than I do. Now, to be sure, most of what's available is publicly available, but not at all. And I know that that's a critical difference. Secondly, I like Paul Volcker's basic view of people sitting on the sidelines having been around and giving advice. It's not helpful. [00:28:03] Speaker 3: So I'm going to say hat trick. It's official hat trick. [00:28:06] Speaker 1: We're going to switch topics a little bit here and talk more about the U.S. economy. When I was Fed reporter chasing you around the halls of Congress, we used to always talk about what was Alan Greenspan's favorite indicator of the moment. There was the scrap metal, there were railroad car loadings. Give us your view now on the outlook for the U.S. economy and what you're [00:28:27] Speaker 2: looking at that tells us that tells you. Well, the fundamental issue is the fact that productivity growth is ground to a halt. We're running out of people. In other words, everyone is very pleased in fact that the employment rate is rising. Well, the statistics tell us that we need more and more people to produce less and less. Now, that is not a prescription for a viable political system. And so what we have at this stage is stagnation. I don't think that there's anything out there which suggests that there's a recession, but I don't know that. What I do know is that the money supply, M2, which has always been a critical indicator of inflation, is for the first time, is going up remarkably steadily 6-7%, almost a straight line. It's tilted up in the last several months. It's added a percentage point or two. The thing that we should be worrying about now, which we have actually given no thought to whatsoever, is that this type of economic environment ends with inflation. Historically, fiat money has always ended up that way. I'm going to get a lot of letters when you [00:30:01] Speaker 1: say that from people who are going to say, "What's he talking about? There's no inflation. The markets see no inflation. Futures indicators show no inflation." How do you defend that call? Or, to be more blunt, [00:30:14] Speaker 3: are you an inflationista? That's the phrase that's being used now. All I'm saying is I don't know when it's coming. [00:30:21] Speaker 2: I know if you look at human history, there are times and times again when we thought that there was no inflation and everything was just going fine. I just basically say, wait. This is not the way this thing ordinarily comes out. I don't know. I cannot say I see it on the immediate horizon. In fact, commodity prices are soggy. The oil price has had a terrific impact on global inflation. It's not about to emerge quickly, but I would not be surprised to see the next unexpected move to be on the inflation side. You don't have inflation now and you don't have it until it happens. [00:31:12] Speaker 3: How do you respond to Paul Krugman's essay the other day that there's a glory to simple models? He goes back to Hicks 1939 and he's got a chart from Olivier Blanchard on that. But like you, from a different angle, I'm going to lump Greenspan with Krugman. It's never been done. But if I take Paul Krugman and Alan Greenspan's primal cry, we want simple models. Is our solution now to think simply or is there a value to the complexity of globalization and the complexity of institutions? Which way should we turn now? [00:31:50] Speaker 2: Well, you want to have a simple model that you can get that actually captures the complexity of the forces that are in played. To get simple models merely to slim them down, that's easy to do, [00:32:07] Speaker 3: but they may not work. Do they work with negative interest rates and other distortions of this financial system? Mike, this is what you want to talk to the chairman about. [00:32:14] Speaker 1: Well, the argument has been that Bill Dudley of the New York Fed said this, that DSGE models that you use in Ferbis, the Fed's model, don't do well at incorporating financial markets [00:32:25] Speaker 2: into their model. That's correct. In other words, the Ferbis model, the Ferbis, FRB, U.S. That model works exceptionally well for the non-financial area. I had many inputs myself. I worked with it very closely. My sideline was econometrics so that I, you know, argue with the people who are on T values and everything else like that. But the financial model was awful. It captured nothing. It didn't grasp what the issue is. And I try to reproduce the right, what I would do is in the map in the territory 2.0, which is the latest version of that. And I demonstrate that what we have going that we don't measure correctly are bubbles and their implications. Bubbles per se are not toxic. The 2000 bubble collapsed. We barely could see change in economic activity. On October the 19th, 1987, the Dow Jones went down 23% in one day. You will not find the slightest indication of that collapse and that bubble in the GDP numbers or in industrial production or anything else. So I think that you have to basically decide what is causing what. I think the major issue in the financial models has got to be to capture the bubble effect. Bubbles are essentially part of the fact that human nature is not wholly rational. And you can see it in the data very clearly. [00:34:16] Speaker 3: Right. One question, if I may, to stay away from Fed policy. Negative interest rates, I don't believe they are in your textbook at NYU. We are learning about negative interest rates. What have you observed, and what will we see if we see even deeper negative interest rates in the coming months? [00:34:36] Speaker 2: Well, let's understand where negative interest rates come from. If you go back and look at the period when, say, the U.S. 10-year note was 5% or thereabouts, or when the normal relationship existed, negative rates would not exist. But if you take, for example, when they emerge, you have, let's see, 5, 10 years ago, the Swiss franc, I should say, the yield on Swiss long-term debt would be 200, 300, 400 basis points under, for example, Italy or other less desirable. And that spread would move up and down. And now it's broken. Well, no, it hasn't broken. What happened is that if the overall rate comes down, then in order to keep that spread, the Swiss franc has to go negative. And so that what you have is that they're going to start to stock up on currency, and that's going to make a difference. We have run out of time. We could go forever, particularly on the United Kingdom. Alan Greenspan, thank you so much.