CNBC'S full interview with Alan Greenspan

[00:00:00] Speaker 1: Joining us now in a CNBC exclusive interview is former five-term Fed chairman Alan Greenspan, also out with a new book. It's called Capitalism in America, a History, co-authored with Adrienne Wooldridge. Mr. Chairman, thank you so much for joining us. Nice to see you again. You're welcome. Good morning. Good morning. Should the Federal Reserve be paying closer attention to the message in the markets right now about growth and inflation? [00:00:28] Alan Greenspan: Well, I don't think they're watching the proper statistics. As far as I'm concerned, monetary policy is interesting but not relevant to what the long-term, longer-term, or even intermediate outlook is going to be. As I've argued for quite a while, I think that the issue of entitlements has been, which is just rising with the population and aging of the population, but the data show unequivocally that it is crowding out capital investment dollar for dollar. And that's been true since 1965. And that says basically that productivity growth is going to be less than we expect. And as a result of that, a lower GDP. So it's a somewhat different outlook than I think is the conventional wisdom at this time. [00:01:25] Speaker 1: So you think the Fed should be paying more attention to that? Should they have not raised interest rates in December? [00:01:35] Alan Greenspan: Well, I think the Fed is doing fine. I'm just saying that fiscal policy is a critical issue. Monetary policy is not at this stage. Got it. At some points, it's critical. But this is not one of them. A few weeks ago, you warned, you made some [00:01:53] Speaker 1: changes that investors should run for cover. Is that the risk you were looking at? The slowdown in productivity and the rise of entitlement spending? [00:02:02] Alan Greenspan: Well, that's pretty much the same story as I'm now indicating. But I remember the run for cover. I think I was trying to get out of the rain. [00:02:16] Speaker 1: What about the markets right now? How do they how do they look to you? I mean, we're what, 14 percent off the highs in the S&P 500? It's been a turbulent [00:02:25] Alan Greenspan: few months. Well, we have a complex system in my office in trying to evaluate price earnings ratios. And what our data system shows is that the market is probably still a bit too high. Not a great deal, not a great deal, but somewhat. Based on what's happening in the real economy? Well, essentially, well, it is basically what we do is we take price earnings ratios and turn them upside down so you've got earnings price relationships. And we can attribute that the sum of the total earnings price directly related to the current data on the rate of return on a lot of different assets. But mainly, it's real long term [00:03:23] Speaker 3: interest rates which drive the numbers. Mr. Chairman, I want to ask you about taxes today because one of the debates brewing this morning is whether or not marginal rates in a dream world for some especially in the Democratic Party should be up to 70 percent in tax brackets, say $10 million or more in annual income. Would that make sense given your concerns about fiscal policy? [00:03:51] Alan Greenspan: Well, if you're willing to take a significant drop in economic activity, I would suggest that. Well, maybe I might have make myself clear. I think it would be a terrible mistake. [00:04:11] Speaker 3: To raise rates, to raise marginal rates to that level. [00:04:15] Alan Greenspan: I think we did it. I thought the recent tax cut, which was really crafted after Ireland in the early 1990s, which essentially brought Ireland from an average economy up to one or two numbers. It would be a number one or two, number one or two in the world, depending on how you look at it. But we replicated, I assume, maybe with some cognizance in advance, what the Irish pattern was. And I think that was an excellent tax cut bill. What I didn't agree with was showing no means of how we're going to fund it. Because unless we fund some of these things. We're in this year, we're going to almost surely run a trillion dollar deficit, fiscal fiscal deficit, and it's going up from there. And the factors that are driving it are demographic mainly. And they're built into law. In other words, Social Security, Medicare, Medicaid are all statutorily required expenditures. And when we factor those numbers in with the sort of modest recovery in the economy that we're looking at, which is essentially somewhat below the consensus, we get results we'd prefer that were otherwise. [00:05:47] Speaker 4: Right. So, Chairman, you come back to the deficit, of course. Interesting to remember that when the original tax bill was crafted, it did include a border adjustment tax that would have been a significant producer of revenue. Of course, that was not part of the final bill that was passed. You mentioned the deficit, your expectations for at least trillion dollar deficits, perhaps the fact that you can't necessarily touch entitlements. But when do you believe if ever the market is going to be focused on the deficit and perhaps some of our creditors are going to be focused on the deficit? [00:06:21] Alan Greenspan: Well, nobody cares in the political system or not until you ultimately get the impact of what is currently going on, which will be a rise in inflation. And this is the typical pattern we see where in the early stages that looks benevolent and nobody, nobody cares about the deficit until it grips the economy in an inflationary way. And the book that you just commented on, that I wrote as a co-author, grants us estimates essentially that we're going back to stagflation. That is an economy which is reminiscent of the 1970s, which was a period of inflation and economic slowdown. So that's the type of system we're dealing with unless we can confront the issue of entitlements. In the book, I basically go into the issue of looking at Sweden as the optimum model. They had the very similar type of patterns we have now with respect to entitlements. And they are now after having their interest rates go up to 500 percent, they reshuffle the whole economy and they now have a program which is stable. And they're funding their budget correctly. They've cut their deficit relative to GDP by half. [00:08:11] Speaker 1: Mm-hmm. Not many plans out there in the U.S. for that. On the slowdown piece of the stagflationary forecast, Mr. Greenspan, what do you see for 2019? Because actually 2018 is shaping up to be a pretty solid one for growth overall, best in about a decade. What happens this year? [00:08:30] Alan Greenspan: Well, if you look at the rate of the critical statistic is output per hour. It's not the level of GDP. It's productivity, which tells you the soundness of the economy. Output per hour last year, the calendar year, grew 1.3 percent of a decidedly subnormal number. The reason it looks better in the second half is the first half was negative. The second half was positive. And people are projecting the third and fourth quarter results into subsequent years. And I think that's not appropriate. [00:09:11] Speaker 3: The government shutdowns in day 17, Mr. Greenspan. And we've spent a lot of time at this desk talking about how the impacts of shutdowns are often overstated. But there's been a lot of discussion, especially in this past week, about potentials for delays in tax refunds. Is this one more serious than in years past? [00:09:30] Alan Greenspan: I don't think it's critical, but it's going to become politically unsustainable sooner rather than later. [00:09:40] Speaker 1: I also want to ask you about trade, which is front and center. The administration, Chairman Greenspan, appears to be posturing that the U.S. has the winning hand, because the Chinese economy is suffering a lot worse than ours as a result of the tariffs and the trade friction. Do you think that strategy makes sense and will ultimately lead to victory from the administration? [00:10:06] Alan Greenspan: It depends on how you define terms. The optimum maximum production for all in turn in turn is if tariffs are zero. And what the trade war is, is the tariff level of one country versus the other. Both parties, China and the United States, are losing because it's like taxing the domestic economy, which is what we're doing. I mean, a tariff is an excise tax and it's the suppressing of economic activity. So it's just that we're viewing it, if we have less of a problem than China, we win. But the bottom line is we both lose. It's just who loses the most. [00:11:01] Speaker 1: Right. Nobody wins in a trade war. I've heard you say it many, many times. And finally, you know, this market volatility, we can point to trade, we can point to interest rate hikes. Do you see any of this being related to the fact that the Federal Reserve has to unwind QE123, this massive multi-trillion dollar balance sheet that they've accumulated? You raised questions about it in the past, but do you see this volatility that we're in reflecting that, that challenge that they have to do? [00:11:32] Alan Greenspan: I've, so far, at least in part, managed to restrain from commenting on recent Federal Reserve policy. I don't think it's appropriate for previous chairman, especially, to carp about what has happened after we've left office. I don't know whether I fully succeeded, probably not, but I sure try. [00:11:57] Speaker 1: Well, we appreciate your comments on everything else. Chairman Alan Greenspan, good to see you. Thank you.