US economic conundrum - Greenspan

Posted | 02/03/2015 / Views | 2781
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Whilst we have been banging on about how the ‘apparent’ health of the one economy the world is relying on for global growth is not as great as share prices and gross employment numbers suggest, it is worth considering the words of the ex US Fed Chair, Alan Greenspan.  In a recent TV interview he had the following snippets to say (and our thoughts):

"Lower long-term rates is not a conundrum, its an indication of how weak global economic growth is." – i.e. the nonsense in the likes of last week’s US share rally on his successor, Yellen, indicating zero interest rates for longer is completely counterintuitive.  One should buy shares on forward looking company performance, not on a mindless hunt for yield in a ZIRP world.  (Illustrated beautifully in the graph below.)

"US economic growth is not strong."

"effective demand is extraordinarily weak - tantamount to the late stages of the great depression."

 "Almost all the problems are due to a lack of long-term capital investment... nobody wants to invest in the long-term because nobody knows what is going to happen." – Companies are spending record amounts of cash on buying back shares to prop up the price rather than in forward looking capex that improves the company and broader economy.  So how does it all end?

"It depends...When real interest rates start to move up, that's when the crisis could hit."

And there is your aforementioned conundrum.  They are selling a message of all is good, but know if they raise rates accordingly it all comes crashing down.

US economic conundrum - Greenspan