Greenspan: Higher Interest Rates Are Inbred in Human Nature (Video)

Former Federal Reserve Chairman Alan Greenspan appeared on Fox Business this week with two strong messages for investors:

1. The United States economy is “extraordinarily sluggish,” and part of this problem is the massive amount of government entitlements. He pointed out that entitlements have grown nearly 10% a year for the past 50 years, no matter which political party is in office. This adversely affects savings, which is the foundation for economic growth – a message Peter Schiff has been sharing for years.

2. Interest rates have never been kept this low for this long, so a huge bubble in bonds is forming. While this could correct itself slowly, history tells us that it will likely pop quickly, with devastating effects for the financial markets.

Remember this: normal interest rates for reasonably good debt have always been in the 4-5% annual rate for millennia. We have data going back to ancient Greece, and interest rates were not all that significantly different then than now. And we have daily data going back to 1694 with the Bank of England.

“The reason this is the critical issue is it’s telling us the interest rates we’re looking at in history is almost certainly built into human time preference. It’s inbred. That means we’ve pressed the interest rates well below normal for a protracted period of time. The danger is they will begin to come up to where they’ve always been in millennia. [This is] not good [for the financial markets].”

Greenspan wouldn’t comment on the Federal Reserve’s policy in regards to a September rate hike, but the markets seem to be waking up to the fact that the Fed knows it has painted itself into a corner. The Wall Street Journal published an op-ed the day before the FOMC meeting acknowledging that “higher rates will push the economy away from the Fed’s price and employment goals” – just as Peter Schiff has been saying all year.

Greenspan also makes it a rule to not share personal investment advice, but he’s made comments in the past year that give investors a hint at how he would be preparing for a financial bubble: buy gold. Does he know something you don’t? He’s probably familiar with the case SchiffGold presents in its free special report – Why Buy Gold Now?

Here is Alan Greenspan’s full interview with Fox Business:

Highlights from the interview:

“[The economy] is extraordinarily sluggish. It is being suppressed by a very low rate of increase in productivity. In fact, close to zero. And you can’t get more than a 2% growth rate out of those numbers…

“The basic problem is that we’re not getting any capital investment that significantly adds to the growth in output per hour. In fact, the best way of looking at this whole process is the fact that the sum of gross domestic savings in the Untied States and entitlements has been a constant relative to GDP for 50 years. If that is the case – if for every dollar increase in entitlements you lose a dollar of savings, we’ve had an entitlement problem for years, because entitlements have been growing under the administrations of Republicans and Democrats close to 10% a year for a half century…

“A goodly part of what is invested is the savings of people. We’re getting less and less of that as the consumption involved in entitlements, year by year, eats up the savings. We cannot have investment without savings. Either borrowed from abroad, or hopefully domestically…

“Remember this: normal interest rates for reasonably good debt have always been in the 4-5% annual rate for millennia. We have data going back to ancient Greece, and interest rates were not all that significantly different then than now. And we have daily data going back to 1694 with the bank of England. The reason this is the critical issue is it’s telling us the interest rates we’re looking at in history is almost certainly built into human time preference. It’s inbred. That means we’ve pressed the interest rates well below normal for a protracted period of time. The danger is they will begin to come up to where they’ve always been in millennia. [This is] not good.

“Remember what a bubble is in the bond market. We tend to think of stock market bubbles as very substantial price-earnings ratios. If you turn the bond market around and look at the price of bonds relative to the interest received by those bonds, that looks very much like the usual spread, which would concern us if it were equities. And we should be concerned…

“I think there are two possibilities. Either we move slowly back to normal, or we do it in a fairly aggressive manner. History tells us it’s the latter which tends to be more prevalent than the former…

“I don’t talk about my individual investments, and I don’t talk about the Federal Reserves policies directly…”

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