The former Federal Reserve chairman, Alan Greenspan, is pessimistic about the medium-term prospects for the US economy. He argues that there is a strong risk of stagflation (the combination of low growth and high inflation). Wage growth is now outstripping productivity, which he sees as a key sign that inflation will start to rise. Indeed, he notes that over the past five years output per hour worked has grown by less than 1% in most of the major developed economies, a dismal amount compared with past growth.
Greenspan has two explanations for this. First, an ageing population is forcing governments to spend more money on entitlements such as pensions. This is crowding out savings, reducing the amount of money available for capital investment. Second, uncertainty about the future, especially over the future levels of corporate taxes, is also discouraging firms from spending money on anything other than short-term investments. This means that while industries such as software and IT are booming, long-term investment in residential property has barely recovered from the crash.
Naturally, slow growth and rising prices are bad news for the bond market. Indeed, Greenspan thinks that yields are too low, saying that since "we get very nervous when the stock price index goes to high price-to-earnings ratios, we ought to be ... nervous when the bond rate does the same". He also notes that the historical evidence suggests that rates on long-term bonds should be higher than the current level of just over 2% (for the 30-year Treasury bond). From the 18th century to recent times, these yields have consistently been between 5% and 10% a year far higher than today.
Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.
He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.
Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.
As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.
Follow Matthew on Twitter: @DrMatthewPartri
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