The US economy is "out of whack", Alan Greenspan, former head of the Federal Reserve, told Fox Business last week. "We're moving towards stagflation, and in the process of moving in that direction it feels good, but it's a false dawn."
While signs of a slowdown are already evident, the "longer-term does not exhibit a particularly powerful growth rate", Greenspan said. Headwinds include the ageing population, a huge government spending bill, and higher interest rates all of which will see the economy struggle despite US president Donald Trump's tax cuts and regulatory rollbacks. While Greenspan approves "wholeheartedly" of the corporate tax cut, it also "unquestionably causes the deficit to rise, and we are not funding it by other means As long as the funding is not there, productivity cannot grow and accelerate."
As chairman of the US central bank, Greenspan developed a habit of slashing interest rates every time stockmarkets hit turbulence, and thus gave rise to the widespread belief that the US central bank would always bail out markets in extremis also known as "the Greenspan put", a tradition continued by his successors, Ben Bernanke and Janet Yellen.
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However, Greenspan now believes that the decades-long bull market in bonds is finally coming to an end, and that rates will start to rise. "We're in a bond-market bubble" that's now starting to unwind, as "prices are too high". As a result, we will see "real long-term interest rates rise" and when that happens, "stock prices fall".
