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Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane.

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Speaker 1: Always with Michael McKee daily we bring you insight from

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Speaker 1: the best in economics, finance, investment, and international relations. Find

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Speaker 1: Bloomberg Surveillance on iTunes, SoundCloud, Bloomberg dot Com, and of

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Speaker 1: course on the Bloomberg Let's get right to it here.

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Speaker 1: He needs no introduction. Alan Greenspan is uh the former

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Speaker 1: chairman of the Fellow Reserve System. And I think many

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Speaker 1: of you know without question is recent caution on the economy,

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Speaker 1: and yet everything has changed. Did you fall off your

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Speaker 1: couch on Friday? Could you not play tennis Saturday morning?

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Speaker 1: You were so shocked by the outcome in the United Kingdom?

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Speaker 1: What I play terrible tennis? You play terrible tennis in

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Speaker 1: honor of what was going on because you couldn't see

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Speaker 1: the ball. Let me let me go to your book,

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Speaker 1: The Age of Turbulence. There is an age of church

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Speaker 1: turbulence right now. And I think of a chapter you

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Speaker 1: had there on China, the choices that await China. What

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Speaker 1: are the choices that await the United Kingdom and the

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Speaker 1: new Prime Minister. Well, I think they obviously made a

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Speaker 1: terrible mistake because they had presumed that if they were

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Speaker 1: to have the referendum that it would be closed issues

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Speaker 1: very quickly, and that the political problems that they had

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Speaker 1: internally as a consequence of the minority that they thought

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Speaker 1: would be pushed aside. They were mistaken. Prime Minister has

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Speaker 1: lost his job, Cominant obviously going to lose their job.

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Speaker 1: It's a terrible outcome in all respects. It didn't have

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Speaker 1: to happen. I always thought that the real problem in

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Speaker 1: Europe was the Euro, which I've always thought was basically

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Speaker 1: an unstable currency, can't exist permanently in the existing structure.

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Speaker 1: It never entered my mind that Sterling was an issue

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Speaker 1: because it's a floating currency and Britain isn't was was

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Speaker 1: in fairly good shape economically. If your attention is on Europe,

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Speaker 1: what would you request from Chancellor Miracle and what would

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Speaker 1: you request from Brussels? Well, I'm not in a physician

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Speaker 1: to request that. Would like to know? Now I think

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Speaker 1: what is Let me start off what I think ought

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Speaker 1: to happen with respect to the Euro. First of all,

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Speaker 1: the Euro was being pulled apart basically by the continued

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Speaker 1: existence of Grace Greece in the in the euro structure.

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Speaker 1: Poice got in by mistake or should say, miscalculation of

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Speaker 1: some of the data they submitted for purposes of entering

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Speaker 1: the Euro. It became very clear when the next government,

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Speaker 1: Greek Greek government showed up that the data which had

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Speaker 1: been submitted were just not accurate. They have been a

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Speaker 1: throne in the side of the whole eurostructure ever since.

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Speaker 1: They should never have been in the Euro. They should

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Speaker 1: get out as soon as possible if you want to

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Speaker 1: sustain the fundamental euro structure. The difficulty of the Euro

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Speaker 1: is one we were all aware of very early on.

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Speaker 1: I sat in on the early stages of the development

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Speaker 1: of the new currency, before they had the name Euro.

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Speaker 1: The basic purpose was essentially to foster the question of

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Speaker 1: European integration politically and not necessarily otherwise. Chairman, Mr Charman,

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Speaker 1: you said a little earlier, and you have said in

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Speaker 1: the past, that the Euro has become something of a

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Speaker 1: failed experiment. Here does that suggest that you think the

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Speaker 1: British are right to be concerned about being in the

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Speaker 1: European Union, leave aside the damage that may be caused

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Speaker 1: by leaving, but do you have any sympathy for the

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Speaker 1: idea that they're better off outside. No, there's a fundamental

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Speaker 1: difference between being in a structure or everybody is forced

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Speaker 1: into the same currency, irrespective of differentials and culture, economic

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Speaker 1: status and a variety of other things. The the EU

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Speaker 1: is fundamentally a very good idea. It's a free zone.

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Speaker 1: It's a free trade zone structure which we need an

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Speaker 1: awful lot of. So that the choice of Britain to

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Speaker 1: stay in the EU and get out of the Eurozone

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Speaker 1: was I thought the most sensible action I could be taken.

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Speaker 1: And Gordon Brown, who was instrumental in that decision, I

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Speaker 1: think ought to be distressed by what is going on?

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Speaker 1: Is I know he is? Well, the question comes up

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Speaker 1: if the euro Zone itself is failed experiment, and one

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Speaker 1: of the problems they have is the lack of a

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Speaker 1: fiscal authority, the only way they can get there is

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Speaker 1: to centralize more power in Brussels, which is exactly what

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Speaker 1: the United Kingdom doesn't want. Well, but the problem with

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Speaker 1: the Euro isn't going to be solved by that. The

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Speaker 1: problem with the Euro is a much more fundamentally difficult one,

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Speaker 1: which is which is going to arise fairly Surely, let

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Speaker 1: me suggest something that nobody discusses as the police, and

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Speaker 1: I think it ought to be discussed if the Federal

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Speaker 1: Reserve were, for example, I should say, uh, if the

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Speaker 1: Federal Reserve were to run into financial trouble uh, and

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Speaker 1: the dollar were very extreme case, the sovereign credit of

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Speaker 1: the dollar back, I should say, so, which the Treasury

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Speaker 1: Department would back up the fellow reserved and there'd be

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Speaker 1: no problem. There is no backup on the European Central Bank.

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Speaker 1: I mean theoretically the Master Treaty has got means by

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Speaker 1: which they would be financed that they got in the trouble,

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Speaker 1: but that's not going to That speaks to the fractious

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Speaker 1: nature here, and it speaks to I think Barry I

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Speaker 1: could Green at Berkeley talking about the exorbitant privilege. Where's

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Speaker 1: the leadership to drive a solution. We've been saying this

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Speaker 1: now for four and five days. We remember Valeriees you

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Speaker 1: started to staying Charles de gaul at an hour of Germany,

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Speaker 1: I believe it named Greenspan from the United States, do

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Speaker 1: you observe leaders that can make tough decisions as the

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Speaker 1: acclaimed Chancellor miracle was made, well, yeah, I mean Tony

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Speaker 1: Blair and Gordon Brown made they're not in office right now,

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Speaker 1: you know, and I don't see anybody to match them.

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Speaker 1: So the basic problem is it's very difficult for somebody

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Speaker 1: from the United States no longer in government, I don't

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Speaker 1: have direct daily contact as I did for years. You've

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Speaker 1: not been speaking with Mr Trump recently. No, we may

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Speaker 1: want to get back to that. We'll get back to

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Speaker 1: the little later. If you were still at defended, you

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Speaker 1: going to your office street on Friday, how do you

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Speaker 1: think about it? As a central banker? You lived through

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Speaker 1: market meltdowns before. What's the first thing you do? What

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Speaker 1: do you what kind of conditions within your bank do

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Speaker 1: you try to establish? Well, the first thing I would

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Speaker 1: ask is what is the cause of the problem. Trying

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Speaker 1: to ameliorate the symptoms of the problem, there's never a

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Speaker 1: successful course because it doesn't get at the route issue.

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Speaker 1: Nobody is getting at the route issue that confronts all

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Speaker 1: of the developing world, which is which is the cause

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Speaker 1: of the problem now, because what is happening is productivity growth,

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Speaker 1: as you know, for I think more than two thirds

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Speaker 1: of the O E C D countries is in fact

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Speaker 1: it's more than two herds. UH has been running at

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Speaker 1: less than a half a percent per year for five years.

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Speaker 1: That means incomes of stagnating. And you see that in

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Speaker 1: real disposable income across England just like this. Absolutely, and

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Speaker 1: you know what I'm about to say. This is a

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Speaker 1: problem which is not strictly in the United States, right,

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Speaker 1: but as as I said, by all the O e

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Speaker 1: c D countries and what that is doing is creating

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Speaker 1: a general stagnation in the developed countries which is caught,

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Speaker 1: which is causing desperation on the part of their electorate.

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Speaker 1: I want to go to the economic point of the

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Speaker 1: last number of days people linking currency into interest rate,

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Speaker 1: into inflation, into declining g d P. And it shows

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Speaker 1: within a reduced current account deficit for the United Kingdom.

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Speaker 1: And maybe you bring up the idea of a phrase

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Speaker 1: from another time twin deficits greater fiscal deficit. Tell us

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Speaker 1: your experience with a nation that has to work with

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Speaker 1: a rapidly worsening current account deficit. Well, usually the problem

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Speaker 1: which you have is only two choices. One, you flood

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Speaker 1: the particular problem with reserve violences of some form or another,

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Speaker 1: irrespective of what it's coming from or to, you allow

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Speaker 1: the currencies to float. The first is obviously a desirable

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Speaker 1: one if it works, but it's a risky one and

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Speaker 1: you're always better off to allow the markets to run

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Speaker 1: that course. In other words, free up the currencies, free

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Speaker 1: up very much that the actions which will allow a

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Speaker 1: prices to move. If you try to stop prices, you're

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Speaker 1: going to create huge problems, and that has always been

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Speaker 1: my view as to what should be done. Is there

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Speaker 1: a risk though, in the UK situation, to doing that

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Speaker 1: when you have a seven percent current account deficits. Uh,

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Speaker 1: there's a risk in doing anything. The question is what's

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Speaker 1: the least worst risk? What is it right now? I

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Speaker 1: would say I wouldn't be that concerned about the currency

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Speaker 1: because it's not all that much you're going to be

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Speaker 1: able to do about it. I think the vulnerable institution

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Speaker 1: right now is the Eurozone because as I said before,

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Speaker 1: there is no backup to the e c B yet.

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Speaker 1: European central bank assets, which had gotten up to the

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Speaker 1: high level and then came all the way back down,

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Speaker 1: has now come all the way back to the height

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Speaker 1: of where they were. That raises a serious question is

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Speaker 1: what happens if all of a sudden the Euro ceases

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Speaker 1: to be a hard currency. It happens overnight. Uh, there

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Speaker 1: will be very significant difficulty as far as I can see.

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Speaker 1: And I think the thing to do is what they

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Speaker 1: should have been doing a long time ago, get grease

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Speaker 1: out because that there are a toxic liability sitting in

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Speaker 1: the middle of a very important economic But is it

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Speaker 1: just Greece or would you have to get rid of

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Speaker 1: Portugal or maybe even Italy? I think it depends undone.

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Speaker 1: In other words, theoretically, if you asked me, what would

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Speaker 1: the euro Zone basically exist up? Uh, German On, the Netherlands, Finland,

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Speaker 1: all currencies, Which the best way to put it is

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Speaker 1: when the crosses happens, they all move together. Then are

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Speaker 1: we seeing a death forget about the European experimental moonaise action.

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Speaker 1: Are we seeing a death of the Washington consensus? Here

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Speaker 1: Atlantic Charter to President Bush seniors work with goad and trade.

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Speaker 1: Is this referendum the first signal of the death of

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Speaker 1: your Washington Consensus? Well, it's too soon to say. And

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Speaker 1: incidentally death is too strong a word. It's absolutely needs readjustment.

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Speaker 1: I mean, the euro Zone cannot go on structurally the

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Speaker 1: way it's put together now, It's fundamentally the Northern States

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Speaker 1: of the Eurozone funding the Southern States, and the result

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Speaker 1: of that is, UH, you have an unstable system which

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Speaker 1: cannot go on indefinitely and you need current. If you're

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Speaker 1: going to put more than one currency together, it has

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Speaker 1: to have a similar culture. You cannot have inter differential cultures.

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Speaker 1: And now you know the argument I used to get

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Speaker 1: is that when the Europe comes in, UH, the Italians

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Speaker 1: would behave like Germans. They never did from day one?

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Speaker 1: Is the United Kingdom a differential culture from Germany most

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Speaker 1: certainly in the sense that UH in other kingdom is

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Speaker 1: sort of it's hard to define it. It's not it's

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Speaker 1: coming off of generations. I was squeezing down from British Empire.

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Speaker 1: British Empire in nineteen thirteen was at its peak and

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Speaker 1: the world were one very great damage. World War two

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Speaker 1: obviously a significant and h or not from Margaret Thatcher

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Speaker 1: coming in. UH. Once you did and do did what

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Speaker 1: she did, it wouldn't be in as good shape as

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Speaker 1: it is today. And remember that when Labor came in

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Speaker 1: after Thatcher, Tony Blair and Gordon Brown didn't change anything

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Speaker 1: what Thatcher did. What can the next president due to

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Speaker 1: assist Europe with these immense challenges. Lord Brown of British

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Speaker 1: Petroleum is adamant that the United Kingdom had to remain

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Speaker 1: because of tensions from seventy years ago, the outcome of

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Speaker 1: World War Two. How can we assist Europe stay away

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Speaker 1: from those primeval tensions? I wish I knew the answer

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Speaker 1: to that question. We're dealing now in the very early

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Speaker 1: day age of a crisis which has got a way

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Speaker 1: to low. I mean, this is justice is we've triggered

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Speaker 1: a series of events here which when Scotland, Scotland goes

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Speaker 1: Northern Ireland. To be clear, you're predicting that Scotland back

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Speaker 1: to seventeen I believe oh three will leave the United Kingdom. Yes,

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Speaker 1: in Northern Ireland as well well, Northern Ireland probably. See,

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Speaker 1: you've got the same, not the same type of problem. Uh.

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Speaker 1: Remember Scotland wanted to become an independent nation because it

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Speaker 1: had all that oil in the North Sea. By the

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Speaker 1: time they finally got to the referendum that the whole

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Speaker 1: reserve was almost gone. It has gone now. So the

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Speaker 1: economic problems that Scotland's going to run into when if

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Speaker 1: it I say, when it moves, I'm going to be

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Speaker 1: very difficult. I think because they don't realize the extinct

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Speaker 1: to which White All is funding them, and it's going

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Speaker 1: to be it's going to be a lot of wrenching

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Speaker 1: things are going around. I want to tease forward to

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Speaker 1: our next section. We've got about two more minutes, your Chairman,

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Speaker 1: and will move on the more mundane ideas. Where are

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Speaker 1: we in the debate the battle of rules versus discretion?

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Speaker 1: Give us an update on where that is is we

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Speaker 1: prepare for our next discussion. I'd say that discretion has

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Speaker 1: one the day because every time you're trying to lock

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Speaker 1: in some rules, uh, you get them locked in incorrectly

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Speaker 1: because you can't anticipate how the market's going to behave Well,

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Speaker 1: there's still a movement on Capitol Hill to try to

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Speaker 1: put the Federal Reserve into a rules based procedure. What

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Speaker 1: would happen if that were to pass, Well, we would

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Speaker 1: find ourselves trying to support the currency in an unsupportable position.

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Speaker 1: Is it the legislative version of going back on the

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Speaker 1: gold standard? No? If he went back on the gold

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Speaker 1: standard and we adhered to the actual structure of the

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Speaker 1: gold standard as it existed, say, prior to we'd be

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Speaker 1: fun Remember that the period eighteen seventy thirteen was one

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Speaker 1: of the most progressive periods economically that we've had in

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Speaker 1: the United States, and that was a golden period of

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Speaker 1: the gold standard. So I think that it's I mean,

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Speaker 1: I'm known as a gold bug and everyone laughs at me.

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Speaker 1: But well, why the Central Bank's own goal? Now, Well,

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Speaker 1: we're gonna come back on that. We could talk forever

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Speaker 1: about this. Alan Greenspan gold with us today. Mike, why

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Speaker 1: didn't you start with the army Greenspan's thoughts on the

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Speaker 1: why we're here? Well, that's an interesting question because you

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Speaker 1: have noted and back in March when Tom and I

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Speaker 1: last spoke with you, you know it at the time

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Speaker 1: that there is something beyond the individual day to day

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Speaker 1: news that we are watching. It. It's a deterioration in

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Speaker 1: the standards of living that people have these days. That

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Speaker 1: is around the world, it's global, and that is leading

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Speaker 1: to symptoms like what we're seeing in the United Kingdom

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Speaker 1: that aren't the cause themselves. Well, I think the problems

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Speaker 1: that we have, as I mentioned before, is the fact

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Speaker 1: that well, what's what's You know, it's often useful to

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Speaker 1: start with the end result and go back causation in reverse.

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Speaker 1: What we see is a desperate population out there everywhere.

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Speaker 1: We're seeing it in the United States. You can see

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Speaker 1: it all during our election period. It's a fear, it's

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Speaker 1: a desperation. They're looking for somebody to come and help

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Speaker 1: them out. That is a similar that This is basically

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Speaker 1: what Brexit has been all around. We're seeing it in

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Speaker 1: Europe generally. And so the question is why, well nobody

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Speaker 1: wishes to discuss this because it's politically very difficult to

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Speaker 1: discuss because nobody knows what to do about it in

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Speaker 1: the United States, which is not by itself by any means.

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Speaker 1: In fact, the US is better, it is best to

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Speaker 1: talk about because our data system is better. But when

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Speaker 1: I'm about to tell you exists pretty much throughout the

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Speaker 1: developed world, and that is that as the populations age

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Speaker 1: and they all are now in their baby boom period

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Speaker 1: and they're going into retirement, that is creating a major

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Speaker 1: fiscal problem in all of these countries. And the issue

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Speaker 1: is essentially that entitlements, which are entitlements, are legal issues.

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Speaker 1: They have nothing to do with the economics. You reach

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Speaker 1: a certain age, or you're ill or something of that age,

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Speaker 1: you're entitled to certain expenditures out of the budget without

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Speaker 1: any reference to how it's going to be funded. Where

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Speaker 1: the productivity levels are now, we're lucky to get something

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Speaker 1: even close to two percent annual growth rate, and that

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Speaker 1: annual growth rate of two is not adequate to finance

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Speaker 1: the exist in your experience, can policy makers are adjust

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Speaker 1: productivity higher? No? Oh, they can indirectly, I'm are if

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Speaker 1: they were to slow down the rate of growth of

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Speaker 1: entitlements and enabled remember what's happening, which is a remarkable

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Speaker 1: statistic for the United States, The sum of gross domestic

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Speaker 1: savings plus entitlements as a percent of GDP is flat

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Speaker 1: for a half century. That means that basically every dollar

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Speaker 1: of entitlement crowds out crowds out one dollar gross savings.

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Speaker 1: The gross savings adjusted for the current account balance, is

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Speaker 1: that what gross domestic investment is. But critically, your tenure shows,

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Speaker 1: and I think of Tip O'Neill as well, Speaker O'Neill,

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Speaker 1: nothing gets done without crisis. Do you just does Alan

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Speaker 1: Greenspan just wait for the next crisis the Capitol Hill

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Speaker 1: dozens I said in a book I finished recently. Since

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Speaker 1: I don't know how it's going to resolve, but there's

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Speaker 1: going to be a crisis. She said that in the

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Speaker 1: last book, and he was right. Well, these solutions come

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Speaker 1: on the fiscal side, yes, how and it's not like

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Speaker 1: people on Capitol Hill or people in Westminster don't know

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Speaker 1: what to do. They don't want to do it. What's

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Speaker 1: the communication? How do you tell them? How do you

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Speaker 1: get through to them about these issues? This is one

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Speaker 1: of the great problems of democracy and it goes back

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Speaker 1: to the founding fathers. How do you handle a situation

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Speaker 1: like this? And it's very troublesome, but eventually you get

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Speaker 1: things like Margaret Thatcher showing up in Britain. Their their

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Speaker 1: situation is far worse than honest. And what she did

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Speaker 1: is she turned it all around essentially by as I

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Speaker 1: remember it, Uh, the the minors we're going to strike.

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Speaker 1: And she decided that she knew they were going to

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Speaker 1: strike since at that point the government owned the coal mines.

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Speaker 1: She built up a huge inventory so that when they

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Speaker 1: went on strike there was enough call in Britain so

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Speaker 1: that eventually the the whole union structure collapsed. That put

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Speaker 1: her on a whole different Uh. She changed, She fundamentally

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Speaker 1: changed Britain to this day. I mean the fact that

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Speaker 1: we're doing so well in the EU is not altogether

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Speaker 1: clear that it is the EU or whether it was

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Speaker 1: Margaret Thatcher. What do we need then an accident of history? Uh?

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Speaker 1: Probably I don't see because Uh. And then added states

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Speaker 1: social benefits, which is the more generic term or entitlements

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Speaker 1: UM are considered the third rail of American politics. You

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Speaker 1: you touch them, and you lose. Now that is a

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Speaker 1: general view. The Republicans I want to touch it. The

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Speaker 1: Democrats that want to touch it, they don't even want

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Speaker 1: to talk about it. This is what the election should

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Speaker 1: be all about. In the United States. You will never

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Speaker 1: hear one word from you. Alan Greenspan with US is

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Speaker 1: Bloomberg Radio and Bloomberg Television worldwide. One question, if I

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Speaker 1: made to stay away from Fed policy negative interest rates,

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Speaker 1: I don't believe they are in your textbook. At n

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Speaker 1: y U, we are learning about negative interest rates. What

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Speaker 1: have you observed and what will we see if we

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Speaker 1: see even deeper negative interest rates in the coming months. Well,

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Speaker 1: let's understand where negative interest rates come from. Uh. If

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Speaker 1: you go back and look at the period when say

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Speaker 1: that the US ten year note was five or thereabouts,

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Speaker 1: or when the normal relationship existed, negative rates would not exist.

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Speaker 1: But if you take, for example, when they emerge, you

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Speaker 1: have let's see five ten years ago the Swiss frank

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Speaker 1: I should say that the yield on Swiss long term

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Speaker 1: debt would be two three basis points under for example

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Speaker 1: Italy Italy or rather less desirable, and that spread would

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Speaker 1: move up and down. And now it's broken. Well, no,

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Speaker 1: it hasn't broken. What happened is that if the overall

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Speaker 1: rate comes down, then in order to keep that spread,

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Speaker 1: the Swiss Francaster go negative. And so that what you

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Speaker 1: have is that now they're gonna start they're gonna stop

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Speaker 1: them at stock up on currency, and that's gonna make

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Speaker 1: a difference. We've run out of time. We could go forever,

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Speaker 1: particularly on the United Kingdom. Allen green Span, thank you

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Speaker 1: so much for joining us today here on Bloomberg Radio

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Speaker 1: and Bloomberg Television. Alan Greenspan on the United Kingdom and

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Speaker 1: on our American economics. Thanks for listening to the Bloomberg

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Speaker 1: Surveillance podcast. Subscribe and listen to interviews on iTunes, SoundCloud,

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Speaker 1: or whichever podcast platform you prefer. I'm on Twitter at

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Speaker 1: Tom Keane. Michael McKee is at Economy before the podcast.

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Speaker 1: You can always catch us worldwide. I'm Bloomberg Radio