Speaker 1: Yeah, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane.
Speaker 1: Always with Michael McKee daily we bring you insight from
Speaker 1: the best in economics, finance, investment, and international relations. Find
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Speaker 1: course on the Bloomberg Let's get right to it here.
Speaker 1: He needs no introduction. Alan Greenspan is uh the former
Speaker 1: chairman of the Fellow Reserve System. And I think many
Speaker 1: of you know without question is recent caution on the economy,
Speaker 1: and yet everything has changed. Did you fall off your
Speaker 1: couch on Friday? Could you not play tennis Saturday morning?
Speaker 1: You were so shocked by the outcome in the United Kingdom?
Speaker 1: What I play terrible tennis? You play terrible tennis in
Speaker 1: honor of what was going on because you couldn't see
Speaker 1: the ball. Let me let me go to your book,
Speaker 1: The Age of Turbulence. There is an age of church
Speaker 1: turbulence right now. And I think of a chapter you
Speaker 1: had there on China, the choices that await China. What
Speaker 1: are the choices that await the United Kingdom and the
Speaker 1: new Prime Minister. Well, I think they obviously made a
Speaker 1: terrible mistake because they had presumed that if they were
Speaker 1: to have the referendum that it would be closed issues
Speaker 1: very quickly, and that the political problems that they had
Speaker 1: internally as a consequence of the minority that they thought
Speaker 1: would be pushed aside. They were mistaken. Prime Minister has
Speaker 1: lost his job, Cominant obviously going to lose their job.
Speaker 1: It's a terrible outcome in all respects. It didn't have
Speaker 1: to happen. I always thought that the real problem in
Speaker 1: Europe was the Euro, which I've always thought was basically
Speaker 1: an unstable currency, can't exist permanently in the existing structure.
Speaker 1: It never entered my mind that Sterling was an issue
Speaker 1: because it's a floating currency and Britain isn't was was
Speaker 1: in fairly good shape economically. If your attention is on Europe,
Speaker 1: what would you request from Chancellor Miracle and what would
Speaker 1: you request from Brussels? Well, I'm not in a physician
Speaker 1: to request that. Would like to know? Now I think
Speaker 1: what is Let me start off what I think ought
Speaker 1: to happen with respect to the Euro. First of all,
Speaker 1: the Euro was being pulled apart basically by the continued
Speaker 1: existence of Grace Greece in the in the euro structure.
Speaker 1: Poice got in by mistake or should say, miscalculation of
Speaker 1: some of the data they submitted for purposes of entering
Speaker 1: the Euro. It became very clear when the next government,
Speaker 1: Greek Greek government showed up that the data which had
Speaker 1: been submitted were just not accurate. They have been a
Speaker 1: throne in the side of the whole eurostructure ever since.
Speaker 1: They should never have been in the Euro. They should
Speaker 1: get out as soon as possible if you want to
Speaker 1: sustain the fundamental euro structure. The difficulty of the Euro
Speaker 1: is one we were all aware of very early on.
Speaker 1: I sat in on the early stages of the development
Speaker 1: of the new currency, before they had the name Euro.
Speaker 1: The basic purpose was essentially to foster the question of
Speaker 1: European integration politically and not necessarily otherwise. Chairman, Mr Charman,
Speaker 1: you said a little earlier, and you have said in
Speaker 1: the past, that the Euro has become something of a
Speaker 1: failed experiment. Here does that suggest that you think the
Speaker 1: British are right to be concerned about being in the
Speaker 1: European Union, leave aside the damage that may be caused
Speaker 1: by leaving, but do you have any sympathy for the
Speaker 1: idea that they're better off outside. No, there's a fundamental
Speaker 1: difference between being in a structure or everybody is forced
Speaker 1: into the same currency, irrespective of differentials and culture, economic
Speaker 1: status and a variety of other things. The the EU
Speaker 1: is fundamentally a very good idea. It's a free zone.
Speaker 1: It's a free trade zone structure which we need an
Speaker 1: awful lot of. So that the choice of Britain to
Speaker 1: stay in the EU and get out of the Eurozone
Speaker 1: was I thought the most sensible action I could be taken.
Speaker 1: And Gordon Brown, who was instrumental in that decision, I
Speaker 1: think ought to be distressed by what is going on?
Speaker 1: Is I know he is? Well, the question comes up
Speaker 1: if the euro Zone itself is failed experiment, and one
Speaker 1: of the problems they have is the lack of a
Speaker 1: fiscal authority, the only way they can get there is
Speaker 1: to centralize more power in Brussels, which is exactly what
Speaker 1: the United Kingdom doesn't want. Well, but the problem with
Speaker 1: the Euro isn't going to be solved by that. The
Speaker 1: problem with the Euro is a much more fundamentally difficult one,
Speaker 1: which is which is going to arise fairly Surely, let
Speaker 1: me suggest something that nobody discusses as the police, and
Speaker 1: I think it ought to be discussed if the Federal
Speaker 1: Reserve were, for example, I should say, uh, if the
Speaker 1: Federal Reserve were to run into financial trouble uh, and
Speaker 1: the dollar were very extreme case, the sovereign credit of
Speaker 1: the dollar back, I should say, so, which the Treasury
Speaker 1: Department would back up the fellow reserved and there'd be
Speaker 1: no problem. There is no backup on the European Central Bank.
Speaker 1: I mean theoretically the Master Treaty has got means by
Speaker 1: which they would be financed that they got in the trouble,
Speaker 1: but that's not going to That speaks to the fractious
Speaker 1: nature here, and it speaks to I think Barry I
Speaker 1: could Green at Berkeley talking about the exorbitant privilege. Where's
Speaker 1: the leadership to drive a solution. We've been saying this
Speaker 1: now for four and five days. We remember Valeriees you
Speaker 1: started to staying Charles de gaul at an hour of Germany,
Speaker 1: I believe it named Greenspan from the United States, do
Speaker 1: you observe leaders that can make tough decisions as the
Speaker 1: acclaimed Chancellor miracle was made, well, yeah, I mean Tony
Speaker 1: Blair and Gordon Brown made they're not in office right now,
Speaker 1: you know, and I don't see anybody to match them.
Speaker 1: So the basic problem is it's very difficult for somebody
Speaker 1: from the United States no longer in government, I don't
Speaker 1: have direct daily contact as I did for years. You've
Speaker 1: not been speaking with Mr Trump recently. No, we may
Speaker 1: want to get back to that. We'll get back to
Speaker 1: the little later. If you were still at defended, you
Speaker 1: going to your office street on Friday, how do you
Speaker 1: think about it? As a central banker? You lived through
Speaker 1: market meltdowns before. What's the first thing you do? What
Speaker 1: do you what kind of conditions within your bank do
Speaker 1: you try to establish? Well, the first thing I would
Speaker 1: ask is what is the cause of the problem. Trying
Speaker 1: to ameliorate the symptoms of the problem, there's never a
Speaker 1: successful course because it doesn't get at the route issue.
Speaker 1: Nobody is getting at the route issue that confronts all
Speaker 1: of the developing world, which is which is the cause
Speaker 1: of the problem now, because what is happening is productivity growth,
Speaker 1: as you know, for I think more than two thirds
Speaker 1: of the O E C D countries is in fact
Speaker 1: it's more than two herds. UH has been running at
Speaker 1: less than a half a percent per year for five years.
Speaker 1: That means incomes of stagnating. And you see that in
Speaker 1: real disposable income across England just like this. Absolutely, and
Speaker 1: you know what I'm about to say. This is a
Speaker 1: problem which is not strictly in the United States, right,
Speaker 1: but as as I said, by all the O e
Speaker 1: c D countries and what that is doing is creating
Speaker 1: a general stagnation in the developed countries which is caught,
Speaker 1: which is causing desperation on the part of their electorate.
Speaker 1: I want to go to the economic point of the
Speaker 1: last number of days people linking currency into interest rate,
Speaker 1: into inflation, into declining g d P. And it shows
Speaker 1: within a reduced current account deficit for the United Kingdom.
Speaker 1: And maybe you bring up the idea of a phrase
Speaker 1: from another time twin deficits greater fiscal deficit. Tell us
Speaker 1: your experience with a nation that has to work with
Speaker 1: a rapidly worsening current account deficit. Well, usually the problem
Speaker 1: which you have is only two choices. One, you flood
Speaker 1: the particular problem with reserve violences of some form or another,
Speaker 1: irrespective of what it's coming from or to, you allow
Speaker 1: the currencies to float. The first is obviously a desirable
Speaker 1: one if it works, but it's a risky one and
Speaker 1: you're always better off to allow the markets to run
Speaker 1: that course. In other words, free up the currencies, free
Speaker 1: up very much that the actions which will allow a
Speaker 1: prices to move. If you try to stop prices, you're
Speaker 1: going to create huge problems, and that has always been
Speaker 1: my view as to what should be done. Is there
Speaker 1: a risk though, in the UK situation, to doing that
Speaker 1: when you have a seven percent current account deficits. Uh,
Speaker 1: there's a risk in doing anything. The question is what's
Speaker 1: the least worst risk? What is it right now? I
Speaker 1: would say I wouldn't be that concerned about the currency
Speaker 1: because it's not all that much you're going to be
Speaker 1: able to do about it. I think the vulnerable institution
Speaker 1: right now is the Eurozone because as I said before,
Speaker 1: there is no backup to the e c B yet.
Speaker 1: European central bank assets, which had gotten up to the
Speaker 1: high level and then came all the way back down,
Speaker 1: has now come all the way back to the height
Speaker 1: of where they were. That raises a serious question is
Speaker 1: what happens if all of a sudden the Euro ceases
Speaker 1: to be a hard currency. It happens overnight. Uh, there
Speaker 1: will be very significant difficulty as far as I can see.
Speaker 1: And I think the thing to do is what they
Speaker 1: should have been doing a long time ago, get grease
Speaker 1: out because that there are a toxic liability sitting in
Speaker 1: the middle of a very important economic But is it
Speaker 1: just Greece or would you have to get rid of
Speaker 1: Portugal or maybe even Italy? I think it depends undone.
Speaker 1: In other words, theoretically, if you asked me, what would
Speaker 1: the euro Zone basically exist up? Uh, German On, the Netherlands, Finland,
Speaker 1: all currencies, Which the best way to put it is
Speaker 1: when the crosses happens, they all move together. Then are
Speaker 1: we seeing a death forget about the European experimental moonaise action.
Speaker 1: Are we seeing a death of the Washington consensus? Here
Speaker 1: Atlantic Charter to President Bush seniors work with goad and trade.
Speaker 1: Is this referendum the first signal of the death of
Speaker 1: your Washington Consensus? Well, it's too soon to say. And
Speaker 1: incidentally death is too strong a word. It's absolutely needs readjustment.
Speaker 1: I mean, the euro Zone cannot go on structurally the
Speaker 1: way it's put together now, It's fundamentally the Northern States
Speaker 1: of the Eurozone funding the Southern States, and the result
Speaker 1: of that is, UH, you have an unstable system which
Speaker 1: cannot go on indefinitely and you need current. If you're
Speaker 1: going to put more than one currency together, it has
Speaker 1: to have a similar culture. You cannot have inter differential cultures.
Speaker 1: And now you know the argument I used to get
Speaker 1: is that when the Europe comes in, UH, the Italians
Speaker 1: would behave like Germans. They never did from day one?
Speaker 1: Is the United Kingdom a differential culture from Germany most
Speaker 1: certainly in the sense that UH in other kingdom is
Speaker 1: sort of it's hard to define it. It's not it's
Speaker 1: coming off of generations. I was squeezing down from British Empire.
Speaker 1: British Empire in nineteen thirteen was at its peak and
Speaker 1: the world were one very great damage. World War two
Speaker 1: obviously a significant and h or not from Margaret Thatcher
Speaker 1: coming in. UH. Once you did and do did what
Speaker 1: she did, it wouldn't be in as good shape as
Speaker 1: it is today. And remember that when Labor came in
Speaker 1: after Thatcher, Tony Blair and Gordon Brown didn't change anything
Speaker 1: what Thatcher did. What can the next president due to
Speaker 1: assist Europe with these immense challenges. Lord Brown of British
Speaker 1: Petroleum is adamant that the United Kingdom had to remain
Speaker 1: because of tensions from seventy years ago, the outcome of
Speaker 1: World War Two. How can we assist Europe stay away
Speaker 1: from those primeval tensions? I wish I knew the answer
Speaker 1: to that question. We're dealing now in the very early
Speaker 1: day age of a crisis which has got a way
Speaker 1: to low. I mean, this is justice is we've triggered
Speaker 1: a series of events here which when Scotland, Scotland goes
Speaker 1: Northern Ireland. To be clear, you're predicting that Scotland back
Speaker 1: to seventeen I believe oh three will leave the United Kingdom. Yes,
Speaker 1: in Northern Ireland as well well, Northern Ireland probably. See,
Speaker 1: you've got the same, not the same type of problem. Uh.
Speaker 1: Remember Scotland wanted to become an independent nation because it
Speaker 1: had all that oil in the North Sea. By the
Speaker 1: time they finally got to the referendum that the whole
Speaker 1: reserve was almost gone. It has gone now. So the
Speaker 1: economic problems that Scotland's going to run into when if
Speaker 1: it I say, when it moves, I'm going to be
Speaker 1: very difficult. I think because they don't realize the extinct
Speaker 1: to which White All is funding them, and it's going
Speaker 1: to be it's going to be a lot of wrenching
Speaker 1: things are going around. I want to tease forward to
Speaker 1: our next section. We've got about two more minutes, your Chairman,
Speaker 1: and will move on the more mundane ideas. Where are
Speaker 1: we in the debate the battle of rules versus discretion?
Speaker 1: Give us an update on where that is is we
Speaker 1: prepare for our next discussion. I'd say that discretion has
Speaker 1: one the day because every time you're trying to lock
Speaker 1: in some rules, uh, you get them locked in incorrectly
Speaker 1: because you can't anticipate how the market's going to behave Well,
Speaker 1: there's still a movement on Capitol Hill to try to
Speaker 1: put the Federal Reserve into a rules based procedure. What
Speaker 1: would happen if that were to pass, Well, we would
Speaker 1: find ourselves trying to support the currency in an unsupportable position.
Speaker 1: Is it the legislative version of going back on the
Speaker 1: gold standard? No? If he went back on the gold
Speaker 1: standard and we adhered to the actual structure of the
Speaker 1: gold standard as it existed, say, prior to we'd be
Speaker 1: fun Remember that the period eighteen seventy thirteen was one
Speaker 1: of the most progressive periods economically that we've had in
Speaker 1: the United States, and that was a golden period of
Speaker 1: the gold standard. So I think that it's I mean,
Speaker 1: I'm known as a gold bug and everyone laughs at me.
Speaker 1: But well, why the Central Bank's own goal? Now, Well,
Speaker 1: we're gonna come back on that. We could talk forever
Speaker 1: about this. Alan Greenspan gold with us today. Mike, why
Speaker 1: didn't you start with the army Greenspan's thoughts on the
Speaker 1: why we're here? Well, that's an interesting question because you
Speaker 1: have noted and back in March when Tom and I
Speaker 1: last spoke with you, you know it at the time
Speaker 1: that there is something beyond the individual day to day
Speaker 1: news that we are watching. It. It's a deterioration in
Speaker 1: the standards of living that people have these days. That
Speaker 1: is around the world, it's global, and that is leading
Speaker 1: to symptoms like what we're seeing in the United Kingdom
Speaker 1: that aren't the cause themselves. Well, I think the problems
Speaker 1: that we have, as I mentioned before, is the fact
Speaker 1: that well, what's what's You know, it's often useful to
Speaker 1: start with the end result and go back causation in reverse.
Speaker 1: What we see is a desperate population out there everywhere.
Speaker 1: We're seeing it in the United States. You can see
Speaker 1: it all during our election period. It's a fear, it's
Speaker 1: a desperation. They're looking for somebody to come and help
Speaker 1: them out. That is a similar that This is basically
Speaker 1: what Brexit has been all around. We're seeing it in
Speaker 1: Europe generally. And so the question is why, well nobody
Speaker 1: wishes to discuss this because it's politically very difficult to
Speaker 1: discuss because nobody knows what to do about it in
Speaker 1: the United States, which is not by itself by any means.
Speaker 1: In fact, the US is better, it is best to
Speaker 1: talk about because our data system is better. But when
Speaker 1: I'm about to tell you exists pretty much throughout the
Speaker 1: developed world, and that is that as the populations age
Speaker 1: and they all are now in their baby boom period
Speaker 1: and they're going into retirement, that is creating a major
Speaker 1: fiscal problem in all of these countries. And the issue
Speaker 1: is essentially that entitlements, which are entitlements, are legal issues.
Speaker 1: They have nothing to do with the economics. You reach
Speaker 1: a certain age, or you're ill or something of that age,
Speaker 1: you're entitled to certain expenditures out of the budget without
Speaker 1: any reference to how it's going to be funded. Where
Speaker 1: the productivity levels are now, we're lucky to get something
Speaker 1: even close to two percent annual growth rate, and that
Speaker 1: annual growth rate of two is not adequate to finance
Speaker 1: the exist in your experience, can policy makers are adjust
Speaker 1: productivity higher? No? Oh, they can indirectly, I'm are if
Speaker 1: they were to slow down the rate of growth of
Speaker 1: entitlements and enabled remember what's happening, which is a remarkable
Speaker 1: statistic for the United States, The sum of gross domestic
Speaker 1: savings plus entitlements as a percent of GDP is flat
Speaker 1: for a half century. That means that basically every dollar
Speaker 1: of entitlement crowds out crowds out one dollar gross savings.
Speaker 1: The gross savings adjusted for the current account balance, is
Speaker 1: that what gross domestic investment is. But critically, your tenure shows,
Speaker 1: and I think of Tip O'Neill as well, Speaker O'Neill,
Speaker 1: nothing gets done without crisis. Do you just does Alan
Speaker 1: Greenspan just wait for the next crisis the Capitol Hill
Speaker 1: dozens I said in a book I finished recently. Since
Speaker 1: I don't know how it's going to resolve, but there's
Speaker 1: going to be a crisis. She said that in the
Speaker 1: last book, and he was right. Well, these solutions come
Speaker 1: on the fiscal side, yes, how and it's not like
Speaker 1: people on Capitol Hill or people in Westminster don't know
Speaker 1: what to do. They don't want to do it. What's
Speaker 1: the communication? How do you tell them? How do you
Speaker 1: get through to them about these issues? This is one
Speaker 1: of the great problems of democracy and it goes back
Speaker 1: to the founding fathers. How do you handle a situation
Speaker 1: like this? And it's very troublesome, but eventually you get
Speaker 1: things like Margaret Thatcher showing up in Britain. Their their
Speaker 1: situation is far worse than honest. And what she did
Speaker 1: is she turned it all around essentially by as I
Speaker 1: remember it, Uh, the the minors we're going to strike.
Speaker 1: And she decided that she knew they were going to
Speaker 1: strike since at that point the government owned the coal mines.
Speaker 1: She built up a huge inventory so that when they
Speaker 1: went on strike there was enough call in Britain so
Speaker 1: that eventually the the whole union structure collapsed. That put
Speaker 1: her on a whole different Uh. She changed, She fundamentally
Speaker 1: changed Britain to this day. I mean the fact that
Speaker 1: we're doing so well in the EU is not altogether
Speaker 1: clear that it is the EU or whether it was
Speaker 1: Margaret Thatcher. What do we need then an accident of history? Uh?
Speaker 1: Probably I don't see because Uh. And then added states
Speaker 1: social benefits, which is the more generic term or entitlements
Speaker 1: UM are considered the third rail of American politics. You
Speaker 1: you touch them, and you lose. Now that is a
Speaker 1: general view. The Republicans I want to touch it. The
Speaker 1: Democrats that want to touch it, they don't even want
Speaker 1: to talk about it. This is what the election should
Speaker 1: be all about. In the United States. You will never
Speaker 1: hear one word from you. Alan Greenspan with US is
Speaker 1: Bloomberg Radio and Bloomberg Television worldwide. One question, if I
Speaker 1: made to stay away from Fed policy negative interest rates,
Speaker 1: I don't believe they are in your textbook. At n
Speaker 1: y U, we are learning about negative interest rates. What
Speaker 1: have you observed and what will we see if we
Speaker 1: see even deeper negative interest rates in the coming months. Well,
Speaker 1: let's understand where negative interest rates come from. Uh. If
Speaker 1: you go back and look at the period when say
Speaker 1: that the US ten year note was five or thereabouts,
Speaker 1: or when the normal relationship existed, negative rates would not exist.
Speaker 1: But if you take, for example, when they emerge, you
Speaker 1: have let's see five ten years ago the Swiss frank
Speaker 1: I should say that the yield on Swiss long term
Speaker 1: debt would be two three basis points under for example
Speaker 1: Italy Italy or rather less desirable, and that spread would
Speaker 1: move up and down. And now it's broken. Well, no,
Speaker 1: it hasn't broken. What happened is that if the overall
Speaker 1: rate comes down, then in order to keep that spread,
Speaker 1: the Swiss Francaster go negative. And so that what you
Speaker 1: have is that now they're gonna start they're gonna stop
Speaker 1: them at stock up on currency, and that's gonna make
Speaker 1: a difference. We've run out of time. We could go forever,
Speaker 1: particularly on the United Kingdom. Allen green Span, thank you
Speaker 1: so much for joining us today here on Bloomberg Radio
Speaker 1: and Bloomberg Television. Alan Greenspan on the United Kingdom and
Speaker 1: on our American economics. Thanks for listening to the Bloomberg
Speaker 1: Surveillance podcast. Subscribe and listen to interviews on iTunes, SoundCloud,
Speaker 1: or whichever podcast platform you prefer. I'm on Twitter at
Speaker 1: Tom Keane. Michael McKee is at Economy before the podcast.
Speaker 1: You can always catch us worldwide. I'm Bloomberg Radio