	Generational Dynamics
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Generational Dynamics Web Log for 17-Feb-05
Greenspan's testimony further repudiates his earlier stock bubble reasoning

Web Log - February, 2005

Greenspan's testimony further repudiates his earlier stock bubble reasoning

The Fed Chairman has now completely reversed his previous position on the stock market bubble of the 1990s.

As I've previously discussed, Federal Reserve Chairman Alan Greenspan expressed a great deal of alarm about the world economy in a February 5 speech to the Advancing Enterprise 2005 Conference in London.

At that time he said,

International trade has been expanding as a share of world gross domestic product since the end of World War II. Yet through 1995, the expansion was essentially a balanced grossing up of cross-border flows. Only in the past decade has expanding trade been associated with the emergence of ever-larger U.S. current account deficits, lesser deficits elsewhere, matched by a corresponding widening of external surpluses in a majority of trading nations. ... The dramatic advances over the past decade in virtually all measures of globalisation have resulted in an international economic environment with little relevant historical precedent.

This represented a very significant change in position by Greenspan, who has always treated the 1990s economy as self-contained and in control of its own future. In particular, his policy in the late 1990s of not treating the bubble but treating its aftermath was based on the belief that the Fed could have headed off the 1930s Great Depression by rapid interest rate cuts. This belief, whether correct or not, takes advantage of the fact that the 1930s economy was almost entirely self-contained within America.

Greenspan's testimony to Congress on February 16 did not use the same alarming language, but continued his repudiation of his past position by emphasizing the international nature of the economy.

Greenspan pointed to a special "conundrum": The flattening of the yield curve in bonds, which I wrote about last year.

The issue is that interest rates for long-term investments keep falling, while the interest rates for short term investments have been rising. Here's an update of the chart that I posted last year, showing the interest rates for short and long-term bonds for some recent dates:

Treasury Bond Yields

Date 3-month
maturity 10-year
maturity Difference

May 11 '04 0.94% 4.74% 3.80%

June 11 '04 1.17% 4.79% 3.62%

Aug 21 '04 1.38% 4.23% 2.85%

Sept 21 '04 1.60% 4.03% 2.43%

Feb 17 '05 2.44% 4.17% 1.17%


Treasury Bond Yields

Date	3-month maturity	10-year maturity	Difference

May 11 '04	0.94%	4.74%	3.80%
June 11 '04	1.17%	4.79%	3.62%
Aug 21 '04	1.38%	4.23%	2.85%
Sept 21 '04	1.60%	4.03%	2.43%
Feb 17 '05	2.44%	4.17%	1.17%

As you can see, the short-term rates continue to increase significantly, and the long-term rates have been decreasing or remaining steady.

Greenspan recounted several reasons that analysts have been giving for this phenomenon, including the business community's fear of recession and the heavy purchases of long-term bonds by foreign banks.

Then he said:

There is little doubt that, with the breakup of the Soviet Union and the integration of China and India into the global trading market, more of the world's productive capacity is being tapped to satisfy global demands for goods and services. Concurrently, greater integration of financial markets has meant that a larger share of the world's pool of savings is being deployed in cross-border financing of investment. The favorable inflation performance across a broad range of countries resulting from enlarged global goods, services and financial capacity has doubtless contributed to expectations of lower inflation in the years ahead and lower inflation risk premiums. But none of this is new and hence it is difficult to attribute the long-term interest rate declines of the last nine months to glacially increasing globalization. For the moment, the broadly unanticipated behavior of world bond markets remains a conundrum. Bond price movements may be a short-term aberration, but it will be some time before we are able to better judge the forces underlying recent experience.

There are two major points to get out of this:

Greenspan is thinking internationally much more than he used to.
He says he has no idea why long-term interest rates are falling.

In affirming his confusion, he's essentially repeating what he said last time: "The dramatic advances over the past decade in virtually all measures of globalisation have resulted in an international economic environment with little relevant historical precedent."

As I've been saying since 2002, Generational Dynamics predicts that we're entering a new 1930s style Great Depression. Even to people without an understanding of Generational Dynamics, including Alan Greenspan, this prediction must be getting increasingly plausible. (17-Feb-05) Permanent Link
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Generational Dynamics Web Log for 17-Feb-05 Greenspan's testimony further repudiates his earlier stock bubble reasoning

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Generational Dynamics Web Log for 17-Feb-05
Greenspan's testimony further repudiates his earlier stock bubble reasoning