Outlook: Alan Greenspan; this time it's serious
On the fed chairman's latest warning, accessing the internet via electricity cables, and WH SmitH
Thursday 09 October 1997
All the same, what he actually did say was sobering enough. Mr Greenspan's normally delphic testimony to the US House of Representatives was, for a change, unambiguous. Mr Greenspan is not a believer in the "new paradigm", the theory that the US has abolished the business cycle, that the economy is on a sustainable glide path of low inflation and high growth out into the indefinite future. Mr Greenspan is far too wise an old bird to call the theory so much hooey; the American public doesn't like to hear that kind of thing. But he might well have done.
Choosing his words carefully, Mr Greenspan said: "Short of a marked slowing in the demand for goods and services and hence, labour - or a degree of acceleration of productivity growth that appears unlikely - the imbalance between the growth in labour demand and the expansion of potential labour supply of recent years must eventually erode the current state of inflation quiescence, and with it the solid growth of real activity". What he is saying here is that to head off inflationary pressures in the US economy, the Fed needs to slow the demand for labour. The only way it can do this is in time honoured fashion - by raising interest rates.
Mr Greenspan was less clear on timing, but a small rise in rates when the Fed's open markets committee meets next month now looks highly likely. What will this do to the markets? When Mr Greenspan warned of "irrational exuberance" in financial markets last December, they took not a blind bit of notice. Since then the Dow Jones Industrial average has risen a further 30 per cent. On that occasion, however, there was nothing in the way of action to halt the rise in asset valuations, only words. This time round he looks intent on going further by pricking the bubble with a rise in rates.
Furthermore, regardless of whatever action the Fed takes, the implication of what Mr Greenspan is saying here is quite bearish. Financial markets have priced in an optimistic outlook, he said. One characteristic of this process is a continual upward revision of longer term corporate earnings forecasts which has driven price earnings ratios to levels never before seen at this stage of the economic cycle.
Running parallel to this has been a marked increase in the perceived rate of return for new business ventures which in turn is leading to a sharp increase in capital investment. In other words, we have here all the elements of a dangerous speculative spiral. Mr Greenspan would not want the market to crash. But he is saying as plainly as he can; cool it, or we will all be sorry.
Liam Neeson's Downton dreams
Thriller is set in the secret world of British espionage
Bomber jacket worn by Mary Berry sells out within an hour
- 2 Scottish referendum results: David Cameron set to unveil major devolution of powers to England
- 3 iOS 8 is full of shiny new features - but it's terrible news for app developers
- 4 Scottish independence: Tory revolt against 'devo max' grows as Rail Minister Claire Perry joins
- 5 Hitler’s former food taster reveals the horrors of the Wolf’s Lair
Scottish independence results live: Reunited kingdom - Scotland gives a clear 'No' in historic referendum
Scottish referendum results: David Cameron set to unveil major devolution of powers to England
Iranian blogger found guilty of insulting Prophet Mohammad on Facebook sentenced to death
Scottish independence: YouGov final prediction puts No campaign 8 points ahead - but Yes team remains optimistic
Scottish independence: Tory revolt against 'devo max' grows as Rail Minister Claire Perry joins
Daniele Watts: Django Unchained actress detained by Los Angeles police after being mistaken for a prostitute
Scottish independence referendum: A nation divided against itself
Scottish independence: David Cameron is becoming the 'George Bush of Britain'
Russia freezes Ukraine into submission: Kiev admits country doesn't have enough fuel for winter
Scottish independence: The Queen breaks silence on referendum debate – as think tank warns of £14bn black hole if Scotland votes Yes
Portuguese academic says British are 'filthy, violent and drunk'
iJobs Money & Business
£320 - £330 per day: Ashdown Group: The Ashdown Group have been engaged by a l...
To £75,000 + Pension + Benefits + Bonus: Saxton Leigh: My client is looking f...
To £85,000 + banking benefits: Saxton Leigh: You will be expected to carry out...
Up to £90,000 + benefits: Saxton Leigh: Credit Risk Audit Manager required to ...