Former Federal Reserve Chairman Alan Greenspan warned investors to prepare for sluggish growth and soaring inflation as the economy begins a long journey to repair itself under President Donald Trump.
"I think we're in a period, because of fiscal reasons, for a sluggish economic growth rate for a while, but superimposed on that are early signs of a pickup inflation," he told CNBC. "My concern now is actually stagflation," he said. "That pickup in inflation is going to move profit margins up temporarily. But it's a false dawn," he said.
Fiscal policy, which has been gridlocked for years in Washington, "needs to be one, two and three" on the list of reforms that must be done to jump-start the economy, said Greenspan. The emphasis on the Fed's monetary policy should be fourth on the list, Greenspan said.
"I'd love to see Dodd-Frank disappear," Greenspan said, calling the regulations designed to reduce banking risk in the wake of the 2008 financial crisis a "disastrous mistake."
Greenspan also warned that current entitlement growth is on a path to disaster.
“Entitlements are growing at a rate which is unsustainable. But it's being determined basically not by economics but by the age structure and other elements within our society,” Greenspan said.
“The age of American population is going up. Throughout all of the developed countries, the ratio of the proportion of population age 65 and over is moving up fairly rapidly and that is causing a major increase in entitlements, social benefits around the developed world. It's far more relevant here in the sense that it's beginning to have a very significant negative impact on economic growth. That's where our problems are. I agree with you. During all the debates that went on during this election and upcoming up to it, nobody used the word entitlements,” Greenspan said.
“We have a rate of increase in entitlements which since 1965 has been 9%. What is occurring currently is that the entitlements plus gross domestic savings is as a percent of GDP has been absolutely flat back to 1965. That essentially says for every dollar increase in entitlements, you're getting a dollar decrease in gross domestic savings which also affects gross domestic investment which is the core of output per hour and our levels of GDP and prosperity,” Greenspan said.
Meanwhile, Greenspan himself does have his critics. For example, Newsmax Finance Insider Jeff Snider contends that "Greenspan’s credentials say nothing; his track record is all that should matter when judging the worth of his opinions."
Greenspan "doesn’t know what he is talking about and there is a mountain of evidence, including his own words, that show that he never did," Snider, in a recent blog, explained.
"We are stuck in this economic depression not just because of his past tenure, but more so now because constant reverence prevents acceptance of these facts. The recovery doesn’t start until the “maestro’s” legend dies, and with it all the confusion and misconstruction about how markets and the economy actually work," Snider wrote.
(Newsmax wire services contributed to this report).
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