Former Federal Reserve chairman Alan Greenspan is bearish. “We have been through a protracted period of stagnant productivity growth, particularly in the developed world, driven largely by the ageing of the ‘baby-boom’ generation.” Rising welfare benefits for the elderly “are crowding out gross domestic savings, the primary source for funding investment”. Falling investment has hit productivity – output per hour over the past five years has grown by about 0.5% a year, compared with near-2% previously. This has “provoked despair” and the “rise in economic populism”.
Greenspan is particularly worried about inflation. “In the US, the unemployment rate is below 5%, which has put upward pressure on wages and unit costs generally.” At the same time, “demand is picking up, as manifested by the recent marked, broad increase in the money supply, which is stoking inflationary pressures”. Wage hikes so far “have largely been absorbed by employers”, but “prices ultimately have to follow suit”. Monetary policies may also be fuelling the problem, especially in Europe, where the European Central Bank’s balance sheet has grown steadily in recent years.
This mix of low productivity and loose monetary policy is unlikely to end well. Rising prices plus weak growth add up to “stagflation”, warns Greenspan, who thinks there is a good chance that we could see a repeat of the situation in the 1980s, when another former Fed governor, Paul Volcker, was forced to hike “the Federal Funds rate to 20%”. So he’s sticking with his advice to buy gold – “one of the only currencies that has an intrinsic value”.