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Yankee

Greenspan Says Economy Faces Asset Price Fall

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SEOUL, April 12 (Reuters) - Former Federal Reserve Chairman Alan Greenspan warned on Wednesday a global glut in liquidity would result in a fall in asset prices.

Greenspan, speaking to a financial conference in Seoul via satellite, also said separately that a U.S. law on corporate governance may face changes.

Greenspan said the market value of assets worldwide had been rising faster than nominal gross domestic product globally due to a decline in real long-term interest rates over the years and a significant fall in real equity premiums.

"A good part of this expansion is a direct function of the decline in real equity premiums," Greenspan said. "That cannot go on indefinitely."

He said asset prices will begin to fall, but did not predict when that would happen.

"I am reasonbly certain that what we are looking at today is an abnormal situation," he said.

Greenspan also said the Sarbanes-Oxley corporate governance act in the United States had created accounting regulations that may have led some foreign firms to seek initial public offerings outside the New York market in places such as London.

He said the the law is a definite advance in terms of corporate governance, but some sections created too many burdens for corporations.

"My impression is that there will be changes," he said.

The Sarbanes-Oxley law was passed by Congress amid accounting schemes that resulted in the collapse of energy trader Enron and telecommunications giant WorldCom. :o

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The 'global liquidity glut' is mostly a problem of Greenspan's making. The 'Greenspan put' was relied upon by investors and speculators the world over to cover them if things went south. Basically, when the market had a problem, AG lowered the IR and printed money to bail them out. He started with crashes in the late 80s and did the same through all crises like LTCM, asia, dotcom bust and then post-Sept 11th.

The risk associated with investing had gone because they knew AG would sort them out if things went wrong. Where's the moral hazard?

Two years ago when it was clear IRs had nowhere to go but up, AG encouraged home buyers in the USA to go with adjustable mortgages instead of fixed rate to afford bigger properties - talk about inflating the bubble. Those mortgages are now starting to adjust, to rates a lot higher than 2 years ago.

This is a problem mostly of his making - now his pals have made their money and left the market, it's time for Joe Average to 'take one for the team' and have his house plummet in value just as his mortgage payments rise.

AG has a habit of this kind of thing. In 1983 he told Congress that Social Security in the US was going to go bankrupt when the boomers retired around 2010, and got them to increase SS taxes to have a pot of money stored away for when this happened. These SS taxes are highly regressive, starting with the first dollar you earn and no exemptions, and a cap at $90k per year earnings - that is the SS tax falls heavily on the working and middle classes. In 2001 when the nation was predicting budget surpluses mostly due to the excess money SS was pumping into the govt (unified budget), Greenspan endorsed a tax cut for the richest 1% of Americans. Then, when the budget went into defecit, he suggested either cutting SS benefits or raising costs to balance things rather than repeal the wealthy's tax cut. Basically, the SS taxes of the workers paid for the taxcut of the rich, and then they wanted to cut the workers benefits because they gave too much to the rich.

Same with the global asset prices - pump them up until your friends are rich, then let them fall and have the taxpayers pick up the bill.

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The 'global liquidity glut' is mostly a problem of Greenspan's making.

etc

10/10. Worry them in, frighten them out. Thanks for saving my typing digits the effort.

Edited by Sledgehead

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The 'global liquidity glut' is mostly a problem of Greenspan's making. The 'Greenspan put' was relied upon by investors and speculators the world over to cover them if things went south. Basically, when the market had a problem, AG lowered the IR and printed money to bail them out. He started with crashes in the late 80s and did the same through all crises like LTCM, asia, dotcom bust and then post-Sept 11th.

The risk associated with investing had gone because they knew AG would sort them out if things went wrong. Where's the moral hazard?

Two years ago when it was clear IRs had nowhere to go but up, AG encouraged home buyers in the USA to go with adjustable mortgages instead of fixed rate to afford bigger properties - talk about inflating the bubble. Those mortgages are now starting to adjust, to rates a lot higher than 2 years ago.

This is a problem mostly of his making - now his pals have made their money and left the market, it's time for Joe Average to 'take one for the team' and have his house plummet in value just as his mortgage payments rise.

AG has a habit of this kind of thing. In 1983 he told Congress that Social Security in the US was going to go bankrupt when the boomers retired around 2010, and got them to increase SS taxes to have a pot of money stored away for when this happened. These SS taxes are highly regressive, starting with the first dollar you earn and no exemptions, and a cap at $90k per year earnings - that is the SS tax falls heavily on the working and middle classes. In 2001 when the nation was predicting budget surpluses mostly due to the excess money SS was pumping into the govt (unified budget), Greenspan endorsed a tax cut for the richest 1% of Americans. Then, when the budget went into defecit, he suggested either cutting SS benefits or raising costs to balance things rather than repeal the wealthy's tax cut. Basically, the SS taxes of the workers paid for the taxcut of the rich, and then they wanted to cut the workers benefits because they gave too much to the rich.

Same with the global asset prices - pump them up until your friends are rich, then let them fall and have the taxpayers pick up the bill.

What does a "global liquidity glut" mean (lots of money?), and how will this affect asset prices exactly? We're not all economists unfortunately! Thanks in advance.

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What does a "global liquidity glut" mean (lots of money?), and how will this affect asset prices exactly? We're not all economists unfortunately! Thanks in advance.

Basically, yes. By lowering interest rates below what is the 'natural level' for price stability, the Fed in the US encouraged lots of borrowing (when credit is cheap, borrow!). This increased the money supply - the total number of dollars in circulation. Those dollars have to go somewhere. Usually this results in what is traditionally labelled inflation - prices of the things you buy goes up (Real inflation is growth of money supply faster than supply growth of goods and services). However, this expansion of cheap money happened at a time when the billions of Chinese and Indian low wage workers entered the scene, and cheap goods and services from those countries kept prices and hence headline inflation down. The money had to go somewhere but the fearful people didn't trust the stock market after the dotcom bust and Enron, and couldn't keep it in the bank as IRs were near zero. People wanted it in a tangible asset they felt secure with - houses!

This is then encouraged speculation in housing since the housing price rise was noticed, and so it became a self-fulfilling prophecy. This is unfortunately a waste of those dollars, since this is not a productive use of the capital - what would have been useful was industry investing in more efficient manufacturing equipment and methods, workers training etc to ensure they economy was competitive. However we all decided to get rich selling houses to one another instead.

At some point, the people buying dollar debt notice that their dollars really aren't worth as much as they were and start demanding a higher interest rate in return, and the pyramid scheme comes crashing down.

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Basically, yes. By lowering interest rates below what is the 'natural level' for price stability, the Fed in the US encouraged lots of borrowing (when credit is cheap, borrow!). This increased the money supply - the total number of dollars in circulation. Those dollars have to go somewhere. Usually this results in what is traditionally labelled inflation - prices of the things you buy goes up (Real inflation is growth of money supply faster than supply growth of goods and services). However, this expansion of cheap money happened at a time when the billions of Chinese and Indian low wage workers entered the scene, and cheap goods and services from those countries kept prices and hence headline inflation down. The money had to go somewhere but the fearful people didn't trust the stock market after the dotcom bust and Enron, and couldn't keep it in the bank as IRs were near zero. People wanted it in a tangible asset they felt secure with - houses!

This is then encouraged speculation in housing since the housing price rise was noticed, and so it became a self-fulfilling prophecy. This is unfortunately a waste of those dollars, since this is not a productive use of the capital - what would have been useful was industry investing in more efficient manufacturing equipment and methods, workers training etc to ensure they economy was competitive. However we all decided to get rich selling houses to one another instead.

At some point, the people buying dollar debt notice that their dollars really aren't worth as much as they were and start demanding a higher interest rate in return, and the pyramid scheme comes crashing down.

Kapeesh

.

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Basically, yes. By lowering interest rates below what is the 'natural level' for price stability, the Fed in the US encouraged lots of borrowing (when credit is cheap, borrow!). This increased the money supply - the total number of dollars in circulation. Those dollars have to go somewhere. Usually this results in what is traditionally labelled inflation - prices of the things you buy goes up (Real inflation is growth of money supply faster than supply growth of goods and services). However, this expansion of cheap money happened at a time when the billions of Chinese and Indian low wage workers entered the scene, and cheap goods and services from those countries kept prices and hence headline inflation down. The money had to go somewhere but the fearful people didn't trust the stock market after the dotcom bust and Enron, and couldn't keep it in the bank as IRs were near zero. People wanted it in a tangible asset they felt secure with - houses!

This is then encouraged speculation in housing since the housing price rise was noticed, and so it became a self-fulfilling prophecy. This is unfortunately a waste of those dollars, since this is not a productive use of the capital - what would have been useful was industry investing in more efficient manufacturing equipment and methods, workers training etc to ensure they economy was competitive. However we all decided to get rich selling houses to one another instead.

At some point, the people buying dollar debt notice that their dollars really aren't worth as much as they were and start demanding a higher interest rate in return, and the pyramid scheme comes crashing down.

Cheers MadJock thats excellent.

I'm a little confused about the last paragraph though - "notice their dollars aren't worth as much as they were"? Why? Who demands what?

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Cheers MadJock thats excellent.

I'm a little confused about the last paragraph though - "notice their dollars aren't worth as much as they were"? Why? Who demands what?

Countries can't just run deficits, same as you or me it is financed by debt although instead of putting it on the credit card it is done as government treasuries/bonds. Someone has to pay for this debt - in the case of a country, it's usually citizens/mutual funds buying treasuries for investment/retirement, foreign individual investors/mutual funds or foreign central banks that lend the govt the money it needs. When they lend the govt money, they do so over a fixed period of time, say 30 years, and get a fixed interest rate on that money.

Govt bonds and treasuries are not typically stellar performers, the IR they pay matches or slightly exceeds inflation usually, but they are regarded as a 'safer' investment (well, if you buy UK, US, and other stable countries bonds). For growth of your money, things like the stock market are typically a better return, but the risk of losing your money is higher.

If the purchasers perceive that either the value of their asset is dropping, or that they can get a better return elsewhere, they will stop buying or even worse start selling. Under those circumstances the govt must do something, usually this means they must raise the interest rates to attract money. This is why it is unlikely that the UK can maintain low interest rates when the US raises them significantly, since we are running a deficit and need the cash inflow - higher US rates would make more money to to the USA rather than the UK.

The reason dollars aren't worth as much as they used to be is because they growth in the amount of dollars in circulation has exceeded the growth of the US economy over the last few years. Imagine 10 years ago their are 100 dollars in circulation, and the GDP of the US is 10 dollars - 10 dollars in circulation for every dollar of GDP. The dollar has a value because it is backed by real goods and services - remember money is just a 'promise to pay' and only representative, it has no inherent value in and of itself. Now imagine today that in those 10 years the economy has expanded to 15 dollars GDP - you'd expect the money supply to be 150 dollars to maintain the 'value' of the dollar - that is, the same amount of goods and services backing up each dollar.

But what if the money supply had expanded to 300 dollars? Then you have 20 dollars for each dollar of GDP. Each dollar in circulation is now only backed by half the amount of goods and services that it was 10 years ago. Each dollar cannot buy as much (inflation!).

If you had bought and held US treasuries 10 years ago, and were getting 5% per year, you may have thought this was good - but what if after 10 years the US govt had printed so much money that the dollar could only buy half as much? Then even though you'd had 10 years of 5% interest, you still lose 'value'! That is why someone may look at dollars and say - 'I'm not buying US treasuries because at the rate they are printing money, I'll lose at 5% IR'. At this point the IR has to rise to get people to buy (or they have to stop rpinting money and make that clear).

Think of it like this - if everyone in the country earned 100,000 pounds and every house cost 1 million pounds, what would the price of a house be if everyone suddenly got a 100% raise? 2 million - everyone gets a raise but you can't actually buy anything more with it, the price of everything just goes up. Each pound buys less than before - which is very annoying if you are on a fixed income like pensioners, or holding assets denominated in that currency.

Same principle applies the world over, be it dollars or pounds. You can also try to deal with the the problem of printing money by devaluing the currency, but I don't want to muddy the waters on that - it's a long enough explanation as it is!

Edited for spelling

Edited by MadJock

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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