U.S. Economy in Stagflation Trap, Greenspan Says
The world’s largest economy is currently the worst economic and political environment and struggling to find a way out of a “stagflation,” trap, according to former Federal Reserve Chairman Alan Greenspan.
Greenspan, who led the U.S. Federal Reserve Bank for over a decade, believes that the low growth and elevated inflation which the U.S. economy is facing has its roots in the inaction by politicians who aren’t willing to cut spending, which hinders the involvement of the private sector.
“It is the worst economic and political environment that I’ve ever been remotely related to,” Greenspan told a conference in Washington on Tuesday evening. (Source: “Greenspan Worries That ‘Crazies’ Will Undermine the U.S. System,” Bloomberg, September 14, 2016.)
The U.S. economy continues to remain in a form of weakness, even though the job market remains strong with higher wage growth. This mixed economic environment has kept the central bank on the sidelines, but rates being near a record low level has pushed the equity markets to record levels.
The economic improvement for low-to-middle-income families is the key political issue in the U.S. during the presidential election campaign, in its full swing leading into the November election.
According to Greenspan, neither Hilary Clinton nor Donald Trump is discussing how to cut spending on health care and social security, which is slowing growth in the world’s largest economy.
“We’re not in a stable equilibrium,” he said. “I hope we can all find a way out because this is too great a country to be undermined, by how should I say it, crazies.” (Source: Ibid.)
Investors in the U.S. are getting nervous about the limited options for policymakers to accelerate growth after a decade of low-interest-rate policies by the Federal Reserve Bank under the leadership of Chairwoman Janet Yellen.
Equity markets have seen a steep sell-off this week as investors speculated on the future interest rate direction before the Fed meeting on September 20–21.The S&P 500 remains down almost three percent from before Friday’s sell-off, despite interest rate futures indicating that a rate hike being announced at the Fed meeting is still seen as unlikely. (Source: “Fed jitters and oil pull Wall Street lower; Apple rallies,” Reuters, September 14, 2016.)