Greenspan on whether Bitcoin is a bubble
'I guess so. Let me say that currencies to be exchangeable have to be backed by something. When we had – when we were on the gold standard, gold and silver had intrinsic value and people would be willing to exchange their goods and services for gold or silver and wouldn’t ask any questions of where the monies came from. Alternatively, when we went into currencies, it was the backing off the issuer of the currency. In other words, if some individual had great credit standing, his checks could circulate as money. But the question is I do not understand where the backing of bitcoin is coming from.
'There is no fundamental issue of capabilities of repaying it in anything which is universally acceptable which is either intrinsic value of the currency or the credit or trust of the individual who is issuing the money, whether it’s a government or an individual. Individuals with very high net worth and who have great reputations could create their own currency because people would be willing to exchange their checks with others probably at par. That is not the case with bitcoin'.
On whether Bitcoin could be the new gold
'No. Well, see that – it has to – it has to have intrinsic value. You have to really stretch your imagination to infer what the intrinsic value of bitcoin is. I haven’t been able to do it. Maybe somebody else can. But if – you asked me is this a bubble in bitcoin. Yeah, it’s a bubble'.
On what has changed with investors' perception about gold this year
'Well first of all, remember we used to be at $35 an ounce. And then even several years ago we were well under $1,000 an ounce now we’re $1,2000 or thereabouts. And to be sure, we’ve come down a bit but it’s after a very significant rise. So the issue here is that the reasons for buying gold were, one, fears of significant inflation first of all which didn’t materialize, and just generally the notion that inflation looks to be relatively stable for the indefinite future and that therefore the hedging aspects of gold are really not that all necessary at the moment.
'And so what you’re getting is clearly this type of problem which one would ordinarily expect when the – the basic reasons for holding gold are not – not that strong. My – I think that we’re probably at a gold price now which is not all that different from where it probably would be considering that it’s, on the one hand a commodity, copper, on the other hand a monetary asset like the Swiss franc used to be before they fixed it against the euro'.
On new market highs and whether we've entered a new age of irrational exuberance
'No, I don’t think that’s the best way to describe what we’re looking at. I tend to look at the market as being made up of two major components. One is the fundamentals of earnings obviously and long-term interest rates and the various risk premiums associated with them. On top of that, we have the valuation process run largely by the extent of animal spirits, to the extent that they’re operating. And that basically includes euphoria, fear and herding. The concept of bubbles has to apply solely to the latter or has no meaning. And in that context, you have to measure what we are looking at with respect to these valuations. And there’s no bubble there in the sense that'.
On whether people should look at the median price to sales ratio
'I look at it, but I find that the most useful thing to capture the extent to which we’re pricing products above what the fundamentals is essentially what we call the equity premium. That is, the price that individuals are willing to hold stocks at. And JPMorgan, which has got the best equity premium measure that I know of, up until a couple of years ago had the highest ratio, meaning the lowest value – the lowest markups – I’m sorry, the lowest valuations for stocks in 50 years.
'Now of course it’s come down a significant amount with the big bulge that’s occurred in the market, and obviously you can’t continue doing what we’re doing. I’m more concerned about the fundamentals at this stage…the market than I am – yeah, exactly. Than I am about the state of euphoria, fear and herding'.
On what he's most concerned about right now
'Well first of all, profits have been rising extraordinarily, as you know. And the result is that the share of national income has been rising to levels which cannot persist in the sense that if you get even a slowdown in the rate of increase in the share of profits to national income, that in and of itself slows the growth in earnings and eventually slows the expectations of future earnings. So that’s one of them. But the main issue is interest rates. As I’ve written in the book that I published a few weeks ago, it’s very difficult for me to see that we’re not on the edge of a significant rise in long-term rates. I don’t know when that is. I do know that we are very significantly undervalued.
'The rates are significantly lower than they would ordinarily be and that obviously is the result of various QE1, QE2 and QE3, which essentially have focused on not monetary policy but buying long-term assets. That’s not something the Fed has done in the past and it’s going to be very interesting to see in retrospect how successful this whole process has been. But it clearly is driving the markets'.
On the Fed's quantitative easing
'Well I’ve stayed away from commenting on current policy. But let me just say that what is actual causing this is not related to the Fed. It’s essentially the fact that if you look at the data on the economy and look at the GDP for example, you find out that all of the shortfall from where we would expect the GDP to be occurs in assets with very long life expectations. Homes, new structures in the industrial sector, all sorts of assets whose average earnings are coming over a very long period of time. Those parts of the economy have never really never fully recovered'.
'Housing clearly has come back. But remember, housing starts with single-family dwellings. At the moment it’s still only a third of where it was in 2006 and ‘07. So we have a – we’ve come back but very little. And the extent of that failure to come back accounts for the rise in the unemployment rate and – and the abnormally low sag in – in growth in the GDP far different from any recovery we’ve seen since the end of World War II'.
On whether he believes there's a problem between what is a bubble in the amount of credit brought by the current Fed and the fact that asset prices haven't followed suit
'No, asset prices have followed suit. That is the issue. The Fed has succeed in raising asset prices by lowing long-term interest rates. And long-term interest rates are the fundamental financial factor that drives the stock market'.
'Well, the issue basically is that it is certainly the case that there’s been a dramatic increase in the size of the balance sheet in the United States, and indeed the ECB, Bank of Japan and Bank of England. But the problem basically is that those monies have not fundamentally filtered into the economies and galvanized economic activity. JPMorgan, for example, holders a large balance at the Federal Reserve Bank of New York as an excess reserve. It clearly has not been relending it out because the total amount of loans and debt increases over the last several years have been very modest. And this tells me that there’s – that money is not actually working yet'.
On how Yellen might differ from Bernanke as Federal Reserve chair
'Well the markets that they’re dealing with are going to be very significantly different. Ben was involved when the Fed saw the necessity of significant balance sheet expansion. We’re coming to a point now where we’re about to not only end the taper, but eventually of course pull a good deal of those assets in because they have not yet really moved into the outer markets where they can affect incomes and inflation. They affect interest rates. They affect stock prices, but until those monies are actually lent out by the commercial banks who hold those deposits of the 12 Federal Reserves, it’s just a – it’s just a bookkeeping activity. Nothing has happened. And you could reverse that. If it weren’t for the psychology of the Fed reserving itself by swapping out of treasury bills, they would – not treasury bills. They don’t hold any treasury bills. Swapping out of treasury notes or even any other type of asset. When you – you can do that now'.
'A deal could be made between the US treasury and the Federal Reserve to offset the holdings of US treasury instruments, and probably even asset – rather mortgage-backeds against their deposits at the 12 reserve banks with just a simple bookkeeping error – entry rather. The issue there is do people – if people did not expect that that was a prelude to tightening, it would literally have no effect. But there is going to be a psychological effect when they move, and that’s going to put the monetary policy actions of the Fed in a quite different mode in the years immediately ahead than in the years that have just preceded us'.
Source: Bloomberg Television