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May 7, 1999
The news media have it that Alan Greenspan delivered a bond-shattering inflation warning in his speech yesterday. This interpretation is mistaken.
Bond yields and interest rates have risen in the last ten days, but Mr. Greenspan did not do the damage. This rise has several "causes" which collectively constitute a shortage of good news -- not new, bad news. The growing list of good news missing in action includes: stabilization of the global economic crisis (which began in Thailand two years ago next month), an end to panicked buying of U.S. Treasurys, and many fewer distressed, inflation-suppressing sales of commodities and manufactured merchandise. Oil prices are up, but only to pre-crisis levels. As one trader observed last week, the economy is moving from "very, very low inflation to very low inflation." With yields to match. Before the world crisis the all-time low for 30-year T-bonds (since their invention in 1977) was 1993's post-recession 5.79%. When 1998 yields plunged to the 4.70's, most of us figured panic was the cause, not economic fundamentals. Yesterday, 30-year T-bonds set a new 1999 high at 5.80%, completing the post-crisis U-turn. If the economy is moving from roughly 1% inflation to 2%, an historical four-point real interest rate spread over inflation suggests that bond yields near 6.00% are appropriate. I strongly suspect that six-something mortgages on low fees have gone the way of the four-something T-bond. Those mortgages are 7.25% this morning, holding the 1999 high.
If Mr. Greenspan did not say what every talking head on the planet says he said -- what did he say? The body of the speech, eight of its nine pages (if you'd prefer to deconstruct Mr. Greenspan yourself, his full texts are available in real time at www.bog.frb.us), was devoted to things other than inflation which have gone right but could go wrong with the economy. Specifically: productivity. If productivity does not grow at the slope built into stock prices, stocks and the economy will go down in a self-reinforcing spiral. With great understatement: "consumer and business investment demands would doubtless weaken considerably." He took his now-typical pains to resist the notion of a technological "new age", and pointed to the turn of the last century as a more powerful technological revolution than now. The warning in the speech was backhand: "...the performance of the American economy over the past seven years has been truly phenomenal." A patient, slightly fatigued, wise man's appreciation of the inevitable: phenomenal isn't forever.
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