February 26, 2008 | posted by Michael Baxter in US economy |

That Alan Greenspan has done it again. Every time he speaks he seems to be more pessimistic about the US economy. A year ago, he said there was a one-third chance the US would hit recession. He has since changed that opinion downwards several times, and then yesterday he went one step further.

“As of right now US economic growth is at zero,” he said yesterday. He added, “The existing financial problems are deeper than we’ve had for a while, so I wouldn’t be surprised if this recession is deeper than the last two shallow recessions.”

Poor old Ben Bernanke, there he is busy trying to create a veneer of wisdom, trying to talk things up, and there is Greenspan saying things like that.

“I try to avoid commenting on my successor because he has enough problems, said Greenspan”

Well you are right there, Alan.

When he was chairman of the Fed, Mr Greenspan used to talk about a conundrum. The long-term rate of interest, set by the markets, was lower than the short-term rate set by the Fed. This was known as reversion of the yield curve – and in the past, whenever this occurred, recession usually followed.

And yet, looking into his crystal ball, Mr Greenspan could see no sign of a recession – hence he called it a conundrum.

Actually, it wasn’t quite the mystery the Fed chairman portrayed. In fact, even in his book, Age of Turbulence, he came up with a good explanation for this conundrum – overseas markets were ploughing so much money into the US, that the high liquidity was keeping rates down.

The thing is, though, it is a different story now. In the US, the markets are no longer so cheap. In fact, the yield on a ten-year treasury note is now higher than it was in January.

The Fed has slashed rates, and the long-term rate of interest has gone up.

It’s a kind of conundrum mark II.

But really, it seems, there is even less of a mystery. Richard Whiteley will be turning in his grave at the thought that the word conundrum is being used to describe something so simple to understand.

You see, the Fed has now cut the rate of interest so that it is lower than inflation. US inflation is 4.2 per cent, the rate of interest 3 per cent – or negative 1.2 per cent in real terms. The markets are not impressed – well, why should they be; that’s why the yield is going up and up.