Former Fed chairman Alan Greenspan sees bubbles in stocks and bonds

The bond market's bubble will be the "critical issue," he says, and links that to the growing federal deficit

Feb 1, 2018 @ 9:51 am

By Bloomberg News

The man who made the term "irrational exuberance" famous says investors are at it again.

"There are two bubbles: We have a stock market bubble, and we have a bond market bubble," Alan Greenspan, 91, said Wednesday on Bloomberg Television. Mr. Greenspan, who led the Federal Reserve from 1987 until 2006, memorably used the phrase to describe asset values during the 1990's dot-com bubble.

His comments come as stock indexes remain near record highs, despite selling off in recent days, and as the yields on government notes and bonds hover not far from historic lows. Interest rates are expected to move up in coming years as the Fed continues with a campaign to gradually tighten monetary policy.

"At the end of the day, the bond market bubble will eventually be the critical issue, but for the short term it's not too bad," Mr. Greenspan said. "But we're working, obviously, toward a major increase in long-term interest rates, and that has a very important impact, as you know, on the whole structure of the economy."

(More: The good — but mostly bad — of rising interest rates)

The Fed on Wednesday opted to leave rates unchanged and markets are pricing in an increase at the central bank's March meeting.

Mr. Greenspan sounded an alarm on forecasts that the U.S. government deficit will continue to climb as a share of gross domestic product. He said he was "surprised" that President Donald J. Trump didn't specify how he would fund new government initiatives in Tuesday's State of the Union speech. Last month, the president signed into law about $1.5 trillion in tax cuts that critics say will further balloon the budget gap.

Mr. Greenspan blamed the growing fiscal shortfall for his bond call.

"What's behind the bubble? Well the fact that, essentially, we're beginning to run an ever-larger government deficit," he said. As a share of GDP, "debt has been rising very significantly" and "we're just not paying enough attention to that."

(More: Bridgewater's Dalio says bonds face biggest bear market since '80s)

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