Monday, February 26, 2007

Greenspan Predicts 2007 Recession

Did you see that former Federal Reserve Chairman Greenspan came out today and predicted the country would be in a recession by the end of this year? The ironic thing is, of course, is how such a statement can be self-fulfilling if enough people believe it. And coming from someone with his credentials, the masses are certainly more likely to believe it - thus, making the prediction more probable.

The financial markets instantly reacted, with Treasury notes and bonds seeing their yields tank a bit - with the 10yr note slipping 8 or 10 basis points to a 4.65 yield. I personally think that this trend will quickly reverse, and end right back where yields started just a day earlier. But, over the longer term, I do have to consider whether this Greenspan statement will predict, or possibly reinforce the prospects of, an economic slowdown in the USA.

The US has undergone a period of considerable long-term economic growth over the past 6 years. This growth has, in my opinion, been a bit of a sham though. Much of the "growth" has been the result of a housing bubble created by Greenspan and company to bail us out of the aftermath of the stock-market bubble collapsing around the year 2000. Extremely low interest rates, coupled with super financial liquidity and easy loans, made for a period of rampant price inflation in housing. Next, there was, and is, the extreme government deficit spending that is also making the economy look more fundamentally sound than it is. Personal savings rates are near or below zero - that isn't a good thing. Outsourcing (of jobs) has put quite a bit of pressure on middle-class employment prospects. And, finally, when you factor in this insane and ever-growing trade deficit and accumulated trade-debt with the rest of the world (China being a very large part of it), things just are not so rosy as they may otherwise appear.

So, where does that leave me? I think Greenspan is right. But, I actually think he is wrong in that the recession he speaks of has already been with us for the past few years in disguise. I have a feeling the people at the absolute upper end of the economic scale are enjoying a period of economic growth, while everyone other than the top few percent has been just floating along or treading water (economically) during this same time. Sure, the numbers have shown that we are in a period of economic growth in aggregate, but with inflationary pressures on the average household's budget for food, energy, and medical expenses, I just don't know how many typical Americans would say that they have enjoyed the benefits of 6 years of economic growth. That given, I can't help but be concerned with the consequences of a true (statistical) recession on this country if Greenspan's comments materialize mathematically this year.