Alan Greenspan: U.S. will suffer from ‘stagflation not seen since the 1970s’

Perhaps former Federal Reserve Chairman Alan Greenspan wants to regain some credibility or maybe he is trying to correct his past sins. Whatever the case, Greenspan is sounding a lot saner than when he was leading the United States central bank.

Speaking in an interview with Bloomberg News, Greenspan warned about soaring inflation and a pop in the bond market bubble. He thinks stagflation – high inflation, high unemployment and weak economy – is one of the biggest economic threats the U.S. faces today.

“The real problem is that when the bond-market bubble collapses, long-term interest rates will rise,” Greenspan said. “We are moving into a different phase of the economy — to a stagflation not seen since the 1970s. That is not good for asset prices.”

Although Greenspan is bullish on equities, he is warning bears to be concerned about bond prices, where he says is the real bubble.

“By any measure, real long-term interest rates are much too low and therefore unsustainable,” the former Fed head said. “When they move higher they are likely to move reasonably fast. We are experiencing a bubble, not in stock prices but in bond prices. This is not discounted in the marketplace.”

Greenspan is right for the most part: the bond market, corporate or Treasury, should be avoided, and inflation is coming. His optimism for the U.S. stock market is questionable.

Whether Janet Yellen gets a second term leading the Fed or Gary Cohn succeeds her, it is going to be an interesting time at the central bank because they’ll need to pull a Paul Volcker: raise rates to fight inflation.

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