Weak corporate confidence is putting a damper on the economy, asserts former Federal Reserve Chairman Alan Greenspan.
In a speech Thursday he said that companies' lack of confidence is illustrated by the low level of long-term capital investment as a share of cash flow, the
Houston Business Journal reports.
"That ratio measures the extent to which corporate executives are willing to take their liquid cash flow and put it into illiquid long-term assets," Greenspan said. About a year ago, the ratio fell to its lowest level since 1938. It has since rebounded a little, but remains stuck near historic lows.
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The budget deficit is a problem,too, because it is "absorbing private savings," Greenspan
said. When the government ran surpluses, "capital investment went up. The relationship is symmetrical," he said.
The budget deficit totaled $680 billion in fiscal 2013, which ended Sept. 30.
Greenspan isn't too impressed with the Dodd-Frank financial reform law. He called it "a whole series of 'thou shall not.'"
Financial regulators are assigned jobs "that are not possible," and many laws, such as the one requiring every corporate security to have a risk rating, simply get ignored, Greenspan said.
"From my knowledge, the law's not working, so you just disregard it," he said.
New financial regulations have established a turning point in the U.S. economy, and a huge amount of corporate cash reserves are being stockpiled, Greenspan said.
Meanwhile, the government's response to the 2008 financial crisis brought a new concept to corporate risk and liability, he said.
"What we've seen is the federal government will stand behind the whole financial system. That means, those [corporate] liabilities are U.S. government liabilities," Greenspan said. As a result, the U.S. debt and deficit "really is a very much larger number," he said.
Greenspan is concerned about the government's willingness to support individual sectors of the economy. The auto industry bailout "showed how far government will go," he said.
Greenspan is also worried about potential problems in China, especially its massive debt burden. China has a "huge amount of debt relative to GDP, far beyond anything we've seen recently," he said. "And there's a very serious concern about serial default."
In mid-2013, China's overall government debt totaled 56 percent of GDP, according to the estimate of UBS economist Tao Wang,
The Washington Post reports.
Greenspan also is worried about a slowdown in China's economy. GDP grew 7.7 percent there last year. "There are tremors around the world that China's growth rate will fall to 5 percent. That would create major problems, mainly because China is a very big consumer" of U.S. goods, Greenspan said.
Not everyone has a negative outlook on the U.S. economy. The Congressional Budget Office (CBO) forecasts GDP growth will rise to 3.1 percent this year, up from 1.9 percent last year. It sees housing construction and business investment fueling the gain, the
Los Angeles Times reports.
And the CBO predicts growth will accelerate to 3.4 percent in 2015 and 2016.
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