Former Fed Chairman Alan Greenspan predicts in a new book out Monday that the Fed will have to raise interest rates to double-digit levels in coming years to thwart inflation.
Greenspan, 81, says in The Age of Turbulence that the inflation-damping effect of globalization, which has led to lower wage pressures, inflation and interest rates worldwide, will recede.
At some point, the flow of people into the workforce in developing countries such as China, which has seen a movement of workers from farms into factories, will slow, leading to stronger wage pressures and prices, he says. The impact will be global.
And the shift "may be upon us sooner rather than later," he says. Evidence: Prices of Chinese imports coming into the USA started rising earlier this year. That suggests that in the "next few years," inflation will build unless action is taken.
The Wall Street Journal first reported details of the book on its website Friday night, saying it had bought a copy of the book in a New York City-area bookstore. USA TODAY had received a copy of the book to review in advance and was given permission to run its story ahead of the official publication Monday.
Greenspan's prediction comes shortly before Fed officials are widely expected to cut interest rates for the first time in more than four years following turmoil in mortgage markets that has rippled through the entire financial sector, leading to concerns about a credit crunch and a slowdown in the overall economy.
Fed Chairman Ben Bernanke and his colleagues, who meet in Washington Tuesday, have kept their target for short-term interest rates, which influence borrowing costs economywide, at 5.25% for more than a year. Greenspan's assertion that the Fed may have to double rates from current levels suggests the Fed may put itself in a bind by cutting rates now.
Criticism of Bush over spending
In his 531-page book, the former Fed chairman sharply criticizes President Bush for not vetoing bloated spending bills and for continuing to focus on issues, such as adding prescription drug benefits to Medicare even though the budget surplus of just a few years ago had disappeared and deficits were mounting.
"In the revised world of growing deficits, the goals were no longer entirely appropriate," Greenspan says. "He continued to pursue his presidential campaign promises nonetheless."
Greenspan, a libertarian Republican, as he calls himself, was also disappointed that his former colleagues from the Ford administration who were working for Bush, including Vice President Dick Cheney, didn't show greater fiscal discipline.
"People's ideas — and sometimes their ideals — change over the years," Greenspan writes. "I was a different person than I had been when first exposed to the glitter of the White House a quarter of a century before. So were my old friends: not in personality or character, but in opinions about how the world works and, therefore, what is important."
The Bush administration has often attributed the deficits to the impact of the 2001 recession, September 11, the war on terror and corporate scandals.
"We are not going to apologize for spending that was required for national security and fighting the war on terror," White House spokesman Tony Fratto says.
"We respect the work that Chairman Greenspan did," Fratto says. "We always respect his opinion. We share his views on limiting fiscal deficits. Once we were able to help the economy recover, it's clear that growth and limited spending are resulting in diminished deficits that will lead us to surpluses."
Greenspan also doesn't spare Republicans in Congress, who he says were "feeding at the trough," passing expensive pet projects for their home districts. For this, he says, they "deserved to lose" control of Congress to the Democrats in 2006.
"The Republicans in Congress lost their way," he says. "They swapped principle for power. They ended up with neither."
Greenspan covers a number of his pet topics, many of them familiar to those who have been following the former chairman's speeches and testimony. He argues U.S. primary and secondary education is slipping and must be reformed quickly to reduce income disparities between the skilled and unskilled, says trade protectionism can only hurt the economy and advocates looser immigration policies to provide more skilled workers.
He also frets about probably his biggest concern: The retirement of the baby boomers and the impending fiscal problems caused by the draws on Social Security and Medicare. He considers it an urgent problem that needs to be addressed soon.
A personal look at his life
Greenspan starts the book out on September 11, 2001, winding back to his childhood and eventually going into detail about his time at the Fed.
He includes details of his relationship with wife, Andrea Mitchell. After their first date he invited her back to his apartment to read an economics paper he had written. And they've been together ever since.
"I'm not threatened by a powerful woman; in fact, I'm now married to one," Greenspan says, when discussing TV newswoman Barbara Walters, whom he dated after meeting in 1975. "The most boring activity I could imagine was going out with a vacuous date — something I learned the hard way over my years as a bachelor."
Greenspan gives readers a look into a man everyone knows but few know a lot about. One million copies of the book have been made in the initial printing.
Although he delves into a variety of economic topics, it is the personal part that is likely to be the most interesting, even for those who have followed the former Fed chief for decades.
He discusses how his parents' divorce "left a big hole" in his life, even though he remained in touch with his dad, Herbert, who was a broker on Wall Street. Later, of his divorce to his first wife, Joan Mitchell, Greenspan says, "I was the main problem," arguing he married a good woman for the wrong reasons.
Greenspan describes how his mathematical abilities shone through at a young age. His mom, Rose Goldsmith, used to show off to relatives how he could do addition and multiplication in his head, a likely uncomfortable feat for someone who as a boy was "more inclined to sit in the corner." As an avid baseball fan, he developed his own technique of keeping baseball box scores during the 1936 World Series.
"To this day, I can recite the lineup of Yankees starting players, complete with their positions and batting averages, for that World Series," he says.
Such skills helped him succeed in later years, starting in his first job as an economist making $45 a week analyzing obscure, industrial data, later building up a successful consulting firm and then joining the government.
After leading the Fed for more than 18 years, Greenspan today runs his own consulting firm, Greenspan and Associates. He continues to make speeches for six-figure fees, mainly at private gatherings. But occasionally he has roiled stock markets when his comments have hit the press, drawing criticism from those who say the guy just doesn't know how to retire.
That criticism will likely grow louder, with Greenspan releasing a book the day before the Fed meets to discuss interest rates.
Greenspan started writing The Age of Turbulence a day after he retired in January 2006. He wrote the book as he did his speeches at the Fed — in longhand and mainly while sitting in the bathtub, which he does every day since starting the practice after a back injury in the 1960s. He says the invention of a pen that can write in water has made it easier for his assistants to make out the sometimes soggy papers.