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No. of Recommendations: 5
<<In the near term, Greenspan thinks deflation is more likely, but inflation is inevitable longer-term because of our "horrendous" deficits. This is a critical transition period. We need an exit strategy to mop up what was an admittedly useful "explosion of money."
Unfortunately, there is no exit strategy ready to go. Treasury is aware of the problem, but politics may prevent them from doing the rational thing.>>

Monetary policy is the realm of the Fed, and the Fed is supposed to be politically immune for this very reason. Obviously, Greenspan and Bernanke was/is far from apolitical, but it is wholly disheartening to hear things like this being said. They aren't even trying to keep up the facade anymore.

<<That said, he does look for China to move dollar assets over time into physical assets, which, while less liquid, will either hold their value better or help China achieve strategic goals.>>

We've already seen a flurry of this type of action, and the announcement today that the China Development Bank is providing a $30 billion loan to PetroChina for overseas acquisition just adds to the slate.

<<Consumers don't differentiate between earned income and capital gains. Thus, when the stock market goes up, they feel rich and spend (see late 1990s). Conversely, when the stock market goes down, they retrench even if they have job stability. Thus, if the stock market continues to go up, we should see a sharp rebound in consumer activity as early as this year. If the stock market goes down again, we will likely see a few years of low growth.>>

I readily admit Greenspan is smarter than I am, but I disagree with this statement. I think the wealth effect is felt more through housing than the stock market (I would argue that while over half of Americans now own stock, most do it through employer retirement plans and aren't actively involved and don't have the psychological reaction Greenspan is referring to). Until the housing market can be worked through, I don't think we are going to see much of a rebound in consumer sentiment (although we may see better index reports in the news because stock market performance is one of the metrics used in several consumer sentiment measurements - again, one I am dubious about).

<<So live with it and get through it, but don't overreact to it.>>

I agree with this, but I still hold a job and have no dependents, so it is easier for me to say, and I get paid way less than Sir Alan.
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