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On the afternoon of September 11, 2001, I was flying back to Washington on Swissair Flight 128, returning home from a routine international bankers’ meeting in Switzerland. I’d been moving about the cabin when the chief of the security detail that escorted me on trips abroad, Bob Agnew, stopped me in the aisle. Bob is an ex-Secret Service man, friendly but not especially talkative. At that moment, he was looking grim. “Mr. Chairman,” he said quietly, “the captain needs to see you up front. Two planes have flown into the World Trade Center.” I must have had a quizzical look on my face because he added, “I’m not joking.”

In the cockpit, the captain appeared quite nervous. He told us there had been a terrible attack against our country—several airliners had been hijacked and two flown into the World Trade Center and one into the Pentagon. Another plane was missing. That was all the information he had, he said in his slightly accented English. We were returning to Zurich, and he was not going to announce the reason to the other passengers.

“Do we have to go back?” I asked. “Can we land in Canada?” He said no, his orders were to head to Zurich.

I went back to my seat as the captain announced that air traffic control had directed us to Zurich. The phones on the seats immediately became jammed, and I couldn’t get through to the ground. The Federal Reserve colleagues who had been with me in Switzerland that weekend were already on other flights. So with no way to know how events were developing, I had nothing to do but think for the next three and a half hours. I looked out the window, the work I’d brought along, the piles of memos and economic reports, forgotten in my bag. Were these attacks the beginning of some wider conspiracy?

The question I focused on was whether the economy would be damaged. The possible economic crises were all too evident. The worst, which I thought highly unlikely, would be a collapse of the financial system. The Federal Reserve is in charge of the electronic payment systems that transfer trillions of dollars daily in money and securities between banks all over the country and much of the rest of the world. We’d always thought that if you wanted to cripple the U.S. economy, you’d take out the payment systems. Banks would be forced to fall back on inefficient physical transfers of money. Businesses would resort to barter and-IOUs; the level of economic activity across the country could drop like a rock.

Yet even as I thought about it, I doubted that physically disrupting the financial system was what the hijackers had in mind. Much more likely, this was meant to be a symbolic act of violence against capitalist America—like the bomb
in the parking garage of the World Trade Center eight years earlier. What worried me was the fear such an attack would create—especially if there were additional attacks to come. In an economy as sophisticated as ours, people have to interact and exchange goods and services constantly, and the division of labor is so finely articulated that every household depends on commerce simply to survive. If people withdraw from everyday economic life—if investors dump their stocks, or businesspeople back away from trades, or citizens stay home for fear of going to malls and being exposed to suicide bombers—there’s a snowball effect. It’s the psychology that leads to panics and recessions. A shock like the one we’d just sustained could cause a massive withdrawal from, and major contraction in, economic activity. The misery could multiply.

Long before my flight touched down, I’d concluded that the world was about to change in ways that I could not yet define. The complacency we Americans had embraced for the decade following the end of the cold war had just been shattered.

In late September, the first hard data came in. Typically, the earliest clear indicator of what’s happening to the economy is the number of new claims for unemployment benefits a statistic compiled each week by the Department of Labor. For the third week of the month, claims topped 450,000, about 13 percent above their level in late August. The figure confirmed the extent and seriousness of the hardships we’d been seeing in news reports about people who’d lost their jobs. I could imagine those thousands of hotel and resort workers and others now in limbo not knowing how they would support themselves and their families. I was coming to the view that the economy was not going to bounce back quickly. The shock was severe enough that even a highly flexible economy would have difficulty dealing with it.

But while the immediate shocks were significant, the economy righted itself. Industrial production, after just one more month of mild decline, bottomed out in November. By December the economy was growing again, and jobless claims dropped back and stabilized at their pre-9/11 level. The Fed did have a hand in that, but it was only by stepping up what we’d been doing before 9/11, cutting interest rates to make it easier for people to borrow and spend. I didn’t mind seeing my expectations upset, because the economy’s remarkable response to the aftermath of 9/11 was proof of an enormously important fact: our economy had become highly resilient. After those first awful weeks, America’s households and businesses recovered. What had generated such an unprecedented degree of economic flexibility?

Economists have been trying to answer questions like that since the days of Adam Smith. We think we have our hands full today trying to comprehend our globalized economy. But Smith had to invent economics almost from scratch as a way to reckon with the development of complex market economies in the eighteenth century. I’m hardly Adam Smith, but I’ve got the same inquisitiveness about understanding the broad forces that define our age. After 9/11 I knew, if I needed further reinforcement, that we are living in a new world-the world of a global capitalist economy that is vastly more flexible, resilient, open, self-correcting, and fast-changing than it was even a quarter century earlier. It’s a world that presents us with enormous new possibilities but also enormous new challenges.

While the economic impacts of 9/11 were short-lived, the forces behind the 9/11 terrorist attacks have hardly evaporated. As the Biden Administration’s unbalanced withdrawal from Afghanistan recently demonstrated, the Taliban are still very much in play. Who’s to say what international crisis they could engender? Could a 9/11-type attack happen again? Perhaps. Though I’d like to think that our intelligence community and the advances in surveillance over the past 20 years have given us a greater awareness of the threats we face. In fact many threats we’ve faced since 9/11 have been thwarted by just those advancements.

While the world has changed in many ways since 9/11, the one thing that has not changed is human nature. Tying in to my August newsletter, fear remains a dominant force in our economy. Economic contraction following any major event—9/11, the 2008 financial crisis, and most recently the onset of the COVID pandemic—is driven most forcefully by fear.

While fear is indeed a clear driver of economic contraction, as we’ve witnessed over the past year and a half, resilience is also a part of human nature that has the ability to counteract fear-driven economic contractions. They say necessity is the mother of invention, and when faced with a once-in-a-lifetime pandemic it was, yet again, human ingenuity that kept the economy from falling apart. The solutions we have developed in response to the pandemic will undoubtedly shape our future, especially as processes intended to be temporary become more mainstream and enduring. The innovations in communications technology that allowed work to be decentralized away from a physical office will affect how we live long after COVID is tamed. The mRNA technology that allowed a vaccine to be developed in record time has the potential to combat other infectious diseases and even treat cancer. As we continue to recover from this most recent crisis, I look forward with optimism and the belief that the challenges we overcome and the ingenuity humanity possesses ultimately make us stronger.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.

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By Dr. Alan Greenspan, Senior Economic Advisor

Unprecedented amounts of fiscal and monetary stimulus have driven stock prices to all-time highs, now sitting near double the lows seen during the depths of the coronavirus-driven panic. However, with the debt ceiling holding back further borrowing by the U.S. Treasury, thousand-dollar stimulus checks and trillion-dollar stimulus packages look to be a thing of the past. Meanwhile, on the monetary policy front, Chairman Powell’s speech at the Jackson Hole symposium apparently affirmed that the Federal Reserve is preparing to begin tapering its bond purchases as early as the end of this year. Investors are now left to wonder what will drive asset prices in the vacuum left by the end of these enormous catalysts of market returns over the past year and a half. I believe a review of the animal spirits that drive individual investment decisions would be helpful at this time.Throughout my career, I always viewed animal spirits as the human propensities driven largely by random irrationalities not readily integrated into formal models of the way market economies function. The 2008 financial crisis was a watershed moment for forecasters, myself included. It forced us to find ways to incorporate into our macro models those animal spirits that dominate finance.

All such spirits are tempered by reason to a greater or lesser degree, and hence I more formally choose to describe such marketplace behavior as “propensities.” The technologies that have driven productivity since the Enlightenment were, at root, reasoned insights. Random irrationality produces nothing. If reason were not ultimately prevailing, we could not explain the dramatic improvements in standards of living that the world has achieved in the past two centuries.

These reason-tempered animal spirits significantly affect macroeconomic decision making and outcomes. Newly popular behavioral economics is forcing forecasters to evaluate economic data in the context of a more complex model than that to which most of us had become accustomed.

My ultimate purpose is defining a set of economic stabilities of human actions that are statistically measurable and hence capable of being modeled. I am fully aware that in the process I am delving into disciplines with which I have little experience, and have tried to temper my conclusions accordingly.

We all directly experience threats to our self and our values (fear) and the sense of well-being or elation (euphoria) triggered in the course of our pursuit of our economic interests. Fear, a major component of animal spirits, is a response to a threat to life, limb, and net worth. That emotion is decidedly inbred—no one is immune to it. But people respond to fear in different ways, and the differences are part of what defines the individuality of people. We are all alike fundamentally, but it is our individuality that makes for differences in values and our position in the hierarchy of society. Moreover, it is our individuality that creates markets, division of labor, and economic activity as we know it.

Risk aversion is a complex animal spirit crucial to forecasting. It reflects the ambivalent attitude people exhibit to the taking of risk. That we need to act to obtain food, shelter, and all the necessities of life is evident to all, as is the fact that we can’t necessarily know in advance how successful our actions will be. The process of choosing which risks to take and which to avoid determines the relative pricing structure of markets, which in turn guides the flow of savings into investment, the critical function of finance.

If risk taking is essential to living, is more risk taking better than less? If more risk were better than less risk, demand for lower quality bonds would exceed demand for riskless bonds, and high-quality bonds would yield more than low-quality bonds. They do not, from which we can infer the obvious: Risk taking is a necessary part of living, but it is not something the vast majority of us actively seek. Finding the proper balance of risks is critical to all of us in our day-to-day lives and perhaps manifests itself most obviously in finance in the management of portfolio risk.

The extremes of zero and full risk aversion (or its obverse, full and zero risk taking) are outside all human experience. Zero risk aversion—that is, the absence of any aversion to engaging in risky actions—implies that an individual does not care about, or cannot discriminate among, objective states of risk to life and limb. Such individuals cannot (or do not choose to) recognize life-threatening events. But to acquire the staples of life requires action, that is, the taking of risks, either by an individual or by others, such as parents taking risks on a child’s behalf.

We live our lives day by day well within these outer boundaries of risk aversion and risk taking, which can be measured approximately by financial market yield spreads with respect to both credit rating and maturity. Those boundaries are critical to forecasting. The turn in stock prices in early 2009 following the crash of 2008 was a sign of the level of human angst approaching its historical limit. The limits of angst are also evident in credit spreads, which exhibit few or no long-term historical trends. Prime railroad bonds of the immediate post‒Civil War years, for example, reflect spreads over U.S. Treasuries that are similar to our post‒World War II experience, suggesting long-term stability in the degree and spread of human risk aversion.

I calibrate how people respond to risk in nonfinancial markets, both rationally and emotionally, with a measure I have employed for years—the share of liquid cash flow that management chooses to commit to illiquid, especially long-term, capital investments. That share is a measure of corporate managers’ degree of uncertainty and hence their willingness to take risks. In 2009, it had fallen to its lowest peacetime level since 1938. The equivalent measure of risk aversion for households is the share of household cash flow invested in homes. This measure reached its lowest postwar level in 2010. That collapse in investment, especially in long-lived assets, explains most of the recent failure of the American economy to follow a path of recovery similar to the other ten post‒World War II recoveries.

Alan Greenspan served five terms as chairman of the Board of Governors of the Federal Reserve System from August 11, 1987, when he was first appointed by President Ronald Reagan. His last term ended on January 31, 2006. He was appointed chairman by four different presidents.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.

About the Author

Dr. Alan Greenspan

Dr. Alan Greenspan

Alan Greenspan served five terms as chairman of the Board of Governors of the Federal Reserve System from August 11, 1987, when he was first appointed by President Ronald Reagan. His last term ended on January 31, 2006. He was…
About the Author

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By Dr. Alan Greenspan, Senior Economic Advisor

With a majority of the work force now vaccinated, and vaccines readily available to those who are not, large corporations across the U.S. have decided that the time to return to the office has come. From banks to technology companies, there seems to be a consensus forming that workers should return to some degree, whether full-time or a hybrid model, by this fall. Unsurprisingly, there has been push-back from employees—according to a May survey conducted by Morning Consult on behalf of Bloomberg News, nearly 40% of the 1,000 adults polled said they would consider quitting their jobs if their employers are not flexible about remote work going forward. While some occupations certainly require a physical presence, the data show that by and large the workers have a valid point. Indeed, what I have found to be a silver lining of the pandemic is that it appears to have engendered a rise in the level of worker productivity.

In the chart below, we see that U.S. nonfarm business productivity fell dramatically in March 2020 as the country shut down in response to the novel coronavirus. However, productivity rebounded to new heights just one month later. By itself, this phenomenon is not all that unexpected. When recession first takes hold, businesses reflexively begin “cutting the fat.” The least productive workers will be culled first, and discretionary spending will be reined in, leaving businesses in a more productive posture in the early periods of a recession even as aggregate output falls. That dynamic was magnified by the extraordinary nature of the pandemic response as low-productivity service industries were shut down en masse.

What is both surprising and encouraging to me is that, after a year of additional data, productivity has yet to show any signs of giving back its pandemic gains. Following a decline in November 2020, I was initially concerned that a reversion in productivity back to the pre-pandemic trajectory was in the offing. But the data show that real output per hour rebounded once again, rising a more than expected 5.4% in the first quarter of 2021, and the year-over-year rate of growth rose 1.5ppts to 4.1%. A further increase is expected for the second quarter when the data are published in August. Whether this higher level of productivity can be sustained as the economy continues to reopen and reassimilate the workers lost since the onset of the pandemic carries important implications for the U.S. economy going forward.

In the big picture, productivity is arguably the most central measure of the material success of an economy. The level of productivity ultimately determines the average standard of living and is a defining characteristic that separates the so-called developed world from the developing world. In the near-term, the path of productivity may be even more important as it could play a crucial role in combatting the inflationary pressures that, for now, appear transitory. A higher level of productivity would allow businesses to maintain their profit margins without raising prices too quickly while also rewarding workers with higher compensation. Indeed, the various instances of worker shortages documented in recent headlines could be alleviated if businesses feel confident enough that productivity gains are lasting and therefore wages can be increased to attract new employees without hurting profits.

To be sure, there are numerous challenges the nascent recovery has yet to confront (pullback of monetary and fiscal support) and new risks emerging (Delta variant, stagnating vaccination rate). For now at least, worker productivity provides an unexpected and encouraging tail wind.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.
About the Author
Dr. Alan Greenspan
Dr. Alan Greenspan

Alan Greenspan served five terms as chairman of the Board of Governors of the Federal Reserve System from August 11, 1987, when he was first appointed by President Ronald Reagan. His last term ended on January 31, 2006. He was…
About the Author… Read more

As we enter what may be remembered as our first post-COVID summer in the United States, the domestic landscape seems to be settling into a far less chaotic rhythm. Encouraging vaccination numbers have seen mask mandates disappearing. Businesses that were concerned with simply being open only a year ago are now turning toward increasing capacity limits. But while the home front seems back on track, the foreign policy challenges facing America are as pressing as ever. Recent cyberattacks have disrupted America’s oil infrastructure and meat production, and conflicts in the Middle East have flared anew. However, as I wrote in my August newsletter of last year, I believe the defining foreign policy issue facing America in the coming decades will be China.

Shortly after his inauguration, President Biden acknowledged that his administration is prepared for “extreme competition” with China. Biden has ratcheted up the stakes by arguing in essence that China seeks to challenge the liberal democratic order established by the U.S. and its Western allies following World War II. Just last week, Biden’s Asia Czar Kurt Campbell said that “the period that was broadly described as engagement (with China) has come to an end.” Campbell points to policies under Chinese President Xi Jinping as largely responsible for this shift from engagement to competition.

While Biden’s main objective of competition with China is clear, some core planks of his policy, including trade and military strategy remain undefined. Several China experts said that overall, much of Biden’s policy, while different in tone from the Trump administration’s, remains vague. He has kept in place for now Trump’s controversial tariffs on Chinese goods. Average U.S. tariffs on imports from China are currently at 19.3 percent, and cover 66.4 percent of Chinese exports to the U.S. These tariffs are more than six times higher than before the trade war began in 2018.

In an ideal world, I am an advocate of a free and open market. However, the proponents of tariffs are warranted in arguing that action to address China’s trade-distorting practices is necessary. At the same time, as Secretary of State Tony Blinken has said, it’s important that the tariffs are not “doing more harm to us than the country they’re being wielded against.” The tariffs, along with China’s retaliatory tariffs on U.S. imports, have jeopardized American jobs, increased costs for businesses, raised consumer prices and impeded access to medical products desperately needed during the pandemic. Many analysts argue that the Biden administration’s goal should be to minimize these costs to U.S. workers, companies, and consumers, while maintaining pressure on China to improve its behavior. That will require carefully picking and choosing which tariffs to lift and how.

Trade war aside, competition in science and technology is another major focus of the US-China relationship. President Xi recently called for China to accelerate efforts to become self-reliant when it comes to science and technology. Meanwhile in the U.S., the Senate is considering the U.S. Innovation and Competition Act (USICA), a $250 billion bill to boost U.S. science and technology. It is a widely-backed attempt to put new economic pressure on China while helping to give the U.S. an edge in producing high-power computer chips and other cutting-edge tools seen as critical to the digital age. Just last week, the Senate integrated the Trade Act of 2021 into the USICA in an effort to combat China’s manufacturing imbalances, threats to free and fair trade, and illicit activity which undermine America’s leadership in innovation.

The Biden administration has a complicated road to navigate with respect to U.S.-China relations. I am optimistic they will hammer out a plan which keeps in mind the ultimate goal of keeping our economy growing, bolstering our technological independence, and remaining competitive with China.

About the Author

Dr. Alan Greenspan

Dr. Alan Greenspan

Alan Greenspan served five terms as chairman of the Board of Governors of the Federal Reserve System from August 11, 1987, when he was first appointed by President Ronald Reagan. His last term ended on January 31, 2006. He was…
About the Author

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