Financial Advisor: If we have a soft landing, we could go another couple of years before we are in a recession. This could turn out to be a 13-, 14-year expansion.
Fuss: It certainly is, in my mind, within the realm of possibility. The older part of me says, 'Now wait a minute.' I've been doing this for 42 years now. What changed in the early to mid-'80s was that the federal government stopped taking as large a share of our gross national output. Defense spending used to be 8% of GNP, something like that, in '83, '84, '85. Now it's a little less than 4%. That has freed up a lot of resources.
Financial Advisor: Why do you think the economy has expanded so dramatically so late in the business cycle?
Fuss: There are so many new varieties of activity, and the liquidity's been there. We've had enormous liquidity until recently. The stock market expansion itself created a lot of liquidity, but it's just been a vibrant, healthy thing, and people do produce more now than they used to. They are more productive. Even my barber cuts hair faster than he used to. But you know it just has been one of those magic times where it just continued to go on and the liquidity stayed a lot longer in this economic cycle than it ever had before. There was more liquidity for the economy than there ever has been before.
Also, the government is a smaller issuer of funds in the capital markets to the point where the federal government right now gives money back because they're paying down marketable debt. Federal debt IOU's in the future on Social Security are still building up. But as far as impact on the market, they are a supplier of money to the market.
Most states and most major counties and municipalities have gone cash-flow positive, so they're not net demanding money any more. They are providing funds to the market slightly, and so that leaves the federal agencies, which have been borrowing a lot of money, and that ties into the mortgage market and the corporate market and individuals, all of whom have been borrowing more money.
Now corporate borrowing has really tailed off lately, so on a net basis, both investment-grade and below investment-grade corporate borrowing has really dropped a lot. But there's been the liquidity out there. Money has been there if you needed it.
Gross: There are two other reasons. One of the reasons has to do with productivity and technological innovations, whether it's the Net or derivatives of the Net or simply technology being applied to the workforce in the form of computers. This does appear to be something real in terms of higher productivity levels, whether that's a half percent a year or one percent or whatever relative to historic levels it's hard to judge and Greenspan doesn't know either. The productivity miracle, if you want to call it that, is part of the explanation.
Another part though is simply that prior to the last six months, the U.S. central bank and Europe and, of course, Japan as well have been in a very liquefying mode.
After Asia and after Russia and after Long Term Capital Management collapsed the committee to save the world jumped in there. Rubin, Greenspan, and Summers. They put money into the global economy at a very rapid rate and we see that in money growth.