Samuelson: U.S. Stock Market In A Bubble
Tuesday, December 14, 1999
NEW YORK (Nikkei)--The U.S. Federal Reserve should consider tightening monetary policy slightly to head off the potential risk of the economy overheating, said the eminent U.S. economist Paul Samuelson, who added that the stock market is in a bubble.
In a recent interview with The Nihon Keizai Shimbun, Samuelson, a Nobel prize winner in economics, said that although the U.S. economy is in a "honeymoon" period where "everything is working just right," the nation's stock market could be facing a sizable correction.
"I think there is a little bit of a stock market bubble," Samuelson said. "It's not as big as Japan's in 1985 to 1990, but most people have capital gains and ... think that the market is going to increase by a 20% total return" over the next three to five years.
Samuelson asserted that such outsized returns are not likely to continue indefinitely.
"I think our stock market could stay flat or it could even grow for another year or two ... but everything has to stay just right," he said.
The U.S. Fed, Samuelson said, should "be cautious and put a little pressure on the brakes, not because inflation is already here, but because it won't hurt very much to put on the brakes a little bit."
"The Federal Reserve's concern should always be for the Main Street economy," he said. "It should be concerned about inflation, but it should also be concerned about production."
Samuelson warned that the "greatest danger spot" in the U.S. economy is the possibility of a major stock market correction. If the market has a 30% correction stretching over a year or two, he added, Americans would cut their spending, causing major repercussions through the global economy.
Samuelson suggested, however, that no professional economist "can make an accurate forecast of when a bubble will burst."
"We have studied bubbles in economic history; we understand their features, but we have no theory as to why they could not last as long again as they have lasted because they live on their own momentum," he said. "And it is all justified while the bubble is still there."
Samuelson conceded that it is hard to judge "how to take air out of a stock market bubble," but he also warned that the bubble could affect the Main Street economy.
"And that's why the Federal Reserve should not refuse to raise interest rates for fear that that would hurt the stock market," he said.
(The Nihon Keizai Shimbun Tuesday morning edition)
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