America’s soaring federal budget deficits represent a major obstacle to long-term U.S. economic stability even though they have yet to put pressure on interest rates, Federal Reserve Chairman Alan Greenspan warned on Thursday.
Greenspan cautioned against being lulled into a false sense of security about the deficit, Americans’ low savings rates or the nation’s trade deficit just because these problems have not yet triggered rising interest rates or a steep fall in the value of the dollar.
Posing the question of whether something has fundamentally changed that would allow the country to “disregard all the time-tested criteria of imbalance and economic danger,” Greenspan said, “Regrettably, the answer is no. The free lunch has still to be invented.”
Greenspan told a banking conference that the federal budget deficit was a bigger worry to him than the soaring trade deficit or the high level of household debt because those two problems can be corrected by market forces.
“Our fiscal prospects are, in my judgment, a significant obstacle to long-term stability because the budget deficit is not readily subject to correction by market forces that stabilize other imbalances,” he said in remarks to a banking conference.
Greenspan noted that the federal deficit, estimated by the administration to hit a record $521 billion this year, will amount to 4.25 percent of the total economy after being in surplus just a few years ago.
He said one of the biggest concerns was that the deficits now were occurring right before the first wave of baby boomers retires.
“We have legislated commitments to our senior citizens that, given the inevitable retirement of our huge baby-boom generation, will create significant fiscal challenges in the years ahead,” Greenspan said in a speech delivered by satellite to the conference sponsored by the Federal Reserve Bank of Chicago.
Greenspan cautioned that the country should not be lulled into a false sense of security about the federal deficit just because at the moment interest rates on long-term Treasury securities remain low.
Greenspan did not offer a solution to the budget deficit in his speech Thursday although in the past he has called on Congress to move quickly to address the looming funding difficulties in Social Security by trimming the benefits of future retirees.
Two proposals he has suggested include raising the retirement age for receiving full Social Security benefits and reducing annual cost of living adjustments that Social Security recipients receive.
Federal Reserve policy-makers met on Tuesday and left a key interest rate at a 46-year low but signaled that they planned to start raising rates at a moderate pace in coming months. Greenspan did not address interest rates in his prepared remarks or in answering audience questions.
He did predict in response to one question that China’s rapid economic growth would certainly slow to a more sustainable pace, in part because the Chinese government, worried about inflation pressures, was “working assiduously” to slow growth.
He said slower growth in China would likely help to relieve pressure on global commodity prices, which have been surging in recent weeks, reflecting in part strong demand for commodities such as steel in China.
The Bush administration has been stepping up pressure on China to stop linking its currency to the dollar and to lower trade barriers as a way to deal with America’s record trade deficit with China. It announced on Thursday that Deputy Treasury Secretary John Taylor would visit Beijing next Monday and Tuesday for high-level talks on China’s efforts to prepare for a free-floating currency.
Taylor will also stop in Japan to meet with Japanese finance officials to discuss efforts to bolster the Japanese banking system and in South Korea for the annual meeting of the Asian Development Bank.