warning: very boring post
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Greenspan Says Budget Deficit
Poses a Threat to U.S. Stability

A WALL STREET JOURNAL ONLINE NEWS ROUNDUP
May 6, 2004 10:45 a.m.

WASHINGTON -- Federal Reserve Chairman Alan Greenspan said Thursday that the U.S. government's budget deficit is a threat to the nation's long-term stability.

Mr. Greenspan told a banking conference in Chicago that the federal budget deficit was a bigger worry to him than America's soaring trade deficit or the high level of household debt because those two problems can be corrected by market forces.

"The resolution of our current-account deficit and household debt burdens does not strike me as overly worrisome, but that is certainly not the case for our yawning fiscal deficit," Mr. Greenspan said in prepared remarks to a conference given by the Federal Reserve Bank of Chicago.

"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.

Mr. Greenspan noted that the federal deficit, estimated to climb above $500 billion this year, will amount to 4.25% 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 will begin retiring.

"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," Mr. Greenspan said in his remarks, which were delivered by satellite to the conference in Chicago.

The Fed chairman cautioned that the country shouldn't 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 at low levels.

He said that the dollar's foreign-exchange value has remained close to the average level of the past two decades in spite of soaring trade deficits and that there have been no major economic disruptions triggered by record-high household debt.

"Has something fundamental happened to the U.S. economy and, by extension, U.S. banking, that enables us to disregard all the time-tested criteria of imbalance and economic danger?" Mr. Greenspan asked. Answering his own question, he said, "Regrettably, the answer is no. The free lunch has still to be invented."

Mr. Greenspan said the current-account deficit, a broad measure of U.S. trade, will have to adjust eventually. He said that even if the conditions that have fostered the gap don't change, foreign investors probably will want to hold fewer U.S. assets at some point.

"International investors, private and official, faced with a concentration of dollar assets in their portfolios, will seek diversification, irrespective of the competitive returns on dollar assets," Mr. Greenspan said.

As long as markets remain flexible, they should be able to diffuse the current-account gap before a crisis builds, he said. He cited Fed research saying market forces should restore a more sustainable trade gap "without measurable disruption."

"I say this with one major caveat. Protectionism, some signs of which have recently emerged, could significantly erode global flexibility and, hence, undermine the global adjustment process," Mr. Greenspan said.

Mr. Greenspan didn't offer a solution to the budget deficit in his speech Thursday, though 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.

He has suggested 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. Mr. Greenspan did not address interest rates in his prepared remarks.
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not sure if anyone read the article, but i found it pretty interesting. i think the most interesting part is that i understand what all of this means. when the fiscal deficit rises more than it can handle, it will ultimately affect the rest of the country due to different means. where our GDP is roughly equal to our consumption + business spending + government spending + net exports, the only things that the fed can directly control is the business investment and our income through changing the interest rates or money supply. and as always, greenspan is right, they do not have the ability to directly control government spending even though it is a large factor of our economy. the only way for government to reduce its deficit is to increase taxes or cut spending, or aka programs... which of course, Bush cannot do in an election year. so the question comes down to this... start to save the nation before it gets too late or get re-elected?

tough choice.