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Friday April 27, 1:32 pm Eastern Time
Greenspan Confident Debt to Be Paid Off
By Jonathan Nicholson
WASHINGTON (Reuters) - Federal Reserve Chairman Alan Greenspan predicted on
Friday that the United States is likely to see large budget surpluses for some time, enabling it
ultimately to pay off the publicly held portion of the national debt.
``While the magnitudes of future federal unified budget surpluses are
uncertain, they are highly likely to remain sizable for some time,'' the
central bank chief told the annual convention of The Bond Market
Association.
Greenspan addressed the meeting, which was in White Sulphur Springs,
W.Va., by satellite from Washington.
He did not mention the near-term outlook for the U.S. economy, except
to note that the current slowdown in growth probably would cause a
weak spell for productivity gains.
But he said the long-term trend of fast productivity growth should remain
intact, which bodes well for the government's balance sheet.
The government posted a $236.92 billion surplus last year, its third straight annual surplus. Both the White House and
Congressional Budget Office project a continued rise in the surplus, which they see hitting about $281 billion in the current fiscal
year that ends in September.
However, the slowing economy will put a damper on revenues, and plans to speed up an income tax cut to make it effective
this year may put also make a dent in those estimates. But Greenspan suggested there is little reason for concern.
``Current forecasts suggest that under a reasonably wide range of possible tax and spending policies, the resulting surpluses will
allow the Treasury debt held by the public to be paid off,'' Greenspan said.
The national debt, the accumulation of past annual budget shortfalls, totals about $5.601 trillion, of which about $3.327 trillion
is in the hands of the investing public. The remainder is held by government trust funds, including the trust fund for the Social
Security retirement program.
``CONFIDENT'' MARKETS WILL ADAPT
While financial markets have worried about the potential loss of the U.S. Treasury debt market -- which serves as a benchmark
for pricing private-sector issues and as a ``safe haven'' for investors during rocky markets -- Greenspan offered reassuring
comments about the impact of a dwindling supply of low-risk government paper.
``I am confident that U.S. financial markets, which are the most innovative and efficient in the world, can readily adapt to a
paydown of Treasury debt by creating private alternatives with many of the attributes that market participants value in Treasury
securities,'' he said.
As surpluses have mounted in recent years, the Treasury has needed to issue less and less debt to finance government
operations. As a result, the Treasury eliminated some debt issues and dramatically curtailed issuance of others, raising concerns
on Wall Street that the Treasury securities market will become less active and eventually disappear.
Greenspan admitted there would likely be transition costs as markets moved to replace Treasury securities with other financial
instruments, such as swaps, agency securities and corporate debt. But he said those costs are likely ``to be outweighed by the
benefits to the country of a higher capital stock and the resulting increases in productivity and income that appear to be the
consequence of debt reduction.''
And even if the Treasury market should vanish, Greenspan told the bond industry participants he had ``great confidence'' in
their ability to renew a market for Treasury debt in the future. Government deficits, and their attendant financing needs, are
expected to return as the retirement of the Baby Boom generation puts a strain on Social Security.
Greenspan also repeated that the central bank, which buys and sells Treasury securities itself to carry out interest rate policy, is
examining its options for the future. Any adjustments to its operations, he said, would depend on how rapidly the supply of
Treasury debt shrinks and for how long the market is unavailable.
DOLLAR NOT SEEING PAYDOWN EFFECTS
Greenspan discounted concerns that the U.S. dollar could weaken as the supply of Treasury securities -- a favorite for foreign
investors -- dwindles.
``The evidence of the past year and a half gives little support to this notion: Foreign private investors, on net, have run off their
holdings of U.S. Treasury securities, while they have built up their holdings of private dollar assets by an even larger amount,
and the foreign exchange value of the dollar has appreciated.''
The Fed chief repeated his concern, which he outlined in detail earlier this year in testimony to Congress, that the government
could accumulate large stores of private assets once the debt is paid down.
In that testimony, Greenspan announced his support for tax cuts as a means of forestalling a sudden accumulation of private
assets, a controversial switch from his previous emphasis on paying down the national debt.
In his remarks to The Bond Market Association, he suggested looking into other options, such as individual savings accounts,
for dealing with the need to put aside accumulated surpluses to pay for future retirement program benefits. |
