Mar. 3, 2005. 01:00 AM
Greenspan sounds U.S. deficit warning
Consequences `could be severe,' Fed chief says
Debt worries clouding outlook for economy
WASHINGTON—U.S. Federal Reserve Board chairman Alan Greenspan issued one of his toughest warnings yet to Congress yesterday about the danger of letting the country's giant budget deficits persist, saying "the consequences for the U.S. economy of doing nothing could be severe."
Testifying before the House budget committee, Greenspan endorsed the creation of private retirement accounts within Social Security, saying he favours a "significant personal accounts component." Greenspan said Congress must act to overhaul Social Security "sooner rather than later" because of the impending surge in retirements.
"I fear that we may have already committed more physical resources to the baby-boom generation in its retirement years than our economy has the capacity to deliver," Greenspan said.
"If existing promises need to be changed, those changes should be made sooner rather than later," Greenspan said.
Greenspan said worries about the budget are clouding the economic outlook, "especially in the longer run." Without "major deficit-reducing actions" by Congress, he said, the budget isn't likely to shrink much in the next few years.
During President George W. Bush's term in office, the federal budget has swung from a record surplus to a record deficit — $412 billion (U.S.) last year. The White House says it expects to halve the deficit before Bush leaves office in 2009, but financial markets have grown jittery about the growing indebtedness.
Last month, the U.S. dollar dropped sharply because of worries that Asian central banks might start dumping the currency.
Greenspan said so far this year the economy "appears to be growing at a reasonably good pace." He didn't discuss the outlook for U.S. interest rates.
During questioning, Greenspan said there's "very little evidence" foreign central banks are dumping the U.S. dollar. The recent changes in those banks' currency portfolios are mostly "technical moves backwards and forwards."
Greenspan, when asked what would happen to the economy if foreign banks begin selling U.S. Treasury bonds in large volumes, said he didn't expect it would cause a surge in interest rates.
"Our general conclusion at this stage is we do not perceive that it is a really significant problem for our domestic economy," he said.
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