Greenspan: U.S. must cut spending

Friday’s Wall Street Journal carried a piece by former chairman of the Federal Reserve Alan Greenspan that is informative of the current state of the United States policy towards borrowing and spending.

Greenspan has been criticized for the loose money policies he championed as chair of the Fed, as many feel these policies led to the housing bubble and the present financial crisis. Greenspan denies this.

The Journal article includes some technical discussion of “swap rates” to illustrate the ability of the United States Treasury to borrow. It’s later in the article that Greenspan nails the current problem: “The current federal debt explosion is being driven by an inability to stem new spending initiatives. Having appropriated hundreds of billions of dollars on new programs in the last year and a half, it is very difficult for Congress to deny an additional one or two billion dollars for programs that significant constituencies perceive as urgent.”

Greenspan says the only way we can get out of our current unsustainable posture is cuts: “Only politically toxic cuts or rationing of medical care, a marked rise in the eligible age for health and retirement benefits, or significant inflation, can close the deficit. I rule out large tax increases that would sap economic growth (and the tax base) and accordingly achieve little added revenues.”

U.S. Debt and the Greece Analogy

Don’t be fooled by today’s low interest rates. The government could very quickly discover the limits of its borrowing capacity.

An urgency to rein in budget deficits seems to be gaining some traction among American lawmakers. If so, it is none too soon. Perceptions of a large U.S. borrowing capacity are misleading.

Despite the surge in federal debt to the public during the past 18 months — to $8.6 trillion from $5.5 trillion — inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.

Continue reading at the Wall Street Journal.


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