Greenspan calls for action to reduce US federal debt
Published 21/06/2010 | 05:00
Current US federal debt to the public
Former Federal Reserve chairman Alan Greenspan has said the US may soon face higher borrowing costs on its swelling debt and he called for a "tectonic shift" in fiscal policy to contain borrowing.
"Perceptions of a large US borrowing capacity are misleading" and current long-term bond yields are masking America's debt challenge, Greenspan wrote in an opinion piece posted on the website of the 'Wall Street Journal'.
Entering a debate among global policy makers about how quickly to exit from stimulus measures adopted during the financial crisis, Greenspan rebutted what he said was "misplaced" concern that reducing the deficit would put the economic recovery in danger.
US Treasury Secretary Timothy F Geithner said earlier this month that while fiscal tightening was needed over the "medium term", governments must reinforce the recovery in private demand.
"The United States and most of the rest of the developed world is in need of a tectonic shift in fiscal policy," said Greenspan (84), who served at the Fed's helm from 1987 to 2006. "Incremental change will not be adequate."
Pressure on capital markets would also be eased if the US government "contained" the sale of Treasuries, he wrote.
"The federal government is currently saddled with commitments for the next three decades that it will be unable to meet in real terms," Greenspan said. The "very severity of the pending crisis and growing analogies to Greece set the stage for a serious response".
Yields on US Treasuries have benefited from safe-haven demand in recent months because of the European debt crisis -- a circumstance that may not last, said Greenspan.
Benchmark 10-year Treasury notes yielded 3.2pc in Tokyo yesterday, compared with as high as 5.32pc in June 2007, before the crisis began.
Yields have remained low "despite the surge in federal debt to the public during the past 18 months to $8.6 trillion (€6.9 trillion) from $5.5 trillion," Greenspan said.
He said the swing in demand toward American government debt and away from euro-denominated bonds was "temporary".
He added: "Our policy focus must therefore err significantly on the side of restraint."