Greenspan
Says U.S. May Soon Reach Borrowing Limit By Jacob Greber -
Jun 17, 2010
Former
Federal Reserve Chairman Alan Greenspan said the U.S. may
soon face higher borrowing costs on its swelling debt and
called for a “tectonic shift” in fiscal policy
to contain borrowing.
“Perceptions of a large U.S. 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 Wall Street Journal’s
website. “Long-term rate increases can emerge with
unexpected suddenness,” such as the 4 percentage point
surge over four months in 1979-80, he said.
Greenspan rebutted “misplaced” concern that
reducing the deficit would put the economic recovery in
danger, entering a debate among global policy makers about
how quickly to exit from stimulus measures adopted during
the financial crisis. U.S. Treasury Secretary Timothy F.
Geithner said this month that while fiscal tightening is
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.”
Rein in Debt
Pressure on capital markets would also be eased if the
U.S. 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 U.S. Treasuries have benefitted from safe-haven
demand in recent months because of the European debt crisis,
a circumstance that may not last, said Greenspan, who now
consults for clients including Pacific Investment Management
Co., which has the world’s biggest bond fund.
Benchmark 10-year Treasury notes yielded 3.20 percent as
of 12:11 p.m. in Tokyo today, down from the year’s
high of 4.01 percent in April and compared with as high
as 5.32 percent 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
from $5.5 trillion,” Greenspan said.
The swing in demand toward American government debt and
away from euro-denominated bonds is “temporary,”
he said.
“Our economy cannot afford a major mistake in underestimating
the corrosive momentum of this fiscal crisis,” Greenspan
said. “Our policy focus must therefore err significantly
on the side of restraint.”