Alan Greenspan, the world’s most powerful central banker, yesterday blamed the threat of war for delaying the US recovery and delivered a stern warning to President Bush about the dangers of America’s ballooning budget deficit.
In his half-yearly testimony to Congress, the veteran chairman of the US Federal Reserve said uncertainty about war was clouding the economic outlook and putting firms off spending on plant and equipment.
”The heightening of geopolitical tensions has only added to the marked uncertainties that have piled up over the past three years, creating formidable barriers to new investment and thus to a resumption of vigorous expansion of overall economic activity,” he told the Senate banking committee.
Financial markets were experiencing a bout of ”skittishness” he said. He dashed hopes of an immediate cut in borrowing costs to boost confidence, saying calls for extra stimulus were ”premature.”
With the costs of the war on terror likely to put further pressure on public spending, Greenspan signalled that he was unhappy about the record deficits the Bush administration had pencilled into its budget forecasts.
”There should be little disagreement about the need to re-establish budget discipline. The events of September 11 have placed demands on our budgetary resources that were unanticipated a few years ago.”
Although Greenspan declined to comment directly on the White House’s $695-bbillion package of tax cuts, he dismissed suggestions from conservative economists that higher growth might eliminate America’s record deficit without the need for the government to tighten its belt.
Supporters of President Bush’s tax cuts have argued that faster growth will eventually cancel out the rising deficit and that there is no link between interest rates and deficits.
Greenspan said faster economic growth alone was unlikely to close the budget gap, a clear hint that he prefers the fiscal discipline of the previous administration. ”There is no question that if deficits go up, contrary to what some have said, it does affect long-term interest rates, it does have a negative impact on the economy unless attended.”
The Fed expects the US economy to recover to grow by 3-3,75% this year, well above most forecasters’ expectations. If the economy fails to live up to expectations, Greenspan said options for rate cuts would ”move up the agenda”.
Government bonds pared losses and stocks turned negative as some economists read into Greenspan’s remarks a possibility that further interest rate cuts were likely if the underlying economic problems went deeper than war worries. -Guardian Unlimited Â