The former Federal Reserve Bank Chair Alan Greenspan told CNBC on Thursday that inflation, the unknown factors surrounding coronavirus, and budget deficits are the critical issues the US is facing right now. The former chairman said that the US is underestimating the size of the budget deficits that are down the road, as the number of Americans retiring and receiving entitlements increases. Greenspan said he is certain there will be an "extraordinary increase in retirement" ahead.
Budget deficit of United States has increased as the government has spent to help the economy through the pandemic. According to the article, the federal budget deficit reached $3 trillion in August.
Greenspan said, "My overall view is that the inflation outlook is unfortunately negative and essentially the result of a huge increase in entitlements that are crowding out private investment and productivity growth."
We can see that Greenspan's arguments coincide with the policy of the current Chair of Federal Reserve Bank Jerome Powell. Powell announced last month a major shift in Fed policy saying that the Fed is willing to allow inflation to run hotter than normal in order to support the labor market and broader economy. The central bank formally agreed to a policy of “average inflation targeting" which means it will allow inflation to run “moderately” above the Fed’s 2% goal.
https://markets.businessinsider.com/news/stocks/economic-outlook-inflation-major-concern-alan-greenspan-deficits-fed-entitlements-2020-9-1029579654#
3 comments:
Haris, I think these comments are very interesting and reflect the tension that policy makers such as Jerome Powell have to face right now. I think that Powell is correct in his assertion that Americans cannot be overly concerned with the sate of our debt, and even inflation levels, during a pandemic that has caused the amount of financial ruin that we are witnessing today. While it is a shame that the debt is likely to increase for at least another year, to counter the effects of the pandemic, this is probably the least of the Fed's concerns. Hopefully, once the financial effects of the pandemic are mitigated, the Fed's policy will reflect a desire to curb the surmounting debt that has been accumulated. Of course, it is unlikely this will happen given that most presidents prioritize the state of the economy while they are in office rather than addressing the accumulated problem of America's debt — a phenomenon that typically reflects the president's influence on monetary policy.
I believe the current amount of federal debt is problematic and that it is right for Americans to be concerned about it. Any debt that we have today must be repaid using future revenue, which will then decrease the amount of money available in the future for things such as spending, investment, and saving. Leading us into a deeper crisis. While this phenomenon of debt might be 'natural' and reflective of the state of the nation's economy due to the pandemic, it definitely shouldn't be neglected. Obviously, the Fed has to prioritize more pressing issues but I think that eventually, more attention will need to be paid to this matter.
I think that the government should be concerned with the deficit and that they are underestimating how much of an impact it could have down the line. But at the same time you have to recognize that they borrow trillions of dollars a year at very low interest rates on global markets. No one really knows what the “debt limit” is per say but if interest rates remain low the government can handle a heavier debt load. I do think that politicians may be more reluctant to borrow more knowing that they have already borrowed a great deal, but keeping the economy afloat should be the priority to the debt.
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