‘Stagflation A Risk If US Budget Unbalanced’

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Washington, Sept 10: Testifying at the House Budget Committee on Wednesday, Federal Reserve chairman Alan Greenspan said that while there is no inflation premium “of any significance” in the US monetary system, ever-increasing deficits could cause problems.

“The issue that is probably most in a practical sense something that we need to avoid is not an unstable breakdown of the system but significantly higher rates of inflation, inflation premiums embodied in long-term interest rates, and what we used to call — I guess we still would — stagflation. And that what lies in front of us if we don’t restore balance to our fiscal process,” Mr Greenspan said.

“The ultimate instability is the case I made earlier, where you get to a point where the budget deficit is large enough and therefore adding to the national debt, which in conjunction with rising interest rates because of that, creates an unstable statistical or arithmetic system which leads to a major breakdown of the fiscal system,” he added.

“We are nowhere near anything resembling that, as evidenced by the fact that there is no inflation premium of any significance in our monetary system. But it is certainly conceivable that if we wholly disregard fiscal restraint and merely go on our way of, as I said before, advocating ever-increasing deficits, which is the implication of a lot of the actions that we take, then I think we start to risk problems,” the Fed chief said.

In a report on Wednesday, the Federal Reserve said in a report that the economy in many areas of the US grew at a slower pace in late July and August as household spending softened.

“Economic activity continued to expand in late July and August, although several districts indicated that the pace had slowed,” the Fed said in its “beige book,” an anecdotal look at the US economy from the perspective of its 12 regional banks.

The Fed said in the report that a softening in household spending reflected “lacklustre retail sales and some cooling in new and existing home sales.” It said consumer prices were “generally flat or up modestly” in July and August but noted rising costs for energy and some materials used in production.