Greenspan Skips Short-Term Deficit Risk to Rates: John M. Berry

[papau]

http://quote.bloomberg.com/apps/news?pid=10000039&refer=columnist_berry&sid=aUseQ9AfTAVM

Greenspan Skips Short-Term Deficit Risk to Rates: John M. Berry
March 2 (Bloomberg) -- Federal Reserve Chairman Alan Greenspan said last week that big federal budget deficits eventually would lead to increases in long-term interest rates large enough to undermine U.S. economic growth.

However, Greenspan skipped over the possibility that ``eventually'' could arrive as soon as next year, leaving Fed policy makers with a potentially serious problem on their hands. <snip>


The reason the budget outlook could impact rates as early as 2005 isn't that this year's deficit is likely to be around half a trillion dollars.

Rather, it's because Bush, concentrating on re-election and making permanent virtually all the tax cuts enacted in the past three years, has presented no realistic plan for curbing future deficits. <snip>


If investors looking ahead see the prospect of the Treasury and private borrowers competing for funds, the increase in long rates will be magnified. Foreign investors' appetite for holding dollar-denominated assets could be affected as well, putting new pressure on the dollar and rates. <snip>


<snip>``Merely keeping defense (spending) at its current 4 percent of GDP, a low level historically, adds $1 trillion (plus interest) to the 10-year deficit,'' McKelvey said. ``Making the personal tax cuts permanent adds another $1.4 trillion (plus interest).''

Indexing the alternative minimum tax, which has to happen sooner or later, allowing non-defense discretionary spending to grow 2 percent a year in real terms and adding an extra $600 billion for the additional interest bill would bring the cumulative deficit for those years to $5.5 trillion, according to his analysis.

<snip>(Deutsche Bank, senior economist M. Cary Leahey)``Conventional analysis suggests that the deficits gradually erode long-term growth. They do so by eventually crowding out private investment, which is competing with the government for scarce capital,'' he said. <snip>