BEIJING, Nov. 15 (Xinhuanet) -- Federal Reserve Chairman Alan Greenspan says the growing US budget deficit could destabilize the economy. Fed Governor Susan Bies says Congress spends like it's dipping into "a cookie jar." St Louis Fed President William Poole says Social Security is in jeopardy.

    In the last two months, Greenspan and at least seven other Fed officials have warned lawmakers about tax-and-spending policies that have led to record budget and current account gaps.

    As Greenspan in January begins his last year atop the central bank, the comments suggest Fed members are concerned his successor will have less room to guide an economic expansion should they have to raise interest rates to counter a plunging dollar or surge in spending.

    "If you get to a point of fairly significant long-term structural budget deficits, it begins to impact on the level of long-term interest rates," Greenspan told the House Budget Committee on September 8. That means the government must pay higher rates to borrow money, leading to even higher deficits, he said.

    "If you get into that sort of debt maelstrom, it is a very difficult issue to get out of," he said.

    Record deficits

    The policy-making Federal Open Market Committee has already raised rates three times since June to restore its benchmark rate to a level that neither slows growth nor sparks inflation.

    Budget surpluses from 1998 to 2001 helped Greenspan orchestrate the longest economic expansion in US history. When the boom ended in 2001, low inflation allowed the Fed to cut the benchmark rate to 1 per cent, the lowest since 1958, limiting the recession to just eight months.

    Then the surpluses evaporated. President George W. Bush, who will choose the next Fed chairman, won passage of US$1.85 trillion in tax cuts and raised spending for wars in Iraq and Afghanistan. Defence spending rose 12.4 per cent in fiscal 2004 to US$437 billion, the Congressional Budget Office said.

    The budget deficit widened to a record US$413 billion in the fiscal year ended September 30, with government spending rising 6.2 per cent from the previous year. The deficit amounted to about 3.6 per cent of the country's US$11.8 trillion gross domestic product, the highest percentage since 1993.

    Policy "out of whack"

    Social Security, the main government-funded retirement programme, will spend more money than it takes in starting in 2018, according to a report by the programme's trustees. Unless taxes are increased or benefits cut, trust-fund assets for retirees, now at US$1.4 trillion, will fall to zero by 2042. A report by trustees of Medicare, a federal health-insurance programme, shows their hospital insurance fund spending will exceed income by 2012.

    "There are a number of things that are just extraordinary, beginning with the fiscal imbalance," said Representative Jim Leach, an Iowa Republican and former head of the House Financial Services Committee, which oversees the Fed. "The Fed has less credible discretion the more out of whack fiscal policy gets."

    Possible successors

    Bush, who won re-election on November 2, hasn't mentioned a likely successor to Greenspan, whose nonrenewable term as governor ends January 31, 2006, after a tenure spanning four presidents.

    Alan Blinder, a Fed vice chairman from June 1994 to January 1996, said possible successors include Harvard University economist Martin Feldstein, a Bush adviser on Social Security, and John Taylor, Treasury undersecretary for international affairs.

    Blinder, a Princeton University economist who was an adviser to Democratic nominee John Kerry, also named Fed Governor Ben Bernanke and former Fed Governor Lawrence Lindsey as potential candidates, at a September 28 meeting of the Council on Foreign Relations in Washington.

    Greenspan's successor must steer the economy through the effects of deficits, high oil prices and global terrorism, Leach said.

    "These are extraordinary times," he noted. "Virtually all the risks in the world economy are on the downside."

    US$88.5 billion tax

    San Francisco Fed Bank President Janet Yellen said the surge will result in a temporary boost in broad inflation and, as long as prices stay high, a tax on US consumers. Greenspan said that tax amounted to about US$88.5 billion this year, equal to 0.75 percentage points of GDP.

    Former Dallas Fed President Robert McTeer flagged the record US$166.2 billion deficit in the US's current account, the broadest measure of trade, as a threat to stability.

    The current-account shortfall was equal to 5.7 per cent of the economy in the second quarter, up from 5.1 per cent in the first three months. The US needs to attract about US$1.8 billion a day from overseas to plug the gap. If other nations sour on US securities, the value of the dollar may plunge.

    "The current account deficit is going to cause problems," said McTeer, who resigned November 4 from the Fed to run Texas A&M University in College Station, Texas. "Flows will turn against us, and there will be a crisis that will result in rapidly rising interest rates and a rapidly depreciating dollar that will be very disruptive," he said on October 7 at a New York event sponsored by Market News International.

    Dollar drop

    Bush's pledge to make his tax cuts permanent also has traders predicting the dollar will continue to fall. The currency may fall to its lowest level ever against the euro for a second consecutive week after Bush signaled he would expand policies that fueled the deficits and the dollar's decline of about 20 per cent against a basket of currencies since he took office in 2001, according to a Bloomberg News survey. Bush will also seek more funding for the war in Iraq.

    Sixty per cent of the traders, strategists and investors questioned on November 5 from Tokyo to New York advised selling the dollar against the euro.

    "A second term for Bush doesn't bode well for the dollar," said Samarjit Shankar, director of global foreign-exchange strategy at Mellon Financial Corp in Boston.

(China Daily)