Market Watch: Greenspan Warns U.S. Budget Deficit will Ultimately Lead to Higher Inflation

Article by Greg Robb in Wall Street Journal market Watch

The yawning federal budget deficit is ultimately going to eventually lead to higher inflation, former Federal Reserve Chairman Alan Greenspan said Thursday.

The federal debt-to-gross domestic product ratio is on track to be as large as it was during World War II, Greenspan said during a talk at a National Association for Business Economics conference.

“Unless you believe in fairies, that is not an economy that can function without inflationary instability,” Greenspan said.

The former Fed chairman despaired the lack of political pressure to control entitlement spending and narrow the deficit.

“Despite the huge increase that we’ve seen in the debt, nothing is happening. People are behaving like it’s a terrible thing, but [say] ‘I want a little more,’” he said.

Current Fed Chairman Jerome Powell and his colleagues have said that they see muted inflationary pressures in the economic horizon. That is a key reason the Fed has said it can be patient with further interest-rate adjustments.

Greenspan was fairly upbeat about the fourth-quarter GDP data, released earlier Thursday, which showed a 2.6% growth rate, above economic forecasts.

“The long-term outlook is terrible,” he said.

In an interview with Bloomberg Television, Greenspan did not sound enthused with modern monetary theory, that a country with its own currency can spend as much as it likes until inflation accelerates.

“You would have to shut down your foreign exchange markets,” he said. “People will be trying to fly out of your currency.”

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