US Fed chief warns of crippling federal debt and deficits

07 April 2010 20:26  [Source: ICIS news]

WASHINGTON (ICIS news)--The US economy has stabilised and is beginning to grow again, but the mounting and unsustainable federal debt poses a crippling threat to the nation’s financial existence, Federal Reserve Chairman Ben Bernanke said on Wednesday.

Speaking at a chamber of commerce meeting in Dallas, Texas, Bernanke warned that unless federal policymakers take steps to cut spending and reduce record federal budget deficits, the US economy cannot survive.

“Unless we as a nation demonstrate a strong commitment to fiscal responsibility, in the longer run we will have neither financial stability nor healthy economic growth,” Bernanke said.

He quoted an economist’s dictum that “If something cannot go on forever, it will stop”.

“That adage certainly applies to our nation’s fiscal situation,” the Fed chairman said.

Bernanke noted that as the “baby boomer” generation begins to enter their retirement years and birth rates continue to decline, the ratio of working-age Americans to the elderly will fall, imposing dramatic financial obligations “which could hold back the long-run prospects for living standards in our country”.

Baby boomers are those born between 1946 and 1964, and the oldest members of that major population bubble are already eligible for payments under the US taxpayer-funded Social Security retirement system and for health care under the Medicare programme.

It is estimated that Social Security obligations to the “boomers” are approximately $7,700bn (€5,775bn) and Medicare costs for healthcare for the aging group could run to $38,000bn.

Current US federal debt is approximately $12,700bn, having risen sharply since the 1970s when it had been more or less steady at around $3,000bn since the end of World War II.

Federal debt is roughly equal to 90% of the US annual GDP of $14,000bn.

“To avoid large and unsustainable budget deficits,” Bernanke said, “the nation will ultimately have to choose among higher taxes, modifications to entitlement programmes such as Social Security and Medicare, less spending on everything else from education to defence, or some combination of the above.”

He said the challenge of reducing federal debt and budget deficits “are daunting indeed”, and he called on policymakers to begin immediately “to develop a credible plan for meeting our long-run fiscal challenges”.

Bernanke also said that while the US financial crisis “looks to be mostly behind us”, he is still troubled by continuing high unemployment, the struggling housing sector and looming problems in commercial real estate that pose risks for communities and banks holding loans on such properties.

($1 = €0.75)

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