US recovery to continue, but debt crisis threatens - Bernanke

03 February 2011 23:06  [Source: ICIS news]

WASHINGTON (ICIS)--The US recovery has strengthened and should expand faster this year, the top central bank official said on Thursday, but growing government deficits and the nation’s ballooning debt burden threaten the country with financial collapse.

Ben Bernanke, chairman of the Federal Reserve Board, said in a speech that the US economic recovery that began in June 2009 “has strengthened in recent months, although to date growth has not been fast enough to bring about a significant improvement in the job market”.

He said that Fed economists “have seen increased evidence that a self-sustaining recovery in consumer and business spending may be taking hold” as households expanded purchasing at an annual rate of more than 4% in the fourth quarter of 2010.

“Businesses’ investments in new equipment and software grew robustly over most of last year,” Bernanke said, although he noted too that in the long-depressed housing sector “the overhang of vacant and foreclosed homes continues to weigh heavily on both home prices and residential construction”.

“Overall, however, improving household and business confidence, accommodative monetary policy, and more supportive financial conditions - including an apparent increase in the willingness of banks to make loans - seem likely to lead to a more rapid pace of economic recovery in 2011 than we saw last year,” the Fed chairman said.

But as he has in several recent speeches, Bernanke again raised alarm about growth in the federal budget deficit and explosive expansion of the national debt.

“Even after economic and financial conditions have returned to normal, the federal budget will remain on an unsustainable path, with the budget gap becoming increasingly large over time, unless the Congress enacts significant changes,” he said.

He said that federal debt at the end of 2010 was equal to about 60% of US gross domestic product (GDP), which was around $14,700bn (€10,584bn) last year.

At current federal spending rates, he warned, that debt load would reach 90% of US GDP by 2020 and would be 150% of the nation’s total output of goods and services by 2030.

If Congress should fail to take steps soon to reduce the annual budget deficit, “the economic and financial effects would be severe”.

“To put the budget on a sustainable trajectory, policy actions - either reductions in spending or increases in revenues or some combination of the two - will have to be taken to eventually close budget gaps,” Bernanke said.

“The question is whether these adjustments will take place through a careful and deliberative process, or whether the needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis,” he said.

($1 = €0.72)

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