Bernanke Escalates Debt Warnings

[JohnSmith2007 353]

Bernanke Escalates Debt Warnings

By Dunstan Prial

FOXBusiness

Federal Reserve chairman Ben Bernanke on Wednesday raised the volume on his warnings that the U.S. can no longer ignore skyrocketing debt levels.

The Fed Chairman said the U.S. need look no further than Europe to see our future if strong measures arent taken to rein in debt.

Ongoing developments in Europe point to the importance of maintaining sound government finances, Bernanke said in prepared remarks before the House Budget Committee.

While the U.S. economy is buffeted because of its size and diversity, Bernanke said ignoring the debt could have disastrous long-term affects. History makes clear that failure to achieve fiscal sustainability will, over time, sap the nations economic vitality, reduce our living standards, and greatly increase the risk of economic and financial instability.

Elsewhere in his remarks, he noted, "To avoid sharp, disruptive shifts in spending programs and tax policies in the future, and to retain the confidence of the public and the markets, we should be planning now how we will meet these looming budgetary challenges," he said.

The call to arms over U.S. debt levels offset some encouraging economic projections.

Its not the first time Bernanke has warned Congress that the U.S. government spends too much and takes in too little.

In April, Bernanke warned that U.S. debt levels could rise sharply over the next decade and called on Congress to take strong measures to get the nations fiscal house in order.

Bernanke has cited the following data to add heft to his warnings: President Barack Obama's 2011 budget proposal forecasts a record deficit of $1.6 trillion, or 10.6% of gross domestic product, the highest level since World War II. The government plans to reduce that to 3.9% of GDP by fiscal 2014, but that would still be above the 3.0% of GDP that economists consider sustainable.

Some economists have argued that the U.S. is potentially worse off than Europe. The Organization for Economic Cooperation and Development, for instance, predicts that the U.S. budget deficit will still be at 8% of GDP in 2011 after hitting 9.3% of GDP in 2009. For the euro area, the OECD sees the deficit remaining around 4.0% of GDP through 2011.

Even though Greek debt is expected to balloon to more than 130% of GDP next year, the average of the euro area should see public debt levels closer to 93% of GDP, according to the OECD. In the U.S., the gross general government debt, which includes also state and local debt, is seen rising to 100% of GDP in 2011.

Meanwhile, Bernanke predicted the economy will continue to grow well into next year spurred by an increase in consumer spending and business investment. The labor market will continue to be a problem, however.

The Fed chairman said the recovery won't be fast enough to put 8 million people back to work in a short period. He also cautioned the housing market remains soft.

Stock markets rose Wednesday buoyed in part by Bernanke's comments. Most of the Dow Jones Industrial Average's 30 components were higher, led by economically-sensitive Caterpillar (CAT: 58.48, 1.855, 3.28%), DuPont (DD: 36.39, 0.9325, 2.63%) and Boeing (BA: 62.68, 1.665, 2.73%).

http://www.foxbusiness.com/story/markets/industries/finance/recovery-survive-coming-fiscal-drag-bernanke/

Edited June 9, 2010 by JohnSmith2007