Fed Chief Sees Risks for Global Economy

Federal Reserve Chairman Alan Greenspan warned Friday that America’s exploding budget deficit and a protectionist backlash against soaring trade deficits could disrupt the global economy.

On a day when he was being honored in London for his nearly two decades in the world’s highest-profile economic job, Greenspan restated some familiar worries. He said U.S. deficits were set to soar with the pending retirement of 78 million baby boomers and he suggested that Congress consider trimming Social Security and Medicare benefits because the government probably had promised more than it could afford.

If something isn’t done to trim benefit costs, the resulting budget deficits would “cast an ever-larger shadow” over the future living standards of Americans, Greenspan said in a taped speech delivered to a conference sponsored by the Philadelphia Federal Reserve Bank.

Greenspan repeated his belief that the country’s record trade deficits could be addressed by market forces without any harm to the economy. But he said this benign outcome would be jeopardized if the U.S. and other nations did not get their budget deficits under control and if they made the mistake of making their economies less flexible by erecting trade barriers.

“If, however, the pernicious drift toward fiscal instability in the United States and elsewhere is not arrested and is compounded by a protectionist reversal of globalization, the adjustment process could be quite painful for the world economy,” Greenspan said in a second speech, which he delivered to a conference in London.

Greenspan was in London to attend his final meeting of finance ministers and central bank presidents of the Group of 7 industrial countries. The meeting was planned in part as a farewell party for Greenspan, who is retiring next month.