Former Federal Reserve Board Chairman Alan Greenspan warned that surging out of control budget deficits ultimately will cause inflation to roar.
“Right now, there’s no real inflation at play. But if we go further than we are currently, inflation is inevitably going to rise,” the ex-central bank chief said Tuesday on CNBC.
The U.S. budget deficit rose by 2% last month to $209 billion, another step in a journey back toward $1 trillion-a-year budget shortfalls, the Associated Press reported.
The Treasury Department reported Wednesday that the federal government took in $225 billion in tax and other revenue but spent a record $434 billion in November. November is the second month of the government's 2020 budget year.
In the 2019 budget year, the government ran up a deficit of $984 billion, the most in seven years.
Meanwhile, U.S. inflation for years has held below the 2% level that the Fed considers healthy for a growing economy, at least gauged by the central bank’s preferred measure.
The U.S. ran a fiscal deficit in 2019 that just missed $1 trillion. As those excess dollars float through the system, that historically has driven inflation higher, CNBC explained.
“That, on top of the stagnation we are seeing in many areas, is not very beneficent for the world economy and certainly not for the United States and China,” Greenspan said.
The Congressional Budget Office is forecasting that the deficit for 2020 will hit $1 trillion and will stay above $1 trillion for the next decade. The country last ran annual $1 trillion annual deficits from 2009 through 2012 during and after the financial crisis.
The gap narrowed as the economy picked up momentum.
But the fiscal imbalance started to grow again after President Donald Trump and Congress pushed through a massive tax cut in 2017 while ramping up spending. Adding to budget pressures: The baby boom generation is retiring and beginning to collect Social Security and enroll in Medicare.
So far this budget year, the government is running a deficit of $343 billion, up 12% from a year earlier.
Meanwhile, Fed officials are working to keep inflation, which is short of the central bank's 2% target, from getting too low to give policymakers more room for adjusting monetary policy.
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