Greenspan Warns Of Rising Deficits

Says Failure To Control Budget Could Disrupt Global Economy

(AP)  Federal Reserve Chairman Alan Greenspan expressed concerns Friday that America's failure to deal with its exploding budget deficit and worldwide efforts to erect trade barriers could disrupt the global economy.

Speaking at an economic conference in London, Greenspan said so far the United States has had no problem financing its current account trade deficit, which last year hit a record $668 billion, because of the flexibility of the American economy.

But he said such flexibility would be threatened by rising protectionism, which would increase barriers to the flow of goods and investments across the U.S. border. He also worried about the harm that could be done if the United States and other nations do not get their budget deficits under control.

"If ... 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 his prepared remarks, which were released in Washington.

The London speech represented the second warning Greenspan delivered Friday on the threats posed by rising budget deficits. In an earlier speech, he had said that there could be severe consequences for the U.S. economy if policy-makers do not attack a federal budget deficit that is projected to soar with baby boomer retirements.

In that taped speech to a conference in Philadelphia, Greenspan said that Congress would likely have to make "significant adjustments" in reducing benefits for future retirees. He said it appears the country has promised more than it can afford to deliver in Social Security and especially Medicare payments, given that health care costs have been exploding.

Greenspan, who will step down as Fed chairman after 18 and a half years on Jan. 31, used both of the Friday speeches to return to themes he has been emphasizing over the past two years.

He said that the looming retirement of 78 million baby boomers will put severe strains on the country's finances and without changes could disrupt the economy by driving up interest rates from the increased government borrowing.

And he said that the nation's huge trade deficits can be financed as long as the country does not jeopardize the flexibility of the U.S. economy in such ways as increasing protectionist barriers.

"If the currently disturbing drift toward protectionism is contained and markets remain sufficiently flexible," Greenspan said, then a rise in Americans' savings rates and other adjustments needed to reduce the U.S. trade deficit should proceed without problems.

Greenspan was in London to attend his final meeting of finance ministers and central bank president of the world's seven largest economies.