The former Chairman of the Federal Reserve warned markets and officials of the dangers of the national debt in a Wall Street Journal op-ed Friday. Greenspan said that even with debt soaring almost $3 trillion in the last 18 months, investors and the administration seem curiously unconcerned with the danger of borrowing.
Greenspan compared the U.S. to Greece, saying “the very severity of the pending crisis and growing analogies to Greece set the stage for a serious response. That response needs to recognize that the range of error of long-term U.S. budget forecasts is, in historic perspective, exceptionally wide. Our economy cannot afford a major mistake.”
The comments of the former Fed chairman could have real implications across many sectors, as U.S. Treasuries bankroll or impact huge swathes of the economy. A concerted effort to cut back on spending will probably lead to a sharp shock to stock index futures and commodities futures, particularly oil and base metals. Although many investors cite U.S. borrowing as a macro-economic risk, even the slightest hints of austerity have shaken markets in Asia, Latin America and Europe.
On the other hand, continuing full-throttle down the borrowing path will probably undercut bond market futures as markets start to process the threat of inflationary fiscal policy and rising interest rates, which will have to come up for the U.S. to keep issuing T-bills. Gold futures and crude oil will likely rise in that scenario, as investors hedge inflation, and for a period of time, at least, stock index futures would follow, buoyed by public-sector spending.
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