Former U.S. Federal Reserve Chairman Alan Greenspan said he's not "overly concerned" about the recent weakness in the U.S. dollar, Bloomberg News reported Thursday. However, Greenspan is concerned about the long-term costs to the United States associated with its rising national debt.
"There are equations in which certain relationships become progressively explosive," such as if a spiral starts in which increasing interest payments increase the deficit and debt, leading to another increase in interest payments, and so on, Bloomberg News reported.
Fiscal Analysis: Policy makers in Washington should heed Greenspan's words. Even with recent weakness, the dollar has basically returned to its level before the financial crisis; moreover, the dollar's value is partially a function of the large U.S. budget deficit and national debt. On the latter, presently, interest rates are relatively low, with the United States still benefiting from a flight-to-safety into U.S. Treasuries, which has lowered long-term interest rates below what they would have been in normal times (the rate the U.S. government pays on its bonds is certainly lower than the rate lenders would charge other nations, if they had a similar per capita national debt).
However, the period of relatively low interest rates will not last forever. As the global recovery accelerates, institutional investors will rotate out of safe Treasuries and into higher risk/higher return investments, and long-term interest rates will likely rise -- increasing the U.S.'s borrowing costs. The specter of rising rates is one major reason why, after a deficit-cutting health care reform package is passed, Congress must turn its attention to cutting the budget deficit -- including further spending cuts and a tax increase. If Congress acts courageously, the budget can be balanced by fiscal year 2016, assuming a normal GDP growth rate in the U.S.
Financial Editor Joseph Lazzaro is writing a book on the U.S. presidency and the U.S. economy.