Bernanke Points to 'Increased Possibility of a Sudden Fiscal Crisis'

Matt Cover | February 7, 2012 | 11:07am EST
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Federal Reserve Chairman Ben Bernanke (AP Photo/Alex Brandon)

( Federal Reserve Chairman Ben Bernanke said that the current trajectory of the federal budget – marked by large annual deficits – was “clearly unsustainable” and that “serious economic consequences” could result.

“Having a large and increasing level of government debt relative to national income runs the risk of serious economic consequences,” Bernanke told the Senate Budget Committee Tuesday.

“Even the prospect of unsustainable deficits has costs, including an increased possibility of a sudden fiscal crisis. As we have seen in a number of countries recently, interest rates can soar quickly if investors lose confidence in the ability of a government to manage its fiscal policy.”

Bernanke said that while nobody knows when a fiscal crisis will come, it is surely “ever closer.”

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“Although historical experience and economic theory do not indicate the exact threshold at which the perceived risks associated with the U.S. public debt would increase markedly, we can be sure that, without corrective action, our fiscal trajectory will move the nation ever closer to that point.”

Bernanke also said that these rising debts and deficits could also crowd out private investment and was “clearly unsustainable.”

“Of even greater concern is that longer-run projections, based on plausible assumptions about the evolution of the economy and budget under current policies, show the structural budget gap increasing significantly further over time and the ratio of outstanding federal debt to GDP rising rapidly. This dynamic is clearly unsustainable,” Bernanke said.

The central bank chief said that over time, the national debt would “crowd out” private sector investment and growth.

“Over the longer term, the current trajectory of federal debt threatens to crowd out private capital formation and thus reduce productivity growth,” he added.

The only way to prevent lower economic growth and a Greece-like debt crisis in the long term was to begin to get the budget deficit under control now, Bernanke warned.

“To achieve economic and financial stability, U.S. fiscal policy must be placed on a sustainable path that ensures that debt relative to national income is at least stable or, preferably, declining over time. Attaining this goal should be a top priority.”

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