This article is 5 months old but is starting to make sence now!
Oct. 15 2009, (Bloomberg) -- Former Federal Reserve Chairman Alan Greenspan said hes not overly concerned about the recent weakening of the U.S. dollar, while warning of long-term costs to the country and its currency from the rising national debt.
Im not overly concerned about the most recent decline in the dollar, which has returned to its value preceding the financial crisis, Greenspan said today at a Council on Foreign Relations forum in New York. At the same time, he warned it may become increasingly difficult to finance the federal debt.
The U.S. government ended its 2009 fiscal year with a deficit of $1.4 trillion, the biggest since 1945, the Congressional Budget Office reported last week. Greenspan said the increase in federal debt is the most worrisome aspect of the economic agenda in the United States.
There are equations in which certain relationships become progressively explosive, as increasing interest payments expand the deficit and debt, which increases interest payments in a continuing cycle, Greenspan said.
Throughout U.S. history, the capacity of the government to finance the debt has provided a cushion that made the dollar such an important currency in the world, he said.
There is no question that the cushion is going down, and when long-term interest rates start rising and inflation pressures build, thats very late in the game to turn it around, Greenspan said.
The dollar strengthened 0.2 percent to $1.4902 per euro at 10:15 a.m. in New York, from $1.4925 yesterday. It dropped to $1.4968 earlier, the weakest level since August 2008.
Dollar May Drop
Sumitomo Mitsui Banking Corp.s chief strategist said the dollar may drop to 50 yen next year and eventually lose its role as the global reserve currency, citing trading patterns and a likely double dip in the U.S. economy. The yen depreciated 1.4 percent to 90.53 per dollar, from 89.44 yesterday.
U.S. regulators should consider breaking up large financial institutions perceived as too big to fail, Greenspan said.
Such banks have an implicit subsidy allowing them to borrow at lower cost because lenders believe the government will always step in to guarantee their obligations. That squeezes out competition and eventually creates a danger to the financial system, Greenspan said in response to an audience question.
If theyre too big to fail, theyre too big, Greenspan said. In 1911 we broke up Standard Oil -- so what happened? The individual parts became more valuable than the whole. Maybe thats what we need to do.
