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Bernanke 'quite concerned' about budget deficit
Central bank chief says the gap could put future living standards in the United States 'at risk' but markets, not policies, keeping U.S. attractive to foreign investors.
March 14, 2006: 3:32 PM EST
WASHINGTON (Reuters) - Federal Reserve Chairman Ben Bernanke said he was concerned about the U.S. budget deficit, noting in a letter released Tuesday that the aging of the population will increase the pressure on the budget.
"I am quite concerned about the intermediate to long-term federal budget outlook," Bernanke said in a letter to Sen. Robert Menendez, following up on the Fed chief's Feb. 16 testimony to the Senate Banking Committee.
"In particular, the budget is expected to come under severe pressure as impending demographic changes fuel rapid increases in entitlement spending. By holding down the growth of national saving and real capital accumulation, the prospective increase in the budget deficit will place at risk future living standards of our country," Bernanke said.
"As a result, I think it would be very desirable to take concrete steps to lower the prospective path of the deficit," he said in the letter, which was dated March 9.
Regarding global trade imbalances, Bernanke said government policies would have only a "limited" effect unless financial market views shifted. "In the absence of a shift in market perceptions of the relative attractiveness of U.S. and foreign assets, government policies would likely have only limited effects on the trade balance," Bernanke said
The new Fed chief, who was sworn into office on Feb. 1, told the senator the large U.S. trade gap and corresponding surpluses overseas reflected saving abroad that exceeded investment.
"This excess saving has been attracted to the United States by our favorable investment climate, strong productivity growth, and deep financial markets," he said.
Bernanke said that while this had increased U.S. indebtedness, U.S. external debt was still "within international and historical norms" relative to U.S. income and need not be worrying.
"Given the strength and flexibility of our economy, there is every reason to believe that, if changes in the foreign outlook or in the tone of financial markets were to cause a reduction in capital inflows and the trade deficit, economic activity and employment would stay strong," he said.
Bernanke said studies indicated budget cutting would have only "a relatively modest effect" on the U.S. trade gap, although he said the United States should endeavor to raise its savings and cut the trade shortfall to curtail rising debt servicing costs.
He also said pro-growth policies among U.S. trading partners could help whittle away at global imbalances and that more flexible currencies in some countries would provide "greater scope" for market forces to play a role.
While Bernanke suggested budget cuts would do little to rein in the burgeoning U.S. trade gap, he said improving the long-term fiscal outlook would help protect living standards.
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