LONDON, June 26 (Reuters) - Former U.S. Federal Reserve Chairman Alan Greenspan said on Friday that inflation poses a major threat to long-term economic recovery and its threat must be confronted.
“Excess capacity is temporarily suppressing global prices. But I see inflation as the greater future challenge,” he wrote in London’s Financial Times.
”If political pressures prevent central banks from reining in their inflated balance sheets in a timely manner, statistical analysis suggests the emergence of inflation by 2012.
“Earlier if markets anticipate a prolonged period of elevated money supply.”
His comments come after the Fed said on Thursday it would stick to its programme of buying government and mortgage debt and that it saw signs that the deep U.S. recession was easing.
It also said it expected inflation to remain subdued for some time.
Greenspan said the need for governments to finance large fiscal deficits over the next few years could lead to political pressure on central banks to print money to buy much of the new debt.
Meanwhile, government spending commitments over the next decade were “staggering.”
“Historically, the U.S., to limit the likelihood of destructive inflation, relied on a large buffer between the level of federal debt and rough measures of total borrowing capacity,” he said.
“Current debt issuance projections will surely place America precariously close to that notional borrowing ceiling.”
He said inflation fears may soon be factored into longer-term U.S. government bond yields or interest rates.
“The U.S. is faced with the choice of either paring back its budget deficits and monetary base as soon as the current risks of deflation dissipate, or setting the stage for a potential upsurge in inflation.”
Apart from the inflation risk, Greenspan said another potential danger in current U.S. fiscal policy was the funding of the economy through public sector debt.
“For the best chance for worldwide economic growth we must continue to rely on private market forces to allocate capital and other resources,” he wrote.
“The alternative of political allocation of resources has been tried; and it failed.” (Reporting by Michael Holden; Editing by Gary Hill)