Alan Greenspan warns that a bond-market crisis is dead ahead if Congress doesn’t move fast to cut spending.
Greenspan added that inflation was an increasing risk and he reiterated his call to raise taxes immediately. Congress just voted to extend the Bush-era tax cuts for two years.
"The probability that we will go through the next two or three years with no bond-market problems, no inflation problems, is probably better than 50-50," the former Fed Chairman told The Wall Street Journal in an interview. "But not much."
Greenspan predicted that the severe cuts in the Obama deficit commission budget proposal, which failed to reach Congress for lack of support from its own authors, is the most likely version of a new spending regime to come.
"I think that the type of budget agreement that was put together by Alan Simpson and Erskine Bowles is the type of budget that will be passed by Congress," Greenspan said.
"The only question is, will it be before or after the bond-market crisis."
Greenspan pointed out that the U.S. economy was gaining momentum, and he linked that change to rising stock prices, the so-called “wealth effect.” That raises questions about what happens to the economy should stocks tank in the months ahead.
Greenspan also defended his legacy, saying he had answered his critics with facts. "If they prove I'm wrong, I'll change," he said.
Inflation is an increasingly worrying topic in the rest of the world. The G-20 has begun meetings to tackle rising food and energy prices, which in the case of food have already touched record highs.
Wheat rose 47 percent, corn by 50 percent, and soybeans 34 percent in 2010, reports Reuters.
"The world is still in denial about food prices," David Murran, chief investment officer at London venture capital firm Emergent Assent Management, told Reuters.
"If you look at demographics, if you look at production, if you look at the impact of climate change, then we are only at the beginning of this."
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