GREENSPAN WARNS ABOUT FUTURE INFLATION, HIGHER TAXES, EXCESSIVE GOV'T SPENDING AND REGULATION

In an interview with Bloomberg yesterday, former Federal Reserve Chairman Alan Greenspan warned about possible future inflation and higher taxes as consequences for the unprecedented deficit spending taking place in the United States.

In regards to the looming inflation risk, Greenspan said, “Unless we sterilize or unwind the big monetary base we’ve built up, two, three years out inflation really begins to take hold.”

This year's budget deficit is projected to be over $1.6 trillion, which is more than three times 2008's previous record, including President Obama’s $787 billion stimulus package. The non-partisan Congressional Budget Office (CBO) forecasts astronomical cumulative deficits of $7.1 trillion between 2010 and 2019.

To President Obama's handling of the nation's spending, Greenspan admitted, “I don’t think he is sufficiently in control of a very serious budget problem, a very serious health-care problem.”

As a result of the escalating deficit problem, Greenspan predicted higher future taxes, “The presumption that we’re going to be able to resolve this without significant increases in taxes is unrealistic.”

The former Fed Chief also warned the government against overacting to the current financial problems with excessive government regulation, such as controlling executive compensation at institutions that didn't receive government bailouts.

“You have to be careful here because this should be a relationship between shareholders, directors and executives,” he said.

Yesterday's inflationary concerns are consistent with what Mr. Greenspan wrote in a June article entitled, Inflation - The Real Threat To Sustained Recovery in London's Financial Times. Then, Greenspan said:

"Excess capacity is temporarily suppressing global prices. But I see inflation as the greater future challenge. 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.

Inflation is a special concern over the next decade given the pending avalanche of government debt about to be unloaded on world financial markets. The need to finance very large fiscal deficits during the coming years could lead to political pressure on central banks to print money to buy much of the newly issued debt."