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Donald Trump's policies risk sending U.S. economy back to the 1970s, warns former boss of Federal Reserve

The Telegraph logo The Telegraph 2017-02-17 By Szu Ping Chan

Donald Trump's policies risk sending US economy back to the 1970s, warns former boss of Federal Reserve

Donald Trump's economic policies risk plunging America into a period of 1970s-style stagflation with low growth and "out of control" inflation, the former chairman of the US Federal Reserve has warned.

Alan Greenspan, who led the US central bank between 1987 and 2006, said America's huge debt pile meant policymakers "cannot afford" to embark on an infrastructure spending spree or major fiscal loosening as he signalled that the policies put forward by the US president would cause the world's biggest economy to overheat.

Mr Greenspan also expressed "grave concerns" about the future of the eurozone, where countries in northern Europe such as Germany have "in effect been funding the deficits of the South".

Alan Greenspan was US Federal Reserve chairman for two decadesCredit: AFP

"That cannot continue indefinitely," he wrote in the latest issue of Gold Investor . "The eurozone is not working."

Mr Greenspan wrote that the US unemployment rate, at 4.8pc in January, had already fallen to a level where inflationary pressures usually start to emerge.

Asked how central banks around the world were likely to react to Mr Trump's election victory and the "new environment", he suggested that the US could enter a "destabilising period" where inflation rises sharply as workers begin to demand higher pay.

.html-embed.component .quote.component{margin-left:0}.html-embed.component .quote.component .component-content{margin-right:16px}.quote__source, .quote__author {white-space: normal;}@media only screen and (min-width:730px){.html-embed.component .quote.component{margin-left:-60.83px}.html-embed.component .quote.component .quote__content:before{margin-left:-12px;padding-right:1px}}@media only screen and (min-width:1008px){.html-embed.component .quote.component{margin-left:-82.33px}}I have grave concerns about the future of the Euro itselfAlan Greenspan

This could return the US to "what happened in the 1970s, when we last experienced stagflation and there were real concerns about inflation spiralling out of control".

The Federal Reserve was forced to raise rates to 20pc to keep a lid on inflation, but the move also threw the economy into recession and pushed up unemployment.

"I hope that we don't have to repeat that exercise to stabilise the system. But it remains an open question," said Mr Greenspan.

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President-elect Donald Trump gives election victory speech 09:30

The former Fed chief said an explosion in public spending was also "destabilising the financial system" as he warned that Americans would have to retire much later in order to bring back some stability.

Mr Greenspan, who has been blamed for fuelling the 2008 financial crisis and has admitted that he "made a mistake in presuming" that financial giants could regulate themselves, also argued that regulatory capital requirements should be "much higher than they are currently".

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He wrote: "If we raised capital requirements for commercial banks, for example, from the current average of around 11pc to 20pc or 30pc of assets, bankers would argue that they could not make profitable loans under such circumstances."

However, Mr Greenspan cited evidence that showed higher capital requirements would not over time decrease the effectiveness of the financial system.

"To be sure there would likely be some contraction in lending, but, arguably, those loans should, in all likelihood, never have been made in the first place," he said.

Mr Greenspan also had a warning on Greece

Mr Greenspan has said previously that it is "just a matter of time" before Greece is forced out of the single currency bloc .

Writing for the World Gold Council, he added: "The European Central Bank has greater problems than the Federal Reserve.

"The asset side of the ECB’s balance sheet is larger than ever before, having grown steadily since Mario Draghi said he would do whatever it took to preserve the euro.

"And I have grave concerns about the future of the Euro itself. Northern Europe has, in effect, been funding the deficits of the South; that cannot continue indefinitely. The eurozone is not working." 

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