Greenspan’s Case That US Borrowing Power Will Disappear

Alan Greenspan still occasionally shows up on the global stage to sell a new book or defend his legacy as Fed chairman. He must find it irritating that his predecessor Paul Volcker has become such an important figure in US financial reform. Greenspan’s opinions on the matter are almost never aired.

The aging economist argued recently that the US is about to run out of its ability to raise debt at low rates to finance its growing deficits. His disagrees with most economists who worry about the effects of the US debt in a few years, but believe that very low borrowing costs will help American fund its government spending in the meantime.Greenspan’s argument is that the US is about to be unpleasantly surprised by the global capital markets. These markets will begin to reject American borrowing because the federal government has no realistic plan to bring down spending and reign-in the national debt.

“The federal government is currently saddled with commitments for the next three decades that it will be unable to meet in real terms,” Greenspan said according to Bloomberg. The “very severity of the pending crisis and growing analogies to Greece set the stage for a serious response.” Greenspan expects that the price the US will have to pay for new debt could rise quickly to 4%, which would increase debt service by tens of billions of dollars a year. The CBO already forecasts that total federal debt service will be $700 billion at the end of the decade.

Greenspan, like most economists and many members of Congress, believes that rising deficits and debt will be the nation’s financial undoing.

The President recently set up a deficit reduction panel with 18 members, co-chaired by former Republican Senator Alan Simpson of Wyoming and former Clinton chief of staff Erskine Bowles of North Carolina. The group is scheduled to give its report in December.

Any educated person with a modest understanding of the US  economy can surmise what the panel will say. Discretionary spending will need to be dropped, which Obama is already in the process of doing. Military spending will need to be cut and along with the multiple wars that the US likes to fight overseas. There will need to be caps put on the size and growth of the massive entitlement programs–Social Security, Medicare, and Medicaid. A vote for reductions in these three programs would be political suicide for most members of Congress, which means that they will not happen.

Greenspan is probably wrong in his timing. The debt crisis will not begin right away. Too much money is flowing from Europe into US government paper. That process could occur for some time.

Greenspan is right about one thing. The day that the US cannot borrow in the capital markets without raising interest rates will almost certainly be unexpected. One auction will fail and then another. Lenders will have decided that American debt is becoming perilously high.  Suddenly, the cost of what the federal government pays for money will increase,  making the growing problem of the deficit even worse.

Douglas A. McIntyre