Greenspan, At 84, Can See The Future

Alan Greenspan is a child of the Depression, born in 1926. He spends much of his time, now retired from the chairmanship of the Federal Reserve, traveling the globe dispensing advice about the credit crisis and recession. These activities in turn bring him speaker fees and help sell his books

Greenspan’s most recent forecast is that the rise in the American national debt, which shows no sign of abating, may soon drive bond buyers away from US paper, which would balloon the cost of financing the national deficit.

“He spoke about the issue at a panel, chaired by former White House chief of staff Erskine Bowles and former U.S. Senator Alan Simpson, is due to deliver a report on debt and deficits by Dec. 1,” according to Reuters.

The fact that Greenspan is in a minority does not mean he is wrong. Most economists believe that the day of reckoning for US sovereign debt is five years or more away. By then, it will be determined if Congress and whomever is President approve significant austerity programs to cut the deficit. The other alternatives to drop the national debt, which are less likely to work, are higher taxes or a return of 5% or 6% GDP growth. A Presidential committee which has examined the problems of the deficit has already warned that the deficit is a problem that cannot be solved by an improved economy. The costs of defense spending, entitlement programs, and the federal roll of employees is simply too great to be fixed by IRS receipts

Greenspan’s vision is frightening, but American debt is still highly attractive to the capital markets, and carries a very modest yield. The world’s appetite for US paper would have to change quickly for the old man to be right. But, the sovereign debt crisis shows that nations can fall into disrepute with global institutional investors and nations like China which buys up debt issued by other nations at an astounding pace. Trust in the recovery power of the American economy may have eroded more than the federal government knows.

Douglas A. McIntyre