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Too Much Debt?
Chart: Too Much Debt?

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Greenspan Shifts View on Deficits

By EDMUND L. ANDREWS

Published: March 16, 2004

WASHINGTON, March 15 Consumer debt is hitting record levels. The federal budget deficit is yawning ever larger. The trade gap? Don't even ask.

Many mainstream economists are worried about these trends, but Alan Greenspan, arguably the most powerful and influential economist in the land, is not as concerned.

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In speeches and testimony, Mr. Greenspan, chairman of the Federal Reserve Board, is piecing together a theory about debt that departs from traditional views and even from fears he has himself expressed in the past.

In the 1990's, Mr. Greenspan implored President Bill Clinton to lower the budget deficit and tacitly condoned tax increases in doing so. Today, with the deficit heading toward a record of $500 billion, he warns more emphatically about the risks of raising taxes than about shortfalls over the next few years.

On Monday, the nonpartisan Congressional Budget Office published new calculations showing that the budget deficit now stems almost entirely from tax cuts and spending increases rather than from lingering effects of the economic slowdown.

Mr. Greenspan's thesis, which is not accepted by all traditional economists, is that increases in personal wealth and the growing sophistication of financial markets have allowed Americans individually and as a nation to borrow much more today than might have seemed manageable 20 years ago.

This view is good news for President Bush's re-election prospects. It increases the likelihood that the Federal Reserve will keep short-term interest rates low. And it could defuse Democratic criticism that the White House has added greatly to the nation's record indebtedness.

Adjusted for inflation, the average family's debt, including a mortgage, has climbed from $54,000 in 1990 to $79,000 last year. Mortgage foreclosures, credit card delinquencies and personal bankruptcies are all at near record levels.

Mr. Greenspan's view is that household balance sheets are "in good shape," and perhaps stronger than ever, because the value of people's homes and stock portfolios have risen faster than their debts.

The Fed chairman is equally sanguine about the nation's overall borrowing from foreigners, which has soared to more than $500 billion a year and has contributed to a sharp drop in the value of the dollar. And he has also made it clear he will not try to torpedo the president's tax-cutting agenda, which could add another $2 trillion to federal borrowing over the next decade.

"History suggests that the odds are favorable that current imbalances will be defused with little disruption," he declared in a speech two weeks ago.

But a growing number of experts are worried that Mr. Greenspan is too casual. Though most economists agree that American's indebtedness is not a problem at the moment, many worry that the country has become too dependent on extraordinarily low interest rates that will inevitably creep higher in years to come.

"The fear I have is that the world is leveraged on low-interest borrowing," said Allen Sinai, chief executive of Decision Economics, an economic forecasting firm. "It's like a drug, and you get hooked on it."

According to the Federal Reserve's most recent data, household wealth bounced back after the economic slowdown and hit a record at the end of 2003.

But the main reason for that new wealth has been rising prices for real estate and stock, and those prices have climbed in large measure because interest rates are at their lowest level in more than 40 years.

If inflation rises and the Fed feels forced to raise interest rates, many economists worry that monthly debt burdens would rise at the very moment that housing prices start to decline.

"The day of reckoning is not now, but maybe five years from now," said James W. Paulsen, chief investment strategist at Wells Capital Management. "To go down Greenspan's route is like saying there is a free lunch. The fallacy is that net worth has gone up because debt went up. And that doesn't give me a good feeling."


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