ASHINGTON, 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.
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
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
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
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."