The timing couldn’t have been better. As President George W. Bush was busy Friday signing his name to a bill that increases the U.S. debt ceiling to $8 trillion, Federal Reserve Chairman Alan Greenspan was warning that sky-high deficits will eventually bring the United States to a financial reckoning.
Greenspan isn’t the only one trying to sound the alarm. Financial analysts, political pundits and even the International Monetary Fund have all tried to restore some fiscal sanity to the U.S. government. They are right in warning that deficit spending is putting the country – if not the global financial system – at risk of a meltdown.
Bush has tried hard throughout his presidency to project a sunny optimism about the future, often preferring a brief glance to a long hard look at painful realities. But no amount of self-deception can spin mounting U.S. debt into a good thing. Greenspan and company are increasingly looking like soothsayers rather than dooms-dayers.
The facts speak for themselves. A September estimate by the Congressional Budget Office put the 2004 federal deficit at $422 billion. That’s a healthy increase over the $375 billion shortfall of 2003. The U.S. current accounts deficit, projected to reach $650 billion this year, provides an equally alarming glimpse into the future. That figure is a rough estimate of U.S. reliance on foreign investments to fund current spending patterns.
Greenspan and others warn that foreign willingness to fund U.S. debt will not go on forever. The Asian banks that continue to buy U.S. treasury bonds by the truckload might one day demand a higher return for an increasingly risky investment. That could eventually lead to higher interest rates, domestic inflation and a slowdown in economic growth.
Bush has pledged to cut the federal deficit in half over the next four years, but that’s hard to square with his commitment to privatize Social Security and enact further tax cuts. Those moves would add further strain to the federal budget just as the baby boom generation is nearing retirement.
How high the deficit will grow before Bush mounts a serious effort to balance the federal budget is not clear. But events might one day force his hand.
