Don’t Take My Word For It, Take Alan Greenspan’s

I might not always agree with Alan Greenspan, but it’s fair to say he’s forgotten more about the economy than most people will ever know. And what he’s saying right now about spending is exactly what conservatives are saying, exactly what the Tea Party is saying, and exactly what much of the country is saying:

Former Federal Reserve Chairman Alan Greenspan said the U.S. may soon face higher borrowing costs on its swelling debt and called for a “tectonic shift” in fiscal policy to contain borrowing.

“Perceptions of a large U.S. borrowing capacity are misleading,” and current long-term bond yields are masking America’s debt challenge, Greenspan wrote in an opinion piece posted on the Wall Street Journal’s website. “Long-term rate increases can emerge with unexpected suddenness,” such as the 4 percentage point surge over four months in 1979-80, he said.

Greenspan rebutted “misplaced” concern that reducing the deficit would put the economic recovery in danger, entering a debate among global policy makers about how quickly to exit from stimulus measures adopted during the financial crisis. U.S. Treasury Secretary Timothy F. Geithner said this month that while fiscal tightening is needed over the “medium term,” governments must reinforce the recovery in private demand.

“The United States, and most of the rest of the developed world, is in need of a tectonic shift in fiscal policy,” said Greenspan, 84, who served at the Fed’s helm from 1987 to 2006. “Incremental change will not be adequate.”

…“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. The “very severity of the pending crisis and growing analogies to Greece set the stage for a serious response.”

…The swing in demand toward American government debt and away from euro-denominated bonds is “temporary,” he said.

“Our economy cannot afford a major mistake in underestimating the corrosive momentum of this fiscal crisis,” Greenspan said. “Our policy focus must therefore err significantly on the side of restraint.”

Greenspan’s message here matches up pretty closely with:  what I wrote in my June 1st column for Townhall, Five Ways to Keep America From Turning Into Greece.

Last week in a teleconference, Senator Tom Coburn told us he thinks it may only take four years for us to end up in the same situation as Greece.

If the United States can’t finance its debt, the government would be unable to pay its bills; we could see runaway inflation, a worldwide economic crisis, a new “Great Depression” — and unlike Greece, there is no nation or collection of nations big enough to bail us out.

…Reform Medicare and Social Security: Since about 2/3 of our budget is made up of “non-discretionary spending,” there simply is no way to get our spending under control without reducing costs in those areas. At a minimum, we obviously need to raise the eligibility age for both programs up to at least 70. That may seem like a big jump, but it’s worth noting that Greece just raised its retirement age 14 years from 53 to 67 — and it’s probably still not enough. Also regrettably, we probably need to raise the tax rate across the board for both programs. Given that both programs are in the red right now and are likely to only get deeper in the hole, we simply need to increase the amount of revenue being generated for both programs. Of course, we should also cut waste and fraud in both programs, move towards small investment accounts with Social Security money and Medicare vouchers that would allow recipients of the program to shop around and reduce costs. That being said, the problems besetting these programs are simply too big to fix by nibbling around the edges. One way or the other, we must make painful choices. Either we do it voluntarily or eventually, we’re going to run out of money to fund these programs and changes will then be forced upon us.

…Finance a much higher percentage of the debt with long-term bonds: Given the increasing worldwide worries about the amount of debt the U.S. is running up and the problems Europe is having, we’re able to currently finance our debt at interest rates that are considerably lower than they will be in the coming years. Yet, we’re still financing a very large portion of our debt with short term Treasury securities sales. We desperately need to change over as much of our debt as possible to 10-year and 30-year Treasury securities. The downside is that we’ll have to pay out higher interest rates; so that will actually increase the deficit in the short term. However, by financing most of our debt over a much longer term, it will keep us from having to constantly turn over our short-term debt at what will likely turn out to be skyrocketing interest rates.

Let me also say that Greenspan deserves some credit for calling for action now instead of action at some unspecified:  future:  point. We have financial wizards galore saying we desperately need to get spending under control — but, not right now! Now, we need to spend. The problem is that the glorious time when they’re going to support cutting spending never seems to arrive.

This situation actually reminds me a bit of some notable lines from Patrick Henry’s famous speech,

They tell us, sir, that we are weak; unable to cope with so formidable an adversary. But when shall we be stronger? Will it be the next week, or the next year? Will it be when we are totally disarmed, and when a British guard shall be stationed in every house? Shall we gather strength by irresolution and inaction? Shall we acquire the means of effectual resistance by lying supinely on our backs and hugging the delusive phantom of hope, until our enemies shall have bound us hand and foot? Sir, we are not weak if we make a proper use of those means which the God of nature hath placed in our power. The millions of people, armed in the holy cause of liberty, and in such a country as that which we possess, are invincible by any force which our enemy can send against us. Besides, sir, we shall not fight our battles alone. There is a just God who presides over the destinies of nations, and who will raise up friends to fight our battles for us. The battle, sir, is not to the strong alone; it is to the vigilant, the active, the brave. Besides, sir, we have no election. If we were base enough to desire it, it is now too late to retire from the contest. There is no retreat but in submission and slavery! Our chains are forged! Their clanking may be heard on the plains of Boston! The war is inevitable–and let it come! I repeat it, sir, let it come.

Hey, : folks, when will:  we:  be stronger and better able to handle the deficit? After we throw away another 5-10 billion dollars Obama has no plan to pay back? After Europe gets its act together, money starts moving back there, and interest rates explode for the money we have to borrow? Will it be easier when the country is defaulting like Greece and the whole world economy is melting down as a result? It may not be easy or pleasant, but this is only going to get harder from here on out. That’s why Greenspan’s right. The time to act is NOW.

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