Early in 2001, Alan Greenspan, the 20-year chairman of the Federal Reserve, worried publicly about future federal surpluses so large they would wipe out the national debt, pour billions into the economy, and strangle private markets. So he proposed a tax cut as “a pre-emptive smoothing of the glide path to zero federal debt.”
“It would be difficult to imagine,” writes Kwasi Kwarteng in War and Gold, “an assessment which was so utterly wrong.”
Today the national debt stands at just under $20 trillion. Throw in $3 trillion more for state and local debt, almost $9 trillion for debt issued by federal agencies, maybe another $25 trillion in unfunded social security benefits, and we are talking real money. And that doesn’t even count private consumer debt of $12.6 trillion (including $1.3 trillion in student debt). That’s a long way from zero.
The U.S. still has a strong balance sheet, and bullish investors have pushed the markets into record territory. I have no idea whether economic growth will erase our deficits – and if Alan Greenspan can’t predict the future, I’m certainly not going to try.
But I do wonder if the apparent safety of our financial system (which has attracted lots of foreign money) and the security of our dollar (which is, at least for now, the world’s currency) is our equivalent of Venezuela’s oil – creating a veneer of wealth that promotes consumption over production, devalues saving, and undermines the discipline we need to manage our economy. Venezuela still has lots of oil, but the party’s over.