“…the Republicans, I think, have been cutting taxes with borrowed money, and the Democrats have been spending with borrowed money. They agree only on the borrowed money. And the system cannot take that…We are now at a state where, excluding World War II, we are in the worst shape of the relationship between borrowing capacity and debt, I suspect, since 1791.” – Alan Greenspan, September 24, 2010
In the past, I have spent a lot of time and ink bashing Greenspan, so it is not easy for me to actually recommend heeding his advice. However, in a frank interview on PBS Newshour, Greenspan gathers a rarely heard command of plain English and talks openly about the risks and dangers of the fiscal condition of the United States. In contrast to his time heading the Federal Reserve, Greenspan dispels any notion that some magical, pain-free solution exists for the economy: “This is a tradeoff between bad and worse not between good and bad. In fact, I sometimes put it between terrible and catastrophic.”
For me, one of the more important parts of this interview came when Greenspan highlighted how we cannot assume the financial markets will continue to accommodate America’s complacency and misplaced confidence in its ability to forecast outcomes from here (emphasis mine).
“We don’t know at this stage why or how the markets respond to this sort of — this type of event. And I think we’re taking a very high risk…In 1979, for example, everyone expected, yes, we have a little inflation, but there is not going to be a real problem.
Within a very short time, the bond markets broke. Interest rates went up sharply. Mortgage rates went up sharply. The economy went into a real serious…recession.
My problem, basically, is that economists can’t make these forecasts. And the issue is, what happens if we are wrong?“
Imagine that. Greenspan talking about inflation risks and the limited abilities of economists!?! It is too bad Greenspan did not speak like this back when it really mattered. Now, I suspect most of the population has finally trained itself to ignore him.
The 8-minute video of Greenspan’s interview includes a transcript: “Greenspan Says Bush-Era Tax Cuts Should Lapse, Warns on Budget Deficit.” I highly recommend watching/reading it for yourself.
Be careful out there!
Full disclosure: no positions