You don't have to be an economic genius to realize that America's soaring federal budget deficits represent a major obstacle to the country's long-term economic stability. Economists have issued warnings. The IMF has issued warnings. Even a cursory examination of Economics 101 reveals that persistently living beyond one's means leads to bad things happening.

Federal Reserve Chairman Alan Greenspan has been criticized for being too supportive of the current administration's complacency in the face of a massive and obvious problem. As the world's most important economic storyteller, every word that Greenspan says is studied with an almost absurd degree of scrutiny. 

On May 6, 2004, Greenspan told a banking conference that the federal budget deficit was a bigger worry to him than America's soaring trade deficit or the high level of household debt because those two problems can be corrected by market forces.

"Our fiscal prospects are, in my judgment, a significant obstacle to long-term stability because the budget deficit is not readily subject to correction by market forces that stabilize other imbalances," he said in remarks to the banking conference.

Greenspan noted that the federal deficit, estimated to climb above $500 billion this year, will amount to 4.25 percent of the total economy after being in surplus just a few years ago.

He said one of the biggest concerns was that the deficits now were occurring right before the first wave of baby boomers will begin retiring.

"We have legislated commitments to our senior citizens that, given the inevitable retirement of our huge baby-boom generation, will create significant fiscal challenges in the years ahead," Greenspan said in his remarks, which were delivered by satellite to the conference in Chicago.

Greenspan cautioned that the country should not be lulled into a false sense of security about the federal deficit just because at the moment interest rates on long-term Treasury securities remain at low levels.

He said that the dollar's foreign exchange value has remained close to the average level of the past two decades in spite of soaring trade deficits and there have been no major economic disruptions triggered by record high household debt.

"Has something fundamental happened to the U.S. economy and, by extension, U.S. banking, that enables us to disregard all the time-tested criteria of imbalance and economic danger?" Greenspan asked.

Answering his own question, the Fed chairman said, "Regrettably, the answer is no. The free lunch has still to be invented." Greenspan said he believed market forces would provide the impetus to move the trade deficit and high household debt to more sustainable levels. But he said his concern was that there were no market forces that would push the country to deal with the federal budget deficit.

Mr. Greenspan, who has sounded similar warnings before, did not elaborate on how deficits threatened economic stability, but in the past he has said they could drive long-term interest rates higher. Administration officials have countered with the alternative story that the link between deficits and interest rates is not strong.

Will the administration or the nation pay attention to Greenspan's worrying future story? Past experience and scientific research suggests not, until there is some intervening event which wakens everyone from their complacency.

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