The time will come to pay the piper, Greenspan warns

Back in late 1996, all it took were two words from Federal Reserve Chairman Alan Greenspan suggesting that a part of the economy was out of kilter and the stock market took a dive. Those words were irrational exuberance, and Greenspan used them to question whether asset values had been unduly escalated.
The other day, Greenspan used a whole lot of words to express his concerns about three different segments of the economy -- segments that we have editorialized on any number of times. Let's hope people in the White House, people in the Capitol and people in the streets are paying attention.
Speaking before a conference of bankers in Chicago, Greenspan warned that the United States in general and many individual Americans are living beyond their means. Favorable economic conditions have allowed this to happen with little apparent consequence, but Greenspan suggested that the end is near.
Paraphrasing an adage, Greenspan told the bankers: "The free lunch has still to be invented."
We'd paraphrase another adage: Congress, President Bush and American consumers have been spending like there is no tomorrow. There will be.
The factors
Greenspan said the rising federal budget deficit is "a significant obstacle to long-term stability" (and he said that without even knowing that the administration was going to propose adding another $25 billion to unpaid bill for the war in Iraq). He also cautioned that the nation's expanding trade gap and record-high household debt will eventually take a toll.
The federal budget deficit for the year will exceed $400 billion, and is projected to balloon in future years when baby-boomers start collecting Social Security and Medicare benefits.
Americans are continuing to consume more than they produce and save. The gap, known as the current account deficit, represents the shortfall on all trade, services and investment income between the U.S. and the rest of the world. It totaled $500 billion last year.
Greenspan didn't say it, but we will. As the United States continues to place a higher premium on cheap imported products than on protecting jobs at home, and as even more service and high-tech jobs are outsourced in the name of short-term corporate profit, the trade deficit will only grow.
Caught in transition
Greenspan's theory is that the American economy is in transition, and this transition has allowed for a temporary suspension of the conventional laws of economics. It has even allowed individuals to build up record levels of household debt without creating problems for the overall economy.
Greenspan didn't say it, but we will. Wait until that record level of debt begins to catch up with people. As more and more overextended consumers are forced into bankruptcy, the burden will be shifted onto others. Companies will increase prices to cover their costs, and even so will pay lower dividends to shareholders. Everyone will be drafted into servicing the debts of the profligate.
We are a nation that prides itself on personal responsibility and independence, but our conduct belies us in so many ways.
Our politicians tell us that we can have it all -- guns, butter and lower taxes -- and we believe it because we want to. We're told we can have bigger homes, newer cars and more exciting toys -- all we need do is take out a second or third mortgage or a fourth credit card -- and we believe it because we want to.
Greenspan is suggesting that we may be deceiving ourselves.
In a final paraphrase, we'll invoke a television commercial of a number of years ago: When Alan Greenspan talks, people listen. Let's hope so.