Pipedream Shattered: The Illusion of Greenspan’s Debt-Free World Revealed

Alan Greenspan, the former Federal Reserve Chairman, made a bold prediction in 2001 that public debt would be retired by the end of the decade. This prediction was met with disbelief and ridicule at the time, but now, as the United States faces a massive debt crisis, we should take a closer look at what Greenspan was saying.

Greenspan’s prediction was based on the economic stability and fiscal responsibility of the 1980s and 1990s, which he called the “Great Moderation.” During this time, measures were put in place to reduce the national debt, including tighter limits on discretionary spending and a decrease in defense spending. As a result, public debt was reduced by $450 billion in the late 1990s, accompanied by economic growth and productivity advancements.

At the time, Greenspan was not the only one predicting the elimination of public debt. The Office of Management and Budget, the Congressional Budget Office, and the Federal Reserve all shared this optimistic view. The consensus among economists was that as long as the prudent fiscal and monetary policies of the Great Moderation were continued, the country would eventually be able to eliminate its debt.

However, over the past two decades, the United States government has veered away from these responsible policies, leading to the current debt crisis. Greenspan himself acknowledged the growing debt crisis, pointing out that federal spending was out of control and that unfunded entitlement programs were unsustainable. He also warned of the potential risks of inflation and interest rate increases.

In a moment of prescience, Greenspan wrote, “I do not believe that our lawmakers, or others are aware of the impairment of our fiscal brakes.” He expressed hope that the severity of the impending crisis would prompt a serious response from Congress. Unfortunately, we are still waiting for that response. Under current projections, public debt is expected to more than double national income in the coming decades.

For a long time, the American public has become accustomed to living with large deficits, but this was not always the case. Greenspan pointed out that in the 1950s, federal budget deficits were not politically acceptable, just as households spending beyond their means was frowned upon. The expectation was that surplus revenue during peacetime would be used to reduce and eliminate public debt.

However, many economists today see the idea of balanced budgets as outdated, and a world without debt as nothing more than a fantasy. Greenspan, on the other hand, believed that financial markets could still operate effectively without public debt. In fact, before the turn of the century, the Federal Reserve was exploring alternatives to U.S. Treasury securities.

One possible alternative is a sinking fund, which was first implemented by Alexander Hamilton, the nation’s first Secretary of the Treasury. This fund used premium interest rates from new Treasury notes to retire existing debt, and federal revenues were also allocated to the fund. By the Jacksonian period, public debt had been completely eliminated.

If current Treasury Secretary Janet Yellen were to implement a sinking fund, it is possible to eliminate public debt within a generation, just as Hamilton did in the past. However, it seems unlikely that such a solution will be pursued, given the current climate of debt fatigue.

In conclusion, Greenspan’s prediction of a world without debt may have seemed far-fetched at the time, but in light of the ongoing debt crisis, it is worth considering alternative solutions. The idea of balanced budgets and the elimination of public debt was once the norm in American fiscal policy, and perhaps it is time to revisit those principles. Alan Greenspan may no longer be leading the Federal Reserve, but his insights are still relevant today.

Source: RedState

Written by Staff Reports

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