Dollar's Dip Shows Greenspan in Denial

Greenspan then says that he has faith in the markets to restore a sustainable U.S. balance of payments without crisis, citing a Fed paper that supposedly shows this happening in many Western countries since 1980. Problem is, many of the Western countries included in that paper did go through wrenching economic slowdowns in order to cut their trade deficits. What's more, very few of them had the sort of debt levels America now has, and likely none of them had interest rates as low as they are now in the U.S.

In other words, rates in the U.S. are going to have to go up in any adjustment -- and the impact on the debt mountain could be horrible. Indeed, during the last big current account adjustment in the U.S. rates rose sharply, prompting the 1987 stock market crash.

Greenspan also argues that because the U.S. economy hasn't skidded badly since 2001 in face of many shocks, it is strong enough to withstand a current account adjustment. But the main reason the American economy muddled through is that Greenspan slashed rates and shored things up with cheap credit. But it is that cheap credit that has caused the current account deficit to balloon. Take it away, and the current account deficit will decline -- but the economy will also stop in its tracks and debt defaults will be rampant.

In his speech, Greenspan asserts that "inducing recession to suppress consumption" is not a long-term solution. But it looks like the only one left -- because of him.

>To order reprints of this article, click here: Reprints