Greenspan Has a Faulty View of the Landing

The Oracle vs. the Chairman. In terms of heavyweight bouts, they don't get much bigger than this. These two champions of capitalism are duking it out over the future of the U.S. economy.

Warren Buffett, the Oracle of Omaha and the CEO of Berkshire Hathaway(BRK.A Quote), charges that the U.S. is headed for a massive dollar crisis caused by a trade deficit running at better than $600 billion annually. Bam!

Federal Reserve Chairman Alan Greenspan counters that the economy is headed for a soft landing, and the debt owed to foreign investors and savers is no big deal. Smack!

One of these guys is wrong. Before telling you which one I'm putting my money on, let me put the two head-to-head so you can make your own call.

First, the Numbers

Nobody has a better command of the data on the current state of the economy than Greenspan. And the picture he paints isn't pretty. The national personal savings rate has plunged to an average of 1% in 2004, shockingly below the 7% average for the last three decades.

Indeed, we've been running up debt like there's no tomorrow. The unified federal budget (which is the budget that includes the current Social Security surpluses) is running a deficit equal to about 3.5% of gross domestic product. That deficit is only going to climb as outlays for Social Security, Medicare and Medicaid, now 8% of gross domestic product, climb to somewhere near 13% by 2030 as the baby boom generation ages and retires.

Meanwhile, the U.S. current account deficit, a measure of how much more we buy from foreigners than we sell to them, has climbed to 6% of gross domestic product. According to the Fed's economists, you have to go back to the 19th century to find larger current account deficits as a percentage of the size of a country's economy. All of this debt has been funded by an increase in the value of homes (and the size of home mortgages) on the domestic side, and the willingness of foreigners to hold IOUs denominated in U.S. dollars, such as U.S. Treasury bills and notes.